How Layer 2 Technology is Transforming Bitcoin’s Financial Future
In Brief
Charlie Hu, Co-founder of Bitlayer, believes Bitcoin’s Layer 2 evolution holds untapped potential for programmability and scalability despite its cultural resistance to change.
What if Bitcoin, the most secure and decentralized asset in the world, could finally unlock its full potential? For over a decade, Bitcoin has been the foundation of digital value, yet it has lacked the programmability and scalability that Ethereum has embraced. But according to Charlie Hu, Co-founder of Bitlayer, that’s about to change.
In this conversation, Charlie shares how his journey—from Ethereum’s early days to Polkadot and now Bitcoin—has led him to a bold realization: the biggest untapped opportunity in crypto lies in Bitcoin’s Layer 2 evolution. He discusses the challenges of scaling Bitcoin, why its cultural resistance to change is both a strength and a hurdle, and how Bitlayer is paving the way for yield generation and financial innovation on Bitcoin’s rock-solid foundation.
Charlie, can you please share your journey into Web3?
My journey with Web3 started in 2015. I first learned about Ethereum while I was in Berlin. At that time, I was doing my master’s degree in Amsterdam and spent about six years in Europe. While in Berlin, I met the core team building Ethereum Wallet and Ethereum Core. It was the early days of Ethereum’s development.
By 2017, during the big ICO summer, I got to know Polkadot. That was my first major journey. I was an early-stage investor in Polkadot and played a role in bringing it to China. I became deeply involved in the Polkadot ecosystem, helping with its development. When the Web3 Foundation came to China, I served as an interpreter and connected with builders, developers, and market makers. That period saw a lot of hype and progress for Polkadot in Asia.
Between 2017 and 2020, DeFi summer started. I started to yield farming and learning about DeFi protocols across Uniswap, Wi-Fi, Compound (which later became Aave), and others. I did a lot of on-chain trading and started educating communities about DeFi.
In 2021, I officially joined Polkadot, leading Business Development and Developer Relations for China and South Asia. We focused on consumer-facing applications and gaming metaverse projects.
Then, in 2023, I came across Ordinals. That was my first deep dive into the Bitcoin ecosystem. I got involved with BRC-20 and Ordinals, where I met Casey and Domo. That pivotal moment led me to realize that the Bitcoin space needed better solutions for yield generation.
After the conference in October 2023, we started as a research group. Then, my co-founder Kevin and I decided to launch a full-time project, which led to Bitlayer. That’s how we started Bitlayer and how I got involved in research.
What are the biggest challenges in scaling Bitcoin compared to Ethereum? And how does Bitlayer tackle them?
The main difference is that Ethereum’s Layer 1 is already programmable with smart contracts, while Bitcoin is not. Bitcoin relies on proof-of-work and a UTXO-based model, meaning there’s no native yield or smart contract framework on Bitcoin Layer 1. You can’t really do DeFi on Bitcoin natively.
Bitcoin also has very low throughput, around seven transactions per second. Bitcoin Script is quite limited, making it technically challenging to scale Bitcoin with Layer 2 solutions. However, Bitcoin has a much larger asset base than Ethereum, especially with Bitcoin ETFs and institutional adoption. Many Bitcoin holders are looking for ways to earn yield, which hasn’t been available in the last 15 years.
This demand creates a massive opportunity despite the challenges. Building Bitcoin Layer 2 solutions requires maintaining Bitcoin’s core security while finding ways to optimize scalability.
Another key difference is culture. Ethereum has a strong developer and innovation-driven culture, whereas Bitcoin has been more focused on mining and economics. Bitcoiners are more practical and trust Bitcoin as a secure asset, often resisting changes.
With increasing interest in Bitcoin-native applications, do you foresee a DeFi explosion on BTC that is similar to Ethereum?
Some similarities exist. Many Ethereum developers are now entering the Bitcoin ecosystem, bringing new ideas. However, the dynamics are different. Ethereum doesn’t have miners involved anymore since it moved to proof-of-stake, while Bitcoin’s governance is highly decentralized, with no central foundation dictating direction.
Another key factor in this cycle is Bitcoin ETFs, which have added substantial buy pressure. Institutional investors like BlackRock are accumulating Bitcoin via ETFs, which is why Bitcoin has outperformed the rest of the market. These institutions are buying Bitcoin, not altcoins, leading to a Bitcoin-led bull run.
The growing Bitcoin ecosystem is attracting new participants, and we’re seeing more DeFi-like innovations emerge. However, it will take time for Bitcoin-native DeFi to develop fully.
What are the biggest technical challenges your team has faced while building Bitlayer?
Bitcoin’s Script is difficult to work with, has low throughput, and is expensive to verify transactions. Our challenge was finding a balance between security and cost efficiency. One solution we developed is chunking the ZK-STARK proof into multiple pieces and settling them on Bitcoin’s taproot structure, which significantly reduces costs.
Another challenge is education. Many Bitcoin holders resist innovation. They see Bitcoin as something that shouldn’t change. Educating users about the benefits of yield generation and new applications on Bitcoin has been a slow process, but we believe it will gain traction over time.
Do you believe Bitcoin will eventually become the dominant settlement layer for all crypto activity?
Bitcoin already dominates in terms of asset value, but I don’t think all crypto activity will settle on Bitcoin. Bitcoin’s block space is limited, making it expensive. Not every type of transaction needs to be made using Bitcoin. Some activities, like meme coin trading, don’t make economic sense to settle on Bitcoin.
The real question is whether Bitcoin-native use cases like lending, decentralized exchanges, or real-world assets will find product-market fit. If they do, Bitcoin’s role as a settlement layer could expand significantly.
How do you see Bitcoin scaling in the future? Will Layer 2s be the ultimate solution, or will other innovations take over?
Layer 2s are the most promising approach, as Ethereum has demonstrated. Bitcoin L2s can preserve Bitcoin’s security while improving scalability and usability. We’re also seeing momentum in meta-protocols, which rely on social consensus, but L2 solutions are our primary focus for now.
Could AI play a role in Bitcoin Layer 2 development?
I don’t see that yet. Web3 AI is still in its early days. AI tooling could help with Bitcoin yield strategies and investments, but AI-driven smart contracts for Bitcoin are not a major focus yet.
If you could change one fundamental thing about Bitcoin’s base layer to improve scalability, what would it be?
The next Bitcoin Improvement Proposal (BIP) could be critical. Any significant upgrade could unlock new possibilities. However, these decisions are outside our control and depend on the Bitcoin community’s consensus.
Do you see Bitcoin L2s being used for real-world financial systems like remittances or banking?
Yes. We are already seeing interest from financial institutions looking to integrate Bitcoin into their portfolios. ETF adoption has accelerated this trend. However, seamless fiat on-ramps and off-ramps are essential for broader adoption.
What’s your take on ZK-Rollups for Bitcoin? Could Bitlayer integrate zero-knowledge proofs in the future?
We are already working on it. Our technical team is focused on ZK-STARKs, collaborating with providers like StarkWare and RISC Zero. However, native ZK-proof integration on Bitcoin remains technically challenging.
If Bitcoin L2 adoption peaks, will it change Bitcoin’s core economic model?
It depends on how much revenue L2s generate for Bitcoin miners. If enough fees are redirected to miners, it could help sustain the Bitcoin network after block rewards decrease. However, we still need to test how viable this model is.
How do you see the Bitcoin L2 ecosystem evolving in the next five years?
Over the next two years, we aim to build strong L2 adoption with significant TVL and transaction volume. In five years, we hope that mainstream financial institutions will also use Bitcoin L2s for yield generation and other use cases. However, mass adoption will take time.
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About The Author
Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
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Victoria is a writer on a variety of technology topics including Web3.0, AI and cryptocurrencies. Her extensive experience allows her to write insightful articles for the wider audience.
