The launch of the Runes protocol has highlighted the need for Bitcoin layer-2 (L2) solutions. Runes are a new Bitcoin token standard that allows users to create fungible tokens on the Bitcoin blockchain. However, the popularity of Runes has led to skyrocketing Bitcoin transaction fees and unprecedented network congestion. Data from Dune Analytics shows that since the protocol launched, millions of Runes transactions have been processed, accounting for 68% of all Bitcoin transactions. According to research by Spartan Group, the introduction of Ordinals, which enabled Bitcoin nonfungible tokens, resulted in a 280% increase in Bitcoin fees by December 2023. This increased activity on the Bitcoin network highlights the demand for Bitcoin L2 scaling solutions.
Rena Shah, VP of Products and Operations at Trust Machines, believes that a “Bitcoin L2 summer” is unfolding, which will bring an influx of scaling solutions. She compares this to the Ethereum community embracing L2 solutions when transaction fees became unbearable. Daniel Fogg, CEO of Rootstock Labs, states that while Bitcoin can handle the increased activity from Runes, the high fees present an opportunity for L2 solutions that can scale the network and expand its functionality. He emphasizes the need for Turing-complete smart contracts and developer tools to build a new economy on Bitcoin.
Several Bitcoin L2 solutions are currently in development. Rootstock is a Bitcoin L2 solution that combines the security of Bitcoin with the programmability of Ethereum. It allows developers to port Ethereum contracts on top of Bitcoin. The Stacks network, which launched in January 2021, is another well-known Bitcoin L2 that uses a proof-of-transfer consensus mechanism. It is soon to receive a major upgrade that will make it a usable Bitcoin L2 with faster block times and improved security.
There are also other Bitcoin L2 solutions on the horizon. Alexei Zamyatin, co-founder of Build on Bitcoin (BOB), estimates that at least 40 Bitcoin L2s have recently been announced. BOB, a hybrid L2 solution, will launch its mainnet on May 1, combining Bitcoin features with Ethereum’s innovation capabilities.
These Bitcoin L2 solutions will create more use cases for tokens like Runes. Knut Arne Vinger, CTO and co-founder of Coinweb Labs, explains that L2 solutions can extend the functionality of tokens like Runes, making them more composable with other Bitcoin data. Coinweb is preparing to activate its unifying L2 computation layer on top of Bitcoin, allowing users to run smart contracts on Bitcoin using their existing wallets. This, combined with mechanisms for settlement in native Bitcoin, will be a game changer.
However, Daniel Fogg warns that many Bitcoin L2 solutions being developed today may just be for hype. He believes that for a blockchain to be considered a Bitcoin L2, it must use BTC as its native asset, use Bitcