How Layer-2 Networks Ensure Decentralization As Bitcoin DeFi Matures
Bitcoin (BTC) decentralized finance (DeFi) has been discussed for years, yet industry experts believe 2025 will be pivotal for Bitcoin DeFi use cases. A recent report from Bitcoin Builders Association highlights that over 70% of Bitcoin holders are currently interested in using their BTC in DeFi applications.
Research from digital asset provider Galaxy further found that Layer-2 (L2) projects building on Bitcoin have increased over sevenfold from 10 to 75 since 2021. Galaxy data shows that more than 36% of all venture funding in Bitcoin L2s was allocated last year. Crypto venture firms have invested a total of $447 million into Bitcoin L2 projects since 2018.
According to Galaxy, Bitcoin L2s will leverage raised capital to develop robust applications and new use cases for BTC. The report further estimates that over $47 billion of BTC could be bridged into Bitcoin L2s by 2030.
What Is A Bitcoin L2?
While Bitcoin L2 growth is impressive, it’s important to understand the purpose of a Bitcoin L2 network. Sergio Demian Lerner, previous co-founder of Bitcoin L2 Rootstock and an industry scientist, told Cryptonews that a Bitcoin L2 is a ledger that transacts Bitcoin. He explained that a Bitcoin L2 does this by respecting the Bitcoin ethos of decentralization, self-custody, trust-minimization, scarcity, and permissionless participation.
“Any ledger that is connected to Bitcoin or sits on top of Bitcoin that cannot align with Bitcoin ethos cannot be considered a Bitcoin L2,” Demian Lerner said. “This would just be a mere payment network which happens to trade BTC.”
Bitcoin L2 Decentralization
Decentralization is thus a critical component of Bitcoin L2s, yet ensuring this can often be challenging. Willem Schroé, CEO and co-founder of Bitcoin L2 Botanix Labs, told Cryptonews that decentralizing a Bitcoin L2 means addressing hurdles like coordinating a wide network and ensuring fair participation, while tapping into Bitcoin’s hidden liquidity.
“The industry can overcome these by designing systems that lean on Bitcoin’s Proof-of-Work (PoW) for security, rewarding validators with yields to build a broad, engaged base, and simplifying operations so more Bitcoiners can join in and put their dormant BTC to work,” Schroé said.
He added that L2 decentralization is about creating a setup where power stays distributed, incentives align with network health, and tools are accessible enough to turn locked value into active assets.
Different Approaches to L2 Decentralization
Schroé explained that Botanix achieves decentralization through its “Spiderchain.” “Spiderchain is a decentralized platform for onchain Bitcoin finance, which leverages a network of multisignature wallets run by orchestrators who stake Bitcoin.”
He added that orchestrators are randomly selected with each Bitcoin block, preventing any centralized control or potential for censorship. In addition, Spiderchain layers Proof-of-Stake (PoS) consensus over Bitcoin’s PoW. Schroé explained that this allows Spiderchain to anchor its security to Bitcoin while enabling smart contracts.
“This allows holders to tap into new opportunities, like earning yield with their BTC, in a truly decentralized and censorship-resistant system,” he remarked.
Bitcoin L2 network Stacks also ensure decentralization, yet takes a different approach. Rena Shah, core contributor of Stacks, told Cryptonews that following Stacks Nakamoto update, the network has taken a number of steps towards decentralization.
“Stacks is a non-federated network with an open ‘signer set’ that includes industry leaders and thousands of Stackers all contributing to validating the blocks,” Shah explained. “Focusing on this open network that allows everyone to participate is the fundamentals of true decentralization.”
Demian Lerner pointed out that depending on the type of L2, decentralization is achieved by different means. For example, he explained that Rootstock is a Bitcoin sidechain.
“A sidechain is one special type of Bitcoin L2 – in fact, it was the first kind,” Demiam Lerner said. “A sidechain is a blockchain, which means it has a consensus protocol to produce blocks.”
Demian Lerner pointed out that Rootstock’s consensus protocol is very similar to Bitcoin’s. This is because it’s based on merge-mining, which is a method that re-uses Bitcoin hashing rate to secure another chain.
“Informally, merge mining enables decentralization because it is permissionless: any Bitcoin miner can secure Rootstock and earn Bitcoin doing so, and any miner can enter and leave Rootstock at any time,” he said.
Demian Lerner added that Rootstock strengthens the Bitcoin security budget, as the majority of fees paid in Rootstock go back to Bitcoin miners.
In the case of the Lightning Network, Demian Lerner explained that decentralization is achieved by allowing anyone to create channels, which can be used by others to route payments.
“The Lightning Network also makes sure that the revenue of a node is proportional to the capacity of its channels, and cannot be unfairly increased by running secret software,” he said.
However, Demian Lerner noted that the Lightning Network in its current state is not completely fair, as tactics such as the wormhole attack exist.
How Decentralized Are Bitcoin L2s?
While Bitcoin L2s are built upon decentralized standards, Demian Lerner believes that there are no Bitcoin L2s that currently achieve perfect decentralization.
“In order to scale Bitcoin, all Bitcoin L2s will make tradeoffs between efficiency (speed/volume), privacy, functionality, and decentralization,” he said.
Demian Lerner further pointed out that due to Bitcoin’s severe scaling limitations, industry experts need to ask themselves which L2 can satisfy that need, while protecting user funds from censorship or expropriation.
“In all cases, an L2 can be decentralized as long as the L2 allows the creation of secure ‘light clients’ to participate. Light clients are network nodes that have limited resources, such as smartphones. While the Rootstock protocol is light client friendly, no light-clients currently exist. The lightning network also struggles to support light clients,” he said.
A Future Built on Bitcoin L2s
Challenges aside, the continual rise of Bitcoin L2s is promising. Manu Ferrari, co-founder of Money On Chain Protocol, believes that the evolution of Bitcoin’s Layer-2 ecosystem is heading toward absorbing and replicating traditional financial systems. The only difference will be Bitcoin as the base asset instead of fiat currencies like the US dollar.
“Today, the vast majority of financial systems – banking, lending, derivatives, payments, and even global trade – operate with the USD as the base layer of value,” Ferrari said. “However, Bitcoin Layer-2 (and eventually Layer-3) networks have the potential to assimilate these financial structures while inheriting Bitcoin’s properties of decentralization, censorship resistance, and trust minimization.”
Ferrari added that as Bitcoin continues to establish itself as a leading monetary asset, L2 solutions will enable scalable, programmable financial applications that will gradually replace traditional systems.
To put this in perspective, Bitcoin-backed stablecoins may eventually replace USD-based systems. Decentralized derivatives and financial products will also likely operate on Bitcoin L2s in the future.
In the meantime, Shah noted it’s important for Bitcoin L2s to continue to ensure decentralization and security.
“People want to use Bitcoin. Users want their bitcoin active in DeFi. The L2s that create a seamless experience for putting bitcoin to work will see the most success,” she said.