Bitcoin's Potential Layer-2 Expansion: Learning from Ethereum: Analysis

• Growth of Auxiliary Layer-2 Networks Could Improve Bitcoin's Network Performance
• Learning from Ethereum's Architecture
• Growth of Layer-2 Networks on Bitcoin
• The 'Big Four'
• Refining the Big Four Projects
• Emerging Innovations on Bitcoin

Growth of Auxiliary Layer-2 Networks Could Improve Bitcoin's Network Performance

A recent report suggests Bitcoin$42,260 -0.64%, which faced congestion problems due to numerous experiments with NFTs and tokens last year, is likely to see the development of auxiliary layer-2 networks to overcome its inherent limitations. Existing solutions like the Lightning Network are poised for growth, along with a range of new projects in the pipeline, reveals the Bitcoin Layers report by Singapore-based Spartan Group and Kyle Ellicott.

Learning from Ethereum's Architecture

This trend seems to be taking a leaf out of Ethereum$2,315 -2.42%'s book, given the large number of layer-2 projects that have emerged in the Ethereum ecosystem over the last year. Big projects like Arbitrum, Optimism$3.67 -1.41%, and Polygon$0.967 -3.65% are now striving to develop additional networks based on their unique designs.

Growth of Layer-2 Networks on Bitcoin

Compared to other blockchains, Bitcoin's layer-2 networks are still in their nascent stages but are showing promising growth. The report suggests that Bitcoin is now well-positioned to unlock its potential with layered architecture that mirrors Ethereum. It notes that the introduction of the Ordinals protocol a year ago has sparked a resurgence of Bitcoin builder culture.

The 'Big Four'

Bitcoin has faced challenges mainly because of a lack of programmability, application functionality, and slow transaction speeds. While Bitcoin's Lightning Network has been focusing on faster payments for a number of years, other layers aim to bring functionalities such as programmability and application functionality. The report identifies Lightning, layer-2 projects Stacks, Liquid, and Rootstock as the Big Four, which make up the majority of L2 transactions and aim to introduce faster transaction speeds and smart contracts to Bitcoin.

Refining the Big Four Projects

Further refinement of these projects is required to ensure they overcome Bitcoin's inherent limitations. One such anticipated upgrade is Stacks' Nakamoto Release, which is designed to enable inexpensive BTC transfers on an L2 network, thus reducing transaction times from 10-30 minutes to around five seconds.

Emerging Innovations on Bitcoin

In addition to these four, the report suggests there is a considerable list of emerging innovations on Bitcoin that can address the existing technical gaps. Ark, an L2 protocol that allows off-chain payments, and MintLayer, a Bitcoin sidechain optimized for DeFi-related activities, are among a few singled out by the report.

Such advancements could leverage Bitcoin's recent momentum from the listing of exchange-traded funds (ETFs) in the U.S. and the upcoming halving to inspire new use cases for Bitcoin, thereby driving further adoption.

Edited by Jonathan Stoker