Recent developments in Bitcoin, including Ordinals, Inscriptions, BRC-20 tokens, and Runes, have spurred the discussion of Bitcoin scalability solutions to new heights. Bitcoin’s average transaction fee rose from US$1.5 in 2022, to US$4.2 in 2023, and is US$9.5 in 2024 so far.
Ethereum is valued around US$450B, with ~US$45B in total value locked (“TVL”) across its various Layer-2 (“L2”) solutions, i.e. L2 solutions represent ~10% of Ethereum’s total value. Bitcoin, valued at US$1.4T, has only around ~US$2B of L2 TVL, representing just ~0.13% of Bitcoin’s total value.
Key aspects to consider when analyzing Bitcoin scalability solutions include (i) how they solve the trustless two-way bridge issue, (ii) relationship and alignment with the Bitcoin base layer, (iii) whether there are any fork requirements, (iv) what level of incentive alignment they have between users, developers, and crypto newbies.
The development of fundamental Bitcoin technologies at the infrastructure level, namely Taproot and BitVM, has expanded the possibilities of protocols that can be built on Bitcoin. Although some of these implementations are still in their infancy, it has not prevented projects from devising innovative solutions to Bitcoin’s scaling problem.
“Bitcoin-native” projects such as Lightning Network and RGB both aim to increase Bitcoin’s P2P transaction capabilities, as well as introduce smart contract capabilities to the chain, while retaining the integrity of Bitcoin. Lightning has launched with relative success so far, while RGB remains in the development stage.
Other kinds of scaling solutions also exist, ranging from sidechains, to EVM Layer 1s that use bridged BTC as the staked asset to secure their chains. Although somewhat utilizing the economic security of Bitcoin, bridged versions of Bitcoin often have centralized components, and these protocols cannot truly claim to inherit much Bitcoin security.
Zero-knowledge rollups that have appeared in the Bitcoin “Layer 2” scene of late utilize BitVM as its underlying technology to more securely verify rollup data, compared to other scaling solutions that purely post a hash of their block data into Bitcoin blocks. These rollups arguably inherit the most Bitcoin security at the current stage.
As Bitcoin expressivity continues to forge its path, and DeFi primitives such as stablecoins, money markets, staking & restaking, and perpetuals emerge, the importance of Bitcoin L2 solutions will continue to grow. An exciting time ahead, with lots of development expected over the next few months.
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