How Bitcoin Halving Will Drive Action Toward Layers 2 – CoinDesk

How Bitcoin Halving Will Drive Action Toward Layers 2 – CoinDesk

Welcome to “Epoch V” of Bitcoin. On April 20, Bitcoin successfully experienced its fourth halving, the scheduled reduction in the amount of new bitcoin (BTC) entering circulation through mining. Although the event itself is a bit of a barn burner – a time where people around the world can celebrate virtually and in person – many eyes are on what’s to come.

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The launch of Runes, a new protocol enabling the creation of meme coins on Bitcoin, coincided with the halving. Hundreds of tokens have already been launched, bringing over $80 million in fees to Bitcoin miners. This increased trading activity has also increased the costs associated with sending a transaction on Bitcoin, with the current average price above $70, an increase of 1,395.8% over the last 30-day average , according to TokenTerminal.

While it’s difficult to say whether this activity will stabilize, some believe that “Epoch V”, or the period leading up to the next halving in 2028, will be when Bitcoin Layer 2s like the Lightning Network take over. finally their rise. . On April 20, bitcoin fees hit an all-time high of $128.

“Anything that causes fee rates to rise is likely to make people look for other solutions,” Bitcoin Core developer Ava Chow said in an interview with CoinDesk. “Lightning is an option. There are also sidechains like Fedimint, Ark and a bunch of layer 2s. Paid environments will get people interested in them.

This is a point echoed by a recent Messari report, which asserted that with the increasing level of on-chain activity, “layer 2 solutions for Bitcoin are not just a luxury but a necessity,” the analyst wrote Nikhil Chaturvedi. Bitcoin is no longer just “digital gold”, but a platform to build on.

This shift in thinking was sparked by the launch of the Ordinals protocol last year, which enabled new ways to store data on the smallest units of BTC, called satoshis. There have already been over $3 billion in sales of NFT ordinal “inscriptions,” and commercial activity is trending upward with the average number of transactions approaching 2 million.

But Ordinals is not the only one driving up Bitcoin fees. BitVM, a way to move computing off-chain, allows users to create Ethereum-like smart contracts on Bitcoin. Babylon is building a way to stake and earn yield on BTC holdings. And layer 2s like Stacks and Merlin now host a number of decentralized applications and meme coins.

Interestingly, since the halving, tokens associated with Bitcoin L2 have outperformed BTC. For example, Elastos’ ELA token increased by 11% and SatoshiVM’s SAVM by 5%. Stack’s STX token has gained almost 20% to $2.87 – although this could also be due to the network’s planned Nakamoto upgrade, which has begun deployed today.

Although market forces will likely drive action on the secondary layers of Bitcoin, this is not always a good thing. On the one hand, those with low bitcoin balances may not use platforms like Lightning, if they want to use it in a non-custodial manner and create their own channels, Chow suggested.

“The problem is that all of these layer 2s require an on-chain transaction,” Chow said, referring to something like the “inbound capacity” needed to fund a Lightning account. Lightning users must also pay for an on-chain closing transaction. “In a high-fee environment, that means it’s going to be a little bit difficult to start using these things.”

Of course, there are workarounds: Lightning custody companies that subsidize these surprisingly expensive transactions.

“I fear that higher BTC fees will drive users to Lightning custody services… giving BTC users no sovereignty or anonymity over their BTC holdings,” pseudonymous Bitcoiner and Lightning critic. Sovereign Matt told CoinDesk. “Lightning custodial services will become the new banks/intermediaries that people will have to trust with their savings because it will be too expensive to self-custody and transact using main-chain bitcoin.”

To some extent, this is all downstream from the so-called block war over how to scale Bitcoin years ago, where it was decided that instead of increasing the size of Bitcoin blocks required scaling the chain through layers 2. This set Bitcoin on the path it is currently on.

“There are basically two schools of thought on increasing the number of transactions per block. You can make blocks bigger or reduce transaction sizes,” Chow said, adding that increasing block sizes amounts to a “brute forcing” solution.

There are ways to make Bitcoin transactions smaller and more compact, but in the meantime it feels like layers 2 are going to grow.


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