According to a new report, Bitcoin, which suffered from congestion last year as the older blockchain bogged down with experiments in NFTs and tokens, could see the growth of auxiliary layer 2 networks to address the network’s inherent limitations.
Existing solutions like the Lightning Network could see growth, but new projects are also in the works, according to the “Bitcoin Layers” report released Thursday by Singapore-based blockchain asset management firm Spartan Group and Kyle Ellicott, who most recently served as a partner at Bitcoin Frontier Fund.
This trend would seem to take inspiration from the architecture of Ethereum. Dozens of layer-2 projects have popped up in the Ethereum ecosystem over the past year, including Base, from US cryptocurrency exchange Coinbase, and large projects such as Arbitrum, Optimism and Polygon are now pushing to promote additional networks based on their own projects.
According to the authors, layer 2 networks on Bitcoin are in an early stage compared to those on other blockchains, but are growing.
Bitcoin is now well positioned to unlock its potential with a layered architecture that mirrors that of Ethereum, according to the report, arguing that the emergence of the Ordinals protocol a year ago “brought a resurgence of Bitcoin’s builder culture “.
Ordinals allowed the network to host non-fungible tokens (NFTs) and paved the way for the BRC-20 token standard, which uses different technology from Ethereum’s ERC-20 tokens but leverages the concept.
The “Big Four”
Bitcoin’s limitations largely revolve around its lack of programmability or application functionality and slow transactions, the report claims.
Where Bitcoin’s Lightning Network has sought to bring faster payments to Bitcoin for several years, other layers aim to bring features like programmability and application functionality to infuse utility into the network beyond storing value.
Along with Lightning, layer 2 projects Stacks, Liquid, and Rootstock make up what the report calls the “Big Four,” which together make up the majority of L2 transactions and have focused on introducing smart contracts and faster transaction speeds. high. to Bitcoin.
According to the authors, the projects will need to be refined in order not to fall victim to the intrinsic limitations of the Bitcoin network. One particular update on the radar is Stacks’ Nakamoto release, designed to enable cheap BTC transfers over L2, improving transaction speeds to around five seconds instead of 10-30 minutes or even more.
In addition to these four, there is a considerable list of emerging innovations on Bitcoin that can fill existing technical gaps, of which the report identifies a few.
Ark, for example, is an L2 protocol that enables off-chain payments where recipients receive payments without acquiring incoming liquidity, aiming for lower costs than Lightning.
MintLayer is another designed to act as a Bitcoin sidechain optimized for DeFi-related activities.
Such developments could take advantage of Bitcoin tailwinds resulting from the recent listing of Exchange Traded Funds (ETFs) in the US and the upcoming halving to inspire new use cases for Bitcoin and, as a result, spur further adoption.
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