As a seasoned crypto investor with a deep understanding of the Bitcoin ecosystem, I’ve witnessed firsthand how the recent surge in popularity of the Runes protocol has highlighted the need for scalable solutions on the Bitcoin network. The astronomical transaction fees and network congestion caused by millions of Runes transactions have underscored the importance of layer-2 (L2) solutions that can effectively scale Bitcoin while maintaining its security and decentralization.
With the introduction of the Runes protocol, the significance and urgency of implementing Bitcoin layer-2 (L2) solutions have grown increasingly clear.
As a Bitcoin analysis expert, I’d put it this way: I’ve come across an intriguing development in the Bitcoin (BTC) world – the emergence of Runes as a novel token standard. Runes are designed to enable users to generate fungible tokens directly on the Bitcoin blockchain. The concept was brought to life by Casey Rodarmor, the mastermind behind Ordinals, which revolutionized Bitcoin non-fungible tokens (NFTs).
As a researcher studying the blockchain ecosystem, I’ve observed that Runes have gained significant traction in the market. However, this surge in popularity comes with its challenges: exorbitant Bitcoin transaction fees and unparalleled network congestion.
As a crypto investor, I’ve been closely monitoring my Dune Analytics dashboard, and I’m excited to share that over ten million Runes transactions have taken place since the protocol was launched. These transactions account for an impressive 68% of all Bitcoin transactions processed during this period.
As a researcher studying blockchain technology, I’ve come across noteworthy findings from Spartan Group regarding Bitcoin’s fee structure. Specifically, the implementation of Ordinals led to a significant surge in fees. By December 2023, Bitcoin fees had increased by an astounding 280% compared to the beginning of the year.
The Bitcoin network has seen a significant increase in activity, as indicated by the report, due to the growing interest in scalability solutions for Bitcoin (L2).
“According to my analysis of Trust Machines data, approximately 641,668 Bitcoin transactions took place on the Bitcoin network last [mention the time frame], driven primarily by users aiming to inscribe Runes and enhance their BTC utility. I want to emphasize that this transaction volume growth is a warning sign for Bitcoin developers. The issue of transaction bloat is becoming increasingly critical, and it’s essential for Layer 2 (L2) solutions to adapt and scale accordingly to keep up with user demands.”
According to Shah, we are experiencing a “summer of Bitcoin L2 scaling,” during which an abundance of solutions aimed at enhancing the cryptocurrency’s capacity will emerge.
“Likewise, as Ethereum transaction fees grew too high for routine transactions, the community adopted L2 solutions with ease.”
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Daniel Fogg, the CEO of Rootstock Labs, shared with CryptoMoon his perspective that although Bitcoin can accommodate Runes’ heightened engagement, the escalating transaction fees on the main chain provide a promising prospect for Layer 2 (L2) solutions capable of enhancing the network’s capacity and functionality.
“The reintroduction of Runes, akin to Ordinals and inscriptions, has reignited interest in constructing upon Bitcoin. However, developing a novel economy involves more than merely storing and transferring value; it necessitates Turing-complete smart contracts, an array of developer tools, and much more.”
Bitcoin L2s in development
Given these needs, a number of Bitcoin L2 solutions are coming to fruition.
As a crypto investor, I’d describe Rootstock as an innovative layer-2 solution for Bitcoin that brings together the best of both worlds. It retains the robust security features of Bitcoin while adding the flexibility and programmability that Ethereum is known for.
Rootstock belongs to the “Big Four” category of up-and-coming Bitcoin L2 (Layer 2) solutions, as identified by Spartan Group in their Bitcoin Layers Report. This report highlights that Rootstock integrates Ethereum Virtual Machine (EVM)-compatible smart contracts into Bitcoin through its RSK Virtual Machine, which is referred to as RVM. Essentially, this means that developers can transfer Ethereum contracts onto the Bitcoin blockchain using RVM.
Fogg pointed out that Rootstock, among Bitcoin‘s sidechains, has been operational for an extended period, having facilitated over $460 million in total value secured through it.
Approximately 60% of Bitcoin’s mining power is responsible for securing RSK (Rootstock) via its innovative merged mining consensus mechanism. Notably, even the most recent Bitcoin block following its halving event carried an RSK tag, according to Fogg.
