When it comes to the value of crypto, Bitcoin reigns supreme. It holds a market cap of $983 Billion and is the OG token that started it all. However, this massive value is throttled by the chain’s lack of utility. Other ecosystems, most notably Ethereum, are flourishing with growing dApp numbers, and development teams truly exploring the many ways that Web3 can create value.
Between exchanges, gaming, information security, trustless transactions, smart contract management, and more. As more Web3 platforms are developed, more mainstream users are discovering what Web3 can accomplish that Web2 cannot, which creates a positively reinforced cycle.
But rather than grow outside of Bitcoin, it’s worth looking at why so many chains, ecosystems, and platforms have ignored Bitcoin’s massive growth. What has prevented Bitcoin from achieving this massive development phase, and how is that finally changing through the emergence of strong L2s?
What is Bitcoin Layer 2?
Bitcoin Layer 2 solutions, often referred to as Bitcoin L2s, are technologies developed to address the scalability and speed challenges inherent in the main Bitcoin blockchain, known as Layer 1.
The primary goal of these L2 solutions is to increase transaction throughput, reduce transaction fees, and improve the overall scalability of Bitcoin without compromising its security and decentralization.
How Bitcoin L2s Work
1. Off-Chain Transactions: The core idea behind L2 solutions is to take transactions off the main blockchain (off-chain) to reduce congestion and fees. These transactions are processed away from the main blockchain but are still secured by its underlying mechanisms.
2. Settlement on Layer 1: Although transactions occur off the main blockchain, final settlement is done on the Layer 1 Bitcoin blockchain. This ensures the security of the Bitcoin network while allowing for more transactions to be processed more quickly and cheaply.
3. Smart Contracts: Some L2 solutions use smart contracts to manage transactions and ensure that they can be settled on the main blockchain when needed. These contracts handle the logic for transaction processing, dispute resolution, and final settlement.
A common conversation around blockchain developers has for years been: With its massive value, why can’t we just build our platform/dApp/ecosystem on Bitcoin?
After all, while some Bitcoin has been bridged in various ways to other chains, it is a drop in the bucket compared to the value that is still left on the native Bitcoin chain. This much capital, if it could be unleashed, would certainly take Web3 to the next phase of its evolution toward mass adoption. So why hasn’t this already happened?
The first issue is the Bitcoin architecture itself. It is still a Proof of Work consensus model, which means that massive energy and computational power are required by miners to create each block.
Further, each block is created far too infrequently for rapid transactions (on average every 10 minutes, but this can be longer), and the amount of memory in each block cannot store much useful data. This creates enormous scaling problems for utility-based applications. The only real solution is to build L2s on Bitcoin itself.
This is indeed what has happened, but the road has not been smooth. L2s on Bitcoin have been notoriously difficult, as the chain was never designed for this evolution, and the process was learned through observing how Ethereum has flourished using this design.
The difference is that Ethereum has been designed (and has adapted with lessons learned) for this expanded ecosystem. The technical challenges have caused more than a few L2s to flounder and fail on Bitcoin. For those L2s requiring users to lock up funds, this can lead to liquidity issues, and some architecture choices by L2s could inadvertently place too much centralization into the platform, which hinders scalability while also increasing centralization vulnerabilities.
Finally, each L2 should ideally be fully interoperable with other Bitcoin L2s, if not also with those of other chains. This can be extremely difficult when each L2 is working to engineer their ecosystem on a fairly inhospitable L1.
That said, the promise of massive capital is just too large to ignore, and there have been a handful of L2s that have succeeded. In fact, 2024 has already shown explosive growth in the Bitcoin L2 arena, with four major players showing the largest spike in value and scaling.
The Big Four On The Rise
Each of the four L2s leading this Bitcoin ecosystem growth has managed to solve many of the technological challenges required to create user experiences with fast transaction times, immense scalability for both data and speed, can focus on improving what users can accomplish, and can tackle the potential incompatibility issues with other L2s.
Further, these platforms may be able to finally accomplish a major transition in blockchain: Providing a solid connection between Bitcoin and TradFi.
1. Lightning Network
Lighting Network is an L2 that has been especially strong in creating a very fast transaction capability for its community. Notably, it provides near instant blockchain payments in a way that is impossible with the Bitcoin chain L1, as it separates itself from the block confirmation times.
Combined with its strong ability to scale while maintaining low transaction costs, the network has created a massive growth trajectory in late 2023 / early 2024 in promoting microtransactions and P2P payments for Bitcoin, as it has a continuous stream of new nodes and payment channels. The secret to the L2’s success is its management of the transactions via smart contract, meaning that the transactions do not have to be individually placed on-chain in order to be secure.
The Stacks layer is arguably seeing the most growth of the Bitcoin L2s. It is in many ways acting as the accumulation of what Ethereum L2s are accomplishing, except it is directly tied into the massive capital of the Bitcoin ecosystem. It has seen a number of upgrades as it continues to innovate, which has allowed Stacks to introduce both staking and DeFi for its rapidly expanding base.
There are dApps being launched on a regular basis, taking what innovations have been discovered across the blockchain industry and introducing them within a Bitcoin environment. The L2 has seen continued growth and has hit record highs several times so far in 2024. Several of the platforms in the Stacks ecosystem have seen spikes in their TVL, with both StackingDAO and Bitflow exceeding the $10M TVL mark.
While Rootstock hasn’t reached a record high in 2024, it has recovered significantly since its peak in 2022 and subsequent drop. The L2 makes the claim that it operates the world’s most secure smart contracts, and it operates based on a “merged mining” principle where users mine Bitcoin and also earn native RSK tokens.
Claiming to be the L2 designed for “enabling the fast, confidential settlement and issuance of digital assets”, Liquid offers a number of interesting options for dApp development across sub-industries. Another aspect of Liquid is its ability to verify different types of investors, which it calls “accredited investors.” This is meant to help build up investing opportunities across digital or traditional businesses, projects, and even securities.
Bitcoin will continue to be blockchain royalty for the foreseeable future. Instead of working to build up completely separate ecosystems, it is fortunate that there are a growing number of L2s who have cracked the technological hurdles needed to thrive on Bitcoin, and who are building up an entire industry unto itself that can fully embrace and utilize the incredible value that Bitcoin has accumulated.
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