Bitcoin’s Layer2 Ecosystem is Coming of Age

With spot bitcoin ETFs having attracted over 192,000 BTC since their approval on January 11, Bitcoin is once more the talk of the crypto world. While the expected interest from institutional investors has had a predictable effect on the asset’s price, it’s also led to an uptick in the fortunes of native Bitcoin-based applications.

Bitcoin’s Layer-2 ecosystem has long played second fiddle to Ethereum’s. In fact, as Ethereum’s L2 kingdom was growing in strength, there was no equivalent on Bitcoin to speak of. That has all changed with the emergence of a slew of auxiliary networks and decentralized applications (dApps) seeking to leverage the security and popularity of Bitcoin while increasing its throughput.

With interest in the leading cryptocurrency higher than ever, Bitcoin-based DeFi solutions are gathering considerable momentum.

Bitcoin Fundamentals Improve as L2 Thrives

The appeal of Bitcoin Layer-2s is clear: they strengthen the value proposition of the network (and currency) by enabling it to process more transactions.

The popularity of Ordinals inscriptions and the BRC-20 token standard deserve plenty of credit for increasing on-chain activity, but in truth, there are several projects that share collective responsibility for the feel-good factor coursing through the ecosystem at present.

In the wake of the ETF approvals, Stacks, a companion chain for smart contracts built on Bitcoin, witnessed its Total Value Locked (TVL) break previous all-time highs, hitting $63 million on approval day and subsequently soaring past $70 million. Stacks is on a mission to bring the sort of dApps that have flourished on Ethereum and its legion of L2s to the Proof-of-Work chain.

One of several ‘layers’ built on top of Bitcoin and like Lightning, Rootstock, and Liquid, Stacks uses Bitcoin as its foundational settlement layer while simultaneously scaling its functionality. All of these players have enjoyed major wins of late, with Rootstock having recently achieved its highest TVL in two years.

Although Ordinals has proven controversial with some Bitcoin maxis, who lament the network congestion it has caused, many in the community are pleased the network’s technical fundamentals and use-cases have strengthened ahead of the upcoming Halving. If the prospect of Bitcoin turning into a DeFi Wild West makes some OG devs nervous, others are heartened that Bitcoin has another bullish narrative to lean on.

“Recent developments suggest that Bitcoin is evolving into something even more significant,” noted researcher Michael Zhao in a new Grayscale report. “The development of Layer-2 networks emerges as a possible step forward.”

StackingDAO, a Stacks-based liquid staking protocol, is an example of the kind of solution now anchored to Bitcoin rather than Ethereum. In one month, the project rose through the ranks to become the second-biggest DeFi product on Stacks by TVL, with over 45 million $STX tokens now locked in smart contracts. BitFlow, a decentralized exchange for bitcoiners, has also achieved a milestone having announced $20m TVL.

These landmarks and others underscore the proliferation of Bitcoin’s use cases, and the sense that the network is positioning itself to be at the center of DeFi’s next wave. Will it come in the wake of the spring Halving? Time will tell.