Bitcoin Layer-2 Networks Could Address Congestion Issues, Following Ethereum’s Lead

• A recent report highlights the growth of layer-2 networks to improve Bitcoin’s scalability and functionality, addressing its congestion issues.

• The report compares Bitcoin’s evolving architecture to Ethereum’s, emphasizing new developments like the Lightning Network and BRC-20 token standard.

A recent report emphasizes the rapidly growing creation of auxiliary layer-2 networks as a means of addressing the intrinsic limits of Bitcoin. This significant change in the cryptocurrency space aims to address the long-standing problems with Bitcoin’s restricted functionality and congestion.

Last year, Bitcoin’s network faced significant congestion due to an influx of Non-Fungible Tokens (NFTs) and token experiments. This situation highlighted how urgently scalable solutions are needed to improve Bitcoin’s functionality and transaction capacity.

The “Bitcoin Layers” report, co-authored by the Singapore-based blockchain asset-management Spartan Group and industry expert Kyle Ellicott, sheds light on the burgeoning development of layer-2 networks to solve Bitcoin’s challenges. These networks aim to provide much-needed scalability and functionality while maintaining the security and decentralization of the underlying Bitcoin blockchain.

The Lightning Network is a well-known system that has been instrumental in facilitating quicker Bitcoin transactions. The research does note, though, that there are also ongoing initiatives that seek to use Bitcoin for purposes other than its customary function as a store of value.

Ethereum’s Influence and Bitcoin’s Potential

According to the report, Ethereum’s design, which has successfully integrated a number of layer-2 projects, including well-known ones like Arbitrum, Optimism, and Polygon, is a model that Bitcoin’s development is following. These Ethereum initiatives have been crucial in increasing the blockchain’s capacity and lowering transaction costs; they have also served as a model for the development of Bitcoin.

Compared to Ethereum, the Bitcoin network is still in its early phases of layer-2 development, but there is a lot of room for expansion. According to the report, Bitcoin can reach its maximum potential if it adopts an Ethereum-like layered architecture. This potential was further shown when the Ordinals protocol was introduced. By enabling NFTs and inspiring the creation of the BRC-20 token standard, the Ordinals protocol delivered a fresh wave of innovation to the Bitcoin network.

The ‘Big Four’ and Innovations in Bitcoin’s Layer-2 Projects

The report identifies four major layer-2 projects on Bitcoin – Lightning, Stacks, Liquid, and Rootstock, collectively referred to as the ‘Big Four’. These projects are at the forefront of adding capabilities like smart contracts and faster transactions to Bitcoin. They represent a significant portion of layer-2 transactions on the Bitcoin network and are vital in expanding its functional range.

However, the report cautions that these projects must continue to evolve to avoid the inherent limitations of the Bitcoin network. One notable development is the Stacks’ Nakamoto Release, which aims to enable cheaper and faster BTC transfers on a layer-2 network, reducing transaction times drastically.

The Future of Bitcoin with Layer-2 Innovations

The evolution of Bitcoin through layer-2 networks is not limited to the ‘Big Four.’ The report highlights emerging innovations like Ark, which allows off-chain payments with lower costs than the Lightning Network, and MintLayer, a sidechain optimized for decentralized finance (DeFi) activities.

These developments are timely, considering the broader market dynamics, such as the recent listing of Bitcoin ETFs in the U.S. and the forthcoming Bitcoin halving event.  These factors and the developments in layer-2 technology might spur new applications for Bitcoin and alter its function within the digital economy. As a result, usage of the cryptocurrency could rise.