News
A deep dive into Layer 2 technologies
Today, Marcin Kaźmierczak from Redston Oracles explains how Bitcoin’s Layer 2s aim to improve the protocol’s performance while preserving its integrity by implementing improvements on a separate blockchain.
Many advisors attended Consensus 2024 in Austin, Texas last week. We highlight key themes that emerged from the event in Ask an Expert. I can’t wait for next year conferencewhich will be held in Toronto, Canada.
Bitcoin (Bitcoin) has revolutionized the financial world with its decentralized, secure and transparent nature. Although she was the first cryptocurrency, Ethereum (ET) paved the way for the development of the entire decentralized finance, or DeFi, ecosystem. Now, Bitcoin is following suit, ushering in an era of development within its ecosystem. As Bitcoin has grown in popularity, so have the challenges related to its scalability and transaction speed. To address these issues, the Bitcoin community has developed various layer 2, or L2, blockchains that improve the efficiency and functionality of the network without altering Bitcoin’s software itself. This article delves into the concept of Bitcoin Layer 2, exploring its classifications, advantages and expected progress 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 created around it, similar to gold in the physical world.
Q: What are Layer 2 Bitcoins and how are they classified?
A: They are built on the Bitcoin blockchain. Transactions can be offloaded to them, solving the problems and performance limitations of the Bitcoin blockchain and adding programmability features. There are three types of layer 2 Bitcoin:
Q: What problems do Bitcoin L2s solve and why are they important?
A: Bitcoin’s Layer 2s address key issues to improve the efficiency and functionality of the network. First, they improve scalability by reducing congestion. As a result, transaction fees are lower and their execution is faster, making Bitcoin more suitable for everyday use. L2s also increase the utility of bitcoin holdings and introduce complex smart contract functionality, enabling DeFi, NFTs, and other Web3 applications. This increased programmability helps Bitcoin maintain relevance in the market. They expand Bitcoin’s use cases and ensure smoother and more convenient transactions. Ultimately, L2 Bitcoins are important for users, as they enable new features for BTC holders, such as using lending platforms, yield solutions, or decentralized exchanges (DEXs). They serve as an alternative to Ethereum-based solutions for actors who hold a large portion of their bitcoin wallet.
Q: A comparison of existing Bitcoin L2s and what to expect in that space this year.
A: Comparing Bitcoin level 2 involves evaluating their technical classification. You need to identify whether it is a state channel, rollup or sidechain. Additionally, parameters such as transaction fees, security guarantees, and available decentralized applications, or dApps, on a network are crucial. The table below represents the main 2 levels of Bitcoin as of June 2024.
* BounceBit is not a tier 2 but a tier 1 proof-of-stake chain with BTC as the main currency.
** Babylon is a BTC staking platform, which implements a new approach that allows for BTC staking.
Looking to the future, without a doubt, we can expect further expansion and the emergence of new Bitcoin Layer 2. Due to its scarcity and the fact that only around 21 million bitcoins will exist, it is fundamentally logical to expand the programmability and functionality of the digital gold. The upcoming evolution will include reducing transaction costs on the aforementioned L2s, adding additional layers of compatibility, and implementing well-known primitives on Ethereum such as automation dApps or popular wallet support.
Bitcoin has no ceiling or ceiling in its value and cumulative market capitalization which today approaches $1.4 trillion. In its current form, the Bitcoin blockchain plays a critical role upon which innovation can thrive. and today this materializes with Level 2s. Looking at the success of Arbitrum, Optimism, Base and zkSync, it can be argued that we will have at least some thriving ecosystems in that category. Therefore, it is crucial to follow its evolution and embrace the use of BTC as one of the fastest growing narratives in 2024.
Consent summary: The energy was positive at last week’s Consensus 2024 in Austin, Texas. Around 15,000 people attended, from a wide range of industries: service providers, custodians, cryptocurrency exchanges, ETF issuers, RIAs and advisors, all eager to connect. There was a lot of curiosity and involvement.
Q. What were the main themes that emerged?
Through this newsletter, we will continue to focus on these topics and provide more in-depth coverage of these topics as a source of information for industry advisors.
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.