Everyone checks everything
Bitcoin stays decentralized because thousands of independent nodes verify every transaction. That only works if the chain grows slowly enough for ordinary computers to keep up.
An independent explainer
Layer two, explained.
How systems built on top of Bitcoin make payments faster and cheaper — and what you are trusting when you use them.
01 · Why layers
The base layer is built to be checked, not to be fast.
Block space is scarce
Blocks arrive roughly every ten minutes on average and have limited room. When many people want to transact at once, fees rise.
Settle big, move small
Layer-two systems move most activity off the main chain and use it only to anchor funds, settle final balances, and resolve disputes.
02 · Payment channels
How a payment channel works
Payment channels are the idea behind the Lightning Network. Two people share a pot of bitcoin and keep score between themselves, touching the blockchain only to open and close.
Open
Both parties agree to lock bitcoin into a shared output on the blockchain that needs both of their signatures to spend (a 2-of-2 multisignature).
Update
To pay, they sign a new version of how the pot is split. No block is needed, so updates take moments and cost almost nothing.
Protect
Each new version revokes the previous one. In Lightning, if someone publishes an outdated version, the other party can claim the whole channel balance as a penalty.
Close
Either party can publish the latest version on-chain at any time. The final balances settle on layer one.
Route
Payments can hop across a chain of channels. Hash time-locked contracts (HTLCs) make each hop conditional, so nodes in the middle can't keep the money.
03 · Simulator
Open a channel and send a few payments
Alice opens a channel with Bob and funds it with 100,000 sats. Watch how many payments happen off-chain while only two transactions ever touch the blockchain.
Alice
0 sats
Bob
0 sats
0off-chain updates
0on-chain transactions
The channel isn't open yet.
04 · Compare
Different layers, different trust
"Layer two" covers very different designs. The useful question is always who can move your bitcoin, and how you get back to layer one.
| Approach | Who controls the funds | Main trade-off |
|---|---|---|
| Payment channels e.g. Lightning | You and your channel partner; either can close on-chain alone | You need to stay online or use a watchtower, and liquidity has to be on the right side |
| Sidechains | A peg mechanism — often a federation of signers — holds the locked bitcoin | You trust the signers who control the peg |
| Ecash mints | The mint, or a federation of guardians | Custodial, but payments can be very private |
| Statechains | You share key control with a statechain operator | You trust the operator not to collude with a previous owner |
| Rollups proposals | Depends on the design; many need new Bitcoin features | An active research area; trust models vary widely |
05 · Before you trust one
Six questions to ask any layer two
- Who can move my funds, and under what conditions?
- If the operator disappears tomorrow, how do I get back to layer one?
- What does it cost to exit, and how long does it take?
- What do I need to keep online, or backed up?
- What can the operator — or anyone watching — learn about my payments?
- Is the code open, and who has reviewed it?
06 · Glossary
Words you'll meet
- Layer one
- The Bitcoin blockchain itself, where every node checks every transaction.
- Off-chain
- Activity that isn't recorded in a block, but can be settled on-chain later.
- Channel
- A shared on-chain output that two parties update privately between themselves.
- HTLC
- Hash time-locked contract: a payment that completes only if a secret is revealed before a deadline.
- Liquidity
- How much can move in each direction through a channel at a given moment.
- Watchtower
- A service that watches the chain for you and responds if an old channel state is published.
- Peg
- The mechanism that locks bitcoin on layer one and represents it on another system.
- Custodial
- Someone else holds the keys. Convenient, but you are trusting them with your funds.