How Bitcoin's Layer-2 Networks Are Transforming The World's Oldest Digital Asset

The Bitcoin blockchain is notorious for its slow transaction processing times, and it was this reality that led to the development of the first Layer-2 networks. Realizing that Bitcoin could never hope to reach the scale required to supplant fiat currency, its developer community hit upon the concept of offloading transactions to other networks, which can.

But Bitcoin's Layer-2s can do much more than just speed up transaction processing times. They also enable decentralized finance, or DeFi, on the Bitcoin network, and they're paving the way for the creation of an ecosystem of innovative dApps that significantly enhance Bitcoin's utility.

Growing Fast

A recent report from the cryptocurrency exchange Bybit shows that Bitcoin's ecosystem has grown to encompass 74 Layer-2 networks, including sidechains, rollups and state channels, with the majority of them launching in the last year. And they're handling an increasing amount of Bitcoin's network traffic.

With Bitcoin Layer-2s, transactions can be settled much faster and at much lower costs than is possible on the traditional Bitcoin network. They're gaining in popularity as a result. Rootstock, one of the oldest Bitcoin Layer-2s, has processed more than 13 million transactions in its lifetime, with 670,000 of them occurring in the last three months.

Rootstock's appeal is not just its faster settlement times. The sidechain also acts as a base layer for Bitcoin-native decentralized applications. During that three-month period, more than 25 dApps have launched on Rootstock, giving users many different ways to put their Bitcoin to work so they can earn a passive income.

In June, the popular decentralized exchange platform SushiSwap made its debut on Rootstock, enabling its community of more than 438,000 active monthly users to provide liquidity on the network that leverages the unparalleled security of Bitcoin's blockchain. More importantly, SushiSwap's users can now leverage BTC itself in DeFi applications.

Solving Challenges

Other prominent Bitcoin Layer-2s are also striving to boost liquidity in the Bitcoin ecosystem. For instance, Merlin Chain's Merlin DEX platform has seen its Bitmap and Rune token liquidity grow to more than $10 million.

However, the rise of so many Bitcoin Layer-2s has created challenges around liquidity fragmentation, where digital assets and trading volumes are spread so thinly across multiple networks that they lead to higher trading costs, slippage, slower transaction processing times and reduced opportunities.

Fortunately, more innovative Layer-2s are looking to solve this challenge. exSat is building what it likes to call a "docking layer" that aims to streamline interoperability between Bitcoin's L2 ecosystem, so they can interact seamlessly. It acts as a kind of bridge between Bitcoin and every other L2, so users can quickly and easily transfer assets across them.

To do this, exSat has built a decentralized state data indexing platform that increases data availability on the Bitcoin network. It leverages RAM resources on the EOS blockchain as the foundation of this data availability layer, and utilizes a hybrid consensus -- Bitcoin's proof-of-work and its own, novel proof-of-stake -- to synchronize block data across Bitcoin and its ecosystem of Layer-2 networks. In this way, it enables Bitcoin itself to scale while uniting liquidity across every Layer-2. It's also EVM compatible, which means it can tap liquidity from Ethereum's vast DeFi ecosystem.

Accelerating Innovation

Fixing liquidity fragmentation will remove one of the key impediments to growth within Bitcoin's DeFi community, which continues to innovate at breakneck speed.

This month, the interoperability protocol ZKM unveiled the newest Bitcoin Layer-2 on the block, called GOAT Network. Its major innovation is a decentralized sequencer model, which aims to counter growing fears of centralization within the L2 landscape. ZKM points out that the majority of Bitcoin L2s are controlled by their foundations. GOAT Network will instead be controlled by its community of sequence node operators, who are incentivized to secure its network with sustainable yield on their BTC collateral. It sees itself as the first truly decentralized Bitcoin Layer-2, and aims to foster the growth of a "dynamic ecosystem" of Bitcoin-native dApps.

"GOAT Network's launch of a Bitcoin L2 is a powerful first step in ZKM's quest to unite the fragmented Web3 universe," said GOAT Network's Core Contributor Kevin Liu.

Meanwhile, the crypto startup Hamilton has just announced the launch of the first tokenized U.S. Treasury bonds on Bitcoin Layer-2s like Stacks, Core and Build on Bitcoin. Hamilton CEO Mohamed Elkasstawi said that its tokenized Treasury bills will provide traditional financial institutions with a more efficient way to manage their treasuries, avoiding the inefficiencies of traditional finance.

It represents one of the first instances of tokenized "real-world assets" landing on Bitcoin, and underscores the incredible pace of innovation that's breathing new life into the world's most valuable crypto asset.

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