As a crypto investor, I’d describe the Stacks network as follows: Launched in January 2021, Stacks is another popular Bitcoin Layer 2 solution that I’m keeping an eye on. Unlike other L2 solutions, Stacks utilizes a proof-of-transfer consensus mechanism. This means that it operates in parallel to and leverages the existing computational power of Bitcoin’s proof-of-work consensus mechanism. In simpler terms, Stacks builds upon the security and decentralization of Bitcoin while offering faster and more cost-effective transactions.
Shah announced that although Stacks has undergone development for an extended period, it is on the verge of receiving a significant overhaul, ultimately transforming it into a functional Layer 2 solution for Bitcoin transactions.
The Stacks Nakamoto represents a significant enhancement for the Stacks layer, bringing about improved speed and heightened security.
As a crypto investor, I can tell you that Shah outlined some exciting upgrades coming our way. These enhancements will bring about faster block confirmation times, ensuring more definitive transactions, and introducing Miner Extractable Value (MEV) upgrades to further optimize mining rewards.
“Shah announced that Stacks is transitioning into the realm of practical L2 solutions, bringing Bitcoin’s vast capital pool into play for L2 applications. Imagine Decentralized Finance (DeFi), Web3 identities, real-world assets, and more. The $1 trillion Bitcoin reserve can now be transformed from a dormant asset to an active one.”
More Bitcoin L2s underway
Among the oldest Bitcoin L2 (Layer 2) solutions are Rootstack and Stacks. However, according to Fogg’s perspective, there are likely more options emerging in this space.
As a researcher, I’ve had the opportunity to speak with Alexei Zamyatin, one of the brilliant minds behind Build on Bitcoin (BOB). He shared an intriguing piece of information during our conversation with CryptoMoon. According to his estimation, at least forty new Bitcoin Layer 2 (L2) solutions have recently emerged on the scene.
“Zamyatin has kept a keen eye on this sector and discovered several sites that compile new Bitcoin Layer 2 solutions,” he explained.
Zamyatin added that BOB — a hybrid L2 solution — will launch its mainnet on May 1.
“BOB brings together the fundamental aspects of Bitcoin and Etherea’s groundbreaking features such as EVM, smart contracts, and personal self-custody wallets in the Web3 environment,” he explained.
Bitcoin L2s create more use cases
It is crucial to recognize how these advancements may influence Bitcoin’s functionality, but let’s not forget about Runes and consider their potential effects as well.
According to Knut Arne Vinger, the CTO and co-founder of Coinweb Labs, Bitcoin L2 solutions can expand Runes’ capabilities, making them more adaptable to interacting with other Bitcoin data. This is crucial since Runes are currently perceived as having limited utility, akin to memecoins.
Vinger further elaborated that a reactive smart contract on the Coinweb platform, specifically designed for monitoring Runes transactions, could be employed to incorporate features like collateralization and incentive schemes, thereby broadening their applications.
“He expressed that Coinweb is on the verge of launching its unifying layer for second-level computations on Bitcoin, enabling users to execute smart contracts on Bitcoin through their current Bitcoin wallets. He is confident that this integration, along with native Bitcoin settlement solutions, will mark a significant shift in the industry.”
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As an analyst, I’d rephrase Fogg’s statement as follows: I’d like to point out that other Bitcoin L2 (Layer 2) solutions are primarily focused on building robust and secure connections to Bitcoin using BitVM. In a white paper published on October 9, 2023, titled “BitVM: Computing Capabilities on Bitcoin,” project lead Robin Linus introduced BitVM. This innovative solution allows for Turing-complete Bitcoin contracts without modifying the underlying consensus rules of Bitcoin itself.
“Fogg expressed that this could lead to the creation of optimistic rollups linked to Bitcoin. A significant number of Layer 2 (L2) projects that have released whitepapers or initiated testnets lately are pursuing a similar approach.”
However, Fogg warned that many Bitcoin L2 solutions being developed today may just be for hype.
According to Rootstock’s perspective, for a blockchain to be deemed a layer 2 (L2) solution for Bitcoin, it is essential that the native asset be Bitcoin itself, transactions be settled using Bitcoin to validate them, and there be a clear reliance on Bitcoin’s functionality. Any additional features or affiliations can be considered marketing efforts aimed at increasing appeal rather than fundamental requirements.
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2024-05-01 17:03