august 17, 2023
5 Innovative Use Cases For Bitcoin L2 Smart Contracts
by Rick Bartelink on August 17, 2023
Smart contracts, code allowing you to create automatic processes for products and services secured by a decentralized distributed ledger called a blockchain, are causing many developers to think differently about building applications. On the Ethereum blockchain, an influx in applications that are secured by a decentralized blockchain emerged. Use cases of these applications vary in a wide spectrum that goes from finance, to health care, to entertainment.

However, Bitcoin, the most decentralized and secure blockchain, does not allow for interaction with smart contracts. Based on the current successful application landscape on Ethereum's blockchain, and the $500 billion Bitcoin capital in circulation, this as a missed opportunity to onboard more people to Bitcoin.

However, not allowing for smart contracts was a conscious decision, as the to this day unknown creator of Bitcoin named Satoshi Nakamoto intended Bitcoin's codebase to be as simple as possible. Together with its decentralized nature, this makes Bitcoin near impossible to be hacked. Yet, in his words, a separate network that does allow for smart contract, while sharing Bitcoin's CPU power and with that its security, is a possible solution. Enter Bitcoin layers.

Bitcoin layers are separate networks that allow for the use of smart contracts, while the transaction data output of these smart contract settle on the Bitcoin main chain. An example of this is called Stacks, a layer 2 for Bitcoin that anchors its blocks consisting of transaction data to Bitcoin's chain. Stacks does this via a Bitcoin function called the "signature transaction", that enables you to send the hash of all transaction data to the Bitcoin L1.

In simple terms, in order for someone with malicious intent to alter transaction data from smart contracts on the Layer 2, one would need to change the hash settled on Bitcoin and with that alter Bitcoin's state. To put into perspective how difficult is this is, altering Bitcoin historical Bitcoin blocks will cost someone over $7.9 billion in equipment.

Clarity, Stacks' L2 smart contract language, enables you to create these smart contracts that settle on Bitcoin. Due to its core characteristics, Clarity made it easy for front-end developers to create applications with smart contract that settle on Bitcoin. Most front-end developers take roughly 10 hours to learn the basics of Clarity. The result? The start of a broader bitcoin economy with a wide variety of applications built on Bitcoin layers. Let's explore some of these Bitcoin applications created with Stacks' L2 clarity smart contracts.

Lending out $BTC to earn yield

Zest protocol, a decentralized finance application, allows you to lend out your Bitcoin to borrowers and earn yield in $BTC. A smart contract locks up your lend out BTC, gives it to the borrowing, and has a trustless mechanism set in place that calls for the borrower to pay you back with interest within a predetermined time period. Thanks to smart contracts, no intermediary exists that holds power over your ability to lend out the value that you posses. You are in charge of managing your finance and earning a passive form of income.

Borrowing a stablecoin

Stablecoins are cryptocurrencies that are linked to a fiat currency like the dollar to optimize for stability in price. Although a country like the US and all European countries have access to stable fiat currencies, several countries outside of the first world struggle with inflation and getting access to a stable source of value is wanted. Arkadiko allows you to use your $BTC in the form of xBTC and either swap, or us that xBTC as collateral to take out a stablecoin loan. Arkadiko opens up borrowing, lending, holding stable assets, and other financial benefits to a whole new audience, without an intermediary. Free of any power dynamic or corruption, backed by a stable fiat currency. A decentralized form of finance made for anyone in the world.

In-game items and trading

Virtual items used in an in-game world have always been highly desirable by gamers to acquire in any way. So much, that black markets emerged to sell these in-game items for real money. People started to earn money from playing games by selling these items to other players. However, through the use of smart contracts, a game like Project Indigo gave legal ownership of in-game items back to its players. Items are freely and tradable via an automatic marketplace based on smart contracts. Do you want to get rid of an item used for a previous quest? Sell it on the marketplace and use your earnings to earn yield via a decentralized finance application. You own what you earn.

Scaling Bitcoin L1 activity

It is possible to store value on Bitcoin and proof you are the owner of this item. People are willing to pay a premium price for storing assets on the largest and most secure blockchain in the world. BRC-20, a new token standard for Bitcoin that enables communities and protocols to create their own token on top of the Bitcoin L1, gained massive popularity. Whether BRC-20 remains a popular way to store value on Bitcoin remains to be seen. However, paying a premium price to store value on the L1 will stay. As a result, trading these assets has become a costly process. Here's where smart contracts on an L2 come into play. Decentralized Finance Application ALEX created a decentralized exchange that allows you to take your BRC-20 token from the L1 to a L2. In the backend, a smart contract locks up your BRC-20 token and gives you a proof of ownership that is tradable in the Stacks layer. With Stacks, transaction speeds are faster, and costs are substantially lower, while still secured by Bitcoin.


Besides the financial institutions, the healthcare industry is also often accused of altering data in favor of stakeholders and its lack of transparency around important private information. Via automated and transparent smart contract technology, storing important data on a secure distributed ledger, healthcare can take a huge step forward. Eggschain uses Clarity and Bitcoin layer Stacks to bring the entire healthcare and genomics industries onto the blockchain.
Eggschain is the first patented and blockchain-integrated genomics/medical records and biospecimen tracking system. Via the use of smart contracts, Eggschain creates an immutable record of important procedures, and an unchangeable chain of custody of what happened to those biospecimens, such as stem cells, nucleic acid, DNA, RNA, genome, sperm, eggs, embryos, tissues, organs, blood and more. Eggschain strategically chose to build on Bitcoin, as healthcare data should be protected by the most secure data system in the world.