Increased Bitcoin (BTC) network traffic has led to slower processing times and higher transaction fees.
As a result, Bitcoin layer-2 (L2) development has surged. Bitcoin L2 solutions try to improve Bitcoin’s scalability, reduce transaction costs, and add virtual machine programmability to the network.
For instance, the Bitcoin L2 Lightning Network was developed to process BTC transfers faster than on the Layer-1 network. Layer-2 solutions have also led to the rise of decentralized finance (DeFi) on the Bitcoin network.
According to a recent report from crypto exchange Bybit, there are more than 74 Bitcoin L2 solutions, most of which have come to fruition in the past two quarters. The report also points out that Bitcoin L2s consist of sidechains, rollups, and state channels.
Bitcoin Usability Depends on L2s
Rena Shah, COO of Trust Machines – a community of dedicated Bitcoin builders – told Cryptonews that Bitcoin usability has grown to rely on Layer-2 infrastructure.
“For Bitcoin Builders, this felt obvious, but we’re finally seeing it play out in real-time,” Shah said. “Most transactions can settle faster and cheaper on the L2, while the Bitcoin L1 focuses on high-value settlements.”
Shah added that an enormous amount of potential can be unlocked for Bitcoin through L2 solutions.
“Bitcoin as a decentralized base layer for apps is finally becoming a reality,” she said.
Bitcoin L2s Show Increased Growth
Daniel Fogg, CEO of Rootstock – a longstanding Bitcoin sidechain – told Cryptonews that Rootstock had seen record-breaking transactions within the last three months.
“According to block explorer data, there have been over 13 million transactions, to date, on the Rootstock network, with over 670,000 transactions in the last 3 months alone,” Fogg said.
Fogg also shared that Rootstock has incorporated several decentralized applications (dApps) and wallet integrations.
“Over the last three months alone, over 25 dApps and protocols have been integrated into the Rootstock ecosystem providing users with new ways to access, build, and grow on Rootstock,” he remarked.
DeFi on Bitcoin: enabled https://t.co/NdDdL6eU8d
— Rootstock (@rootstock_io) July 3, 2024
For instance, the popular decentralized exchange (DEX) SushiSwap went live on Rootstock last month. According to Token Terminal, SushiSwap has over 438,000 active monthly users and 113,000 active weekly users.
“The integration allows Sushi users to trade and provide liquidity on Rootstock, leveraging Bitcoin’s security and decentralization,” a SushiSwap blog post noted.
This also lets Sushi users leverage Bitcoin assets for DeFi.
L2s Enable Liquidity and DeFi Use Cases
Jeff Yin, Founder of L2 solution MerlinChain, believes that increasing liquidity across Bitcoin L2s will further motivate people to participate in trading and other DeFi activities on Bitcoin.
Yin told Cryptonews that MerlinChain has begun building notable liquidity across its network.
“Currently, the Bitmap and Rune token liquidity on the Merlin DEX is close to $10 million,” Yin said. “We hope to rapidly increase this to $30 million, $50 million, or even $100 million. This is a vital first step as better liquidity will facilitate participation from users of other chains.”
The BTC L2 narrative mindshare is growing.
Fast & cheap transactions on Bitcoin, the hardest crypto asset, are an attractive narrative.
But the complexities of building a REAL decentralized L2 that inherits the security of BTC are significant.
Many “L2s” will launch promising… pic.twitter.com/4pdN4c3z5f
— Ignas | DeFi (@DefiIgnas) February 10, 2024
Karan Bharadwaj, CEO of L2 staking network Arithmic, told Cryptonews that Arithmic also seeks to unlock liquidity across the Bitcoin network. He explained that Arithmic does this through native restaking, which integrates both Bitcoin and Ethereum L2s.
“This unifies liquidity, simplifies the bridging process, and allows users to maximize opportunities across platforms, delivering a seamless and efficient experience,” Bharadwaj said.
Challenges Associated with Multiple L2s
Bharadwaj added that native restaking is becoming critical with the growing number of Bitcoin L2s today.
“The main challenges facing Bitcoin L2s currently include liquidity fragmentation, complexity in bridge usage, and scalability concerns amid increasing transaction volumes,” he remarked.
Bharadwaj believes that these issues can be solved by focusing on interoperability standards to unify liquidity across Bitcoin and Ethereum L2s.
“Engaging and growing a supportive community around L2 developments will also play a pivotal role in overcoming these challenges and fostering broader adoption in the crypto ecosystem,” Bharadwaj added.
Justin Wolfskehl, Community Core Team Member of The Bitcoin Name System (BNS) – a platform that allows users to register and manage BNS domain names – told Cryptonews that he believes the biggest challenge facing L2s is acceptance.
“Everyone wants to be able to use Bitcoin faster and cheaper, but it remains a question as to which offering will get accepted by the mainstream,” Wolfskehl said.
Indeed, while it’s notable that Bitcoin L2s are on the rise, only a few of these solutions will likely be utilized.
“As the COO of a company building the largest ecosystem of Bitcoin applications to maximize the value of the Bitcoin network, we are happy to see the rise of so many L2s,” Shah remarked. “Hundreds will be built, but only a few will have the mass adoption and capital needed to thrive.”
Bitcoin L2s Continue To Thrive
Challenges aside, industry experts remain confident that Bitcoin L2s will continue to develop and mature.
Most recently, interoperability protocol ZKM announced plans to launch a Bitcoin L2 solution called “GOAT Network.” According to a press release, the network will launch with a decentralized sequencer model. Sequencer node operators will help secure the network while earning a yield on their Bitcoin.
Although GOAT Network claims to be the first truly decentralized L2, decentralization is still a challenge for Bitcoin L2s.
“The more decentralized the solution is, the harder it is to build on,” Wolfskehl pointed out. “The less decentralized it is, the easier. Though, most users say they care a lot about decentralization, so it can be hard to balance.”
In addition to the launch of GOAT, crypto startup Hamilton announced tokenized United States Treasury bonds on Bitcoin L2 blockchains. Hamilton U.S. T-Bills (HUST) will soon be available on Stacks, Core, and BoB (Build on Bitcoin) L2s.
“BTC is still the king of all assets, and everyone wants to deploy it because it solidifies an on-chain world,” Shah said.
Wolfskehl added that updates soon to be launched on the Stacks L2 solution will help advance the ecosystem.
“Stacks has an upgrade called ‘Nakamoto’ that is scheduled to release in August,” he said. “Transactions on Stacks are tied to Bitcoin blocks, meaning each transaction on Stacks takes about 10 minutes. The Nakamoto upgrade promises to reduce block times down to seconds while still having Bitcoin finality, meaning transactions are as secure as Bitcoin itself.”
According to Wolfskehl, the Nakamoto upgrade will make dApp interactions such as swapping for tokens or registering a domain name a similar experience to that on Ethereum or Solana.
“I believe the Nakamoto upgrade will be huge for Stacks, BNS, and the entire BTC L2 ecosystem,” Wolfskehl remarked.
The post Bitcoin Usability Relies on Layer-2 Networks appeared first on Cryptonews.
