Bitcoin
A Deep Dive into Layer 2 Technologies
Today, Marcin Kaźmierczak in Redstone Oracles explains how Bitcoin Layer 2 aims to improve the performance of the protocol while preserving its integrity by deploying improvements on a separate blockchain.
Many consultants attended Consensus 2024 in Austin, Texas last week. I highlight the main themes that emerged from the event in Ask an Expert. I’m looking forward to next year conferencewhich will be held in Toronto, Canada.
Bitcoin (Bitcoin) revolutionized the financial world with its decentralized, secure and transparent nature. Although it was the first cryptocurrency, Ethereum (ETH) pioneered the development of the entire decentralized financial ecosystem, or DeFi. Now, Bitcoin is following suit, ushering in an era of development within its own ecosystem. As Bitcoin’s popularity increased, so did challenges related to its scalability and transaction speed. To solve these problems, the Bitcoin community has developed several layer 2 blockchains, or L2s, that improve the network’s efficiency and functionality without changing Bitcoin’s software itself. This article delves into Bitcoin’s Layer 2 concept, exploring its classifications, benefits, and expected advancements in this sector. By understanding these innovative protocols, users can understand how Bitcoin continues to evolve and maintain its relevance in an increasingly competitive digital landscape. Ultimately, the cryptocurrency bitcoin is digital gold and the entire economy is being created around it, analogous to gold in the physical world.
Q: What are Bitcoin Layer 2 and how are they classified?
A: They are built on the Bitcoin blockchain. Transactions can be transferred to them, addressing the performance issues and limitations of the Bitcoin blockchain and adding programming functionality. There are three types of Bitcoin layer 2:
Q: What problems do Bitcoin L2s fix and why are they important?
A: Bitcoin layer 2 addresses important issues to improve network efficiency and functionality. First, they improve scalability by reducing congestion. As a result, transaction fees are lower and execution is faster, making Bitcoin more suitable for everyday use. L2s also increase the utility of bitcoin assets and introduce complex smart contract functionality, enabling DeFi, NFTs and other Web3 applications. This improved programmability helps Bitcoin maintain market relevance. They expand Bitcoin’s use cases and ensure easier and more accessible transactions. Ultimately, Bitcoin L2s are important for users as they enable new functionality for BTC holders, such as the use of lending platforms, yield solutions, or decentralized exchanges (DEXs). They serve as an alternative to Ethereum-based solutions for actors who hold a major portion of their bitcoin portfolio.
Q: A comparison of existing Bitcoin L2s and what to expect from this sector this year.
A: Comparing Bitcoin Layer 2 involves evaluating its technical classification. It must be identified whether it is a state channel, rollup or sidechain. Additionally, metrics such as transaction fees, security guarantees, and available decentralized applications, or dApps, on top of a network are crucial. The table below represents the top 2 layers of Bitcoin as of June 2024.
* BounceBit is not a layer 2 but a layer 1 proof-of-stake chain with BTC as the main currency.
**Babylon is a BTC staking platform, implementing a new approach that allows for BTC staking.
Looking to the future, we can undoubtedly expect further expansion and the emergence of new layer 2s of Bitcoin. Due to its scarcity and the fact that there will only be around 21 million bitcoins in existence, it makes sense to expand the programmability and functionalities of digital gold. The next evolution will include reducing transaction costs on the above L2s, adding more compatibility layers, and implementing well-known primitives on Ethereum such as automation dApps or popular wallet support.
Bitcoin has no floor or ceiling in its value and accumulated market capitalization, which today is close to US$1.4 trillion. In its current form, the Bitcoin blockchain serves as a foundational layer upon which innovation can flourish. and today this materializes with layer 2. Looking at the success of Arbitrum, Optimism, Base and zkSync, it can be argued that we will have at least a few thriving ecosystems in this category. Therefore, it is vital to follow its evolution and embrace the use of BTC as one of the fastest growing narratives in 2024.
Consensus Recap: The energy was positive at Consensus 2024 last week in Austin, Texas. Approximately 15,000 people participated, coming from a wide range of industries: service providers, custodians, cryptocurrency exchanges, ETF issuers, RIAs and consultants – all looking to connect. There was a lot of curiosity and engagement.
Q. What were the main themes that emerged?
Through this newsletter, we will continue to focus on these themes and provide more in-depth coverage of these topics as your source of information for consultants in the field.
Note: The opinions expressed in this column are those of the author and do not necessarily reflect those of CoinDesk, Inc. or its owners and affiliates.