In recent times, the concept of building new assets on top of Bitcoin was often seen as a mere novelty or a way to generate publicity. However, a new trend called “ordinals” emerged in 2023, which involved the creation of non-fungible tokens (NFTs) that were recorded as part of a Bitcoin block.
Previously, Bitcoin had the tools for tokenization, but they were rarely utilized by users and failed to gain traction. As a result, Ethereum became the preferred network for tokenization and Layer 2 scaling projects. However, there is now a growing possibility that Bitcoin Layer 2 solutions could revolutionize decentralized finance.
The purpose of implementing Layer 2 solutions in Bitcoin is to enhance scalability and transform the sector into a hub for liquidity and the creation of new markets. Currently, the sector is relatively small, with fewer than 10 projects officially recognized.
However, there may be new listings in the near future as more projects are generating hype around their Layer 2 tools. As is the case with other blockchain trends, some projects may turn out to be unsuccessful or achieve very little. Nevertheless, the rise of Layer 2 solutions appears to be a long-term development following the recent halving event.
There have been numerous launches and announcements related to Layer 2 solutions in the past few days. A wide range of tokens is being discussed on social media, and more are expected to be added to the list.
One standout project among the new initiatives is Elastos (ELA), which was launched relatively early during the ICO season in 2018. The project has transformed itself into a builder of Layer 2 Bitcoin-based products.
The Bitcoin network now hosts assets that could form the foundation of the new Layer 2 economy. Ordinals and BRC-20 tokens are already occupying transaction bandwidth. The latest addition in April is Runes, a new standard that has already made its way into transaction logs.
Runes is a fresh standard for creating fungible tokens on Bitcoin. The team introduced this new asset type after the halving in late 2023. During the initial hype period, Runes accounted for up to 75% of Bitcoin traffic. The goal of Runes is to facilitate lightweight transactions in order to avoid overwhelming the main network.
The new standard was quickly utilized to launch Runestones, which can be traded similarly to NFTs in a highly competitive marketplace. Additionally, Runestones will also be launched on the Solana network. In fact, many of the Layer 2 projects on Bitcoin are planning to utilize other existing networks to reach a larger user base and access better liquidity and trading conditions.
There is ongoing debate as to whether Bitcoin is a suitable platform for decentralized finance. The maximalist position argues that Bitcoin can serve all purposes and that there is no need for new coins, tokens, or additional blockchains. However, alternatives to Bitcoin have proven to be successful in the past.
Nevertheless, a growing number of new projects are emerging on a daily basis, seeking attention and liquidity deposits. This has sparked some negative feedback from miners, who view Layer 2 tools as a misuse of the Bitcoin network. In the past, Bitcoin’s usability was hindered by congestion in the mempool caused by bot-driven traffic and micro-transactions.
The question of whether Bitcoin can effectively support decentralized finance remains unanswered. However, the increasing number of launches and the hype on social media indicate a willingness to explore the use of Bitcoin with Layer 2 scaling, potentially assuming some of the tasks currently served by blockchains like Ethereum and Solana.
The Layer 2 craze is reminiscent of the previous hype surrounding NFTs, ordinals, and meme tokens. Nevertheless, these new assets are creating value and building new markets with every passing hour. As a result, the Bitcoin mempool is experiencing a higher number of transactions per block, and average fees are once again approaching $30.