Bitcoin Layer 2s gain momentum with new solutions and increased security.
Bitcoin (BTC) layer-2 (L2) blockchains will continue to grow as BTC continues to outperform other major crypto in 2024, according to a report by crypto exchange Bybit.
Bitcoin’s market dominance has surged to 51.1% as of May 7, signaling a robust uptrend since late September 2023. This growth is largely attributed to the US approval of spot Bitcoin exchange-traded funds (ETFs), which has bolstered Bitcoin’s trading volume. Bybit reports an 18% increase in BTC holdings month-over-month from March to April 2024, with Bitcoin’s trading volume now representing 31.8% of the total.
The L2 landscape is enhancing the utility of BTC and leveraging the security of Bitcoin mining. While they face challenges due to the Bitcoin blockchain’s architecture and community resistance to change, the success of projects like Ordinals and Runes suggests that innovation can drive community growth. As Bitcoin maintains its proof of work (PoW) status and outperforms other blockchains, the potential for Bitcoin L2 development remains vast.
This growth has catalyzed the development of Bitcoin L2 solutions, designed to enhance scalability, reduce transaction costs, and introduce programmability to the Bitcoin network. These solutions include state channels, sidechains, and rollups.
State channels like the Lightning Network facilitate faster, more cost-effective transactions by allowing off-chain updates between parties. However, they face limitations in capacity and lack smart contract functionality. RGB, a new project, aims to overcome these challenges by integrating smart contract capabilities with the Lightning Network.
Sidechains operate independently but maintain a connection to the Bitcoin mainnet through bridges, enabling asset transfers. Projects like Stacks and Rootstock are well-established, while newcomers like AILayer boast the highest total value locked (TVL) due to its AI integration and anticipated airdrop.
Rollups, which batch transactions for settlement on the mainnet, are divided into optimistic and zero-knowledge (ZK) rollups. ZK-rollups, in particular, are favored for their lower transaction costs. Merlin Chain leads the ZK-rollup space with a TVL of $1.1 billion, thanks to its early launch and vibrant DApp ecosystem.
Despite these advancements, Bitcoin L2 solutions face inherent risks, including security vulnerabilities, interoperability challenges, and counterparty risks, Bybit points out. These risks mirror those encountered by early Ethereum L2 solutions.
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