Building Trust In The Bitcoin L2 Economy With sBTC

Bitcoin broke the $100,000 barrier last year, cementing its status as the leading cryptocurrency. It’s the most widely adopted digital asset and secure, but it’s often viewed as something more akin to “digital gold” or a store of value instead of a platform for innovation. 

The true potential of Bitcoin as the foundation of an alternative finance economy has yet to be unleashed. Still, the arrival of “Layer-2” networks can change this, sparking a renaissance in utility.

The Promise of L2s

Satoshi Nakamoto designed Bitcoin as a secure, decentralized network for transferring value without intermediaries. Its arrival changed how we think about money, but its limitations became apparent as it became more widespread. Bitcoin struggles with scalability; slow and expensive transactions hold it back, and its limited programmability has been exposed by the emergence of newer blockchains, like Ethereum, which provide developers with more room for innovation. 

For Bitcoin to remain relevant, it needs to expand its utility, and L2s promise to do this by improving its scalability and making it more programmable. They work by bundling transactions together and processing them “off-chain”, before settling them back on the main blockchain as one, single transaction. This makes transactions faster and cheaper while retaining Bitcoin’s economic security. 

The best-known Bitcoin L2s include Lightning Network, which enables almost instant transactions with minimal fees, and Rootstock and Stacks, which bring programmability to Bitcoin via decentralized applications and smart contracts. 

These L2s help ease network congestion and support the development of richer applications based on Bitcoin, but their arrival has also brought new security challenges. While most L2s inherit Bitcoin’s foundational security, they have not been battle-tested to the same extent, and their robustness is far from guaranteed.

New Security Challenges

These problems can be seen with the Lightning Network, which sometimes encounters issues around route payments and liquidity. The reliability of its payment channels can be compromised when its routing nodes do not have enough open connections to other routing nodes. In 2022, Lightning users were hit by an “unattributed payment routing” failure that’s thought to have occurred due to a bug. Users were interacting with faulty nodes, yet they were unaware of the problem when they were doing so. 

Other Bitcoin L2s face different problems. Liquid Network, a federated sidechain, is held back by fears over its centralization. Whereas thousands of miners globally support Bitcoin, Liquid is backed by just 15 nodes that sign and confirm transactions, increasing fears that malicious actors could subvert its network.

Rootstock isn’t free of security issues either, with notable risks including its susceptibility to “double-spending” attacks, especially when users send BTC between the Bitcoin and RSK chains. 

Unlocking Bitcoin’s Potential

Bitcoin L2 Labs, the company behind the Stacks, is looking to settle these security questions once and for all with the recent launch of sBTC, a new programmable asset pegged 1:1 with BTC. Stacks introduced sBTC in the wake of its Nakamoto Upgrade in October 2024, which brought faster transactions and 100% Bitcoin finality to the network. 

The idea with sBTC is to unlock the approximately $2 trillion of liquidity in the Bitcoin network, enabling Bitcoin holders to use their assets in DeFi applications such as the lending and borrowing protocol Zest. 

“Unlike locking BTC in proof-of-stake systems, sBTC is fully expressive and enables an on-chain Bitcoin economy,” said Stacks founder Muneed Ali at the time sBTC launched. “It can power decentralized lending, DEXs, AI bots, and more while inheriting 100% Bitcoin hash power security.” 

sBTC maintains a 1:1 peg with Bitcoin itself, with each sBTC token fully collateralized by 1 BTC token. It’s backed by its decentralized network of signers, which eliminates the need for a custodian, enhancing trust, and it also boasts 100% Bitcoin finality, meaning Bitcoin’s hash power secures it. 

The Role Of Decentralized Signers

Stack’s signers are key participants of the network tasked with the job of validating and signing blocks processed by Stacks miners. With the launch of sBTC, they’ve also been given the important job of processing the peg-ins and peg-outs of the sBTC bridge, earning BTC rewards for performing that task. 

Anyone can participate as a Stacks signer so long as they meet the minimum “stacking” requirements and undergo a strict review process performed by the Stacks community. Those who can’t meet the requirements can alternatively participate by joining a “signer pool”, staking STX tokens, similar to how users stake ETH to support Ethereum validators. 

In the sBTC bridge, the signers are responsible for securing BTC deposits, each holding one of the keys to the multisig UTXO address that holds this collateral. Together, they work to approve deposits, secure them, and mint sBTC. For the sBTC bridge to function, the network requires that 70% of all signers are online and participating honestly. 

Initially, sBTC was launched with a relatively small set of just 15 signers, which means that a minimum of 11 must be in agreement for transactions to be processed, but Stacks plans to expand on this and increase decentralization through the introduction of a permissionless, rotating membership set, meaning that any Stacks signer can participate in signing sBTC transactions. To enable this, the BTC deposits will be moved to a new multi-sig UTXO address with each regular rotation. 

To protect against malicious behavior, the signers also can penalize other signers who misbehave by confiscating the BTC rewards they earn through the Stacks’ consensus. 

Multi-Layered Audits

To further reassure the community, Stacks has gone heavy on the auditing process, subjecting the underlying code to intense scrutiny to ensure it’s free from vulnerabilities. It has partnered with several highly-regarded crypto-security firms, including Asymmetric Research, whose crypto-security researchers are among the best in the business. Moreover, it has collaborated with Immunefi, which has established a lucrative bounty program to incentivize ethical hackers to test sBTC’s code and uncover any potential issues. 

As a final layer of defense, Stacks has reached out to third-party auditors, and there are several audits currently ongoing that aim to vet the sBTC codebase thoroughly. 

A New Bitcoin Economy

With the launch of sBTC, Stacks is laying the groundwork for a much more substantial ecosystem of L2-based decentralized applications that will bring much-needed utility to Bitcoin.

It’s the dawn of an exciting new era for Bitcoin that can unleash the next wave of innovation in the crypto industry, freeing billions of dollars in capital to participate in the decentralized economy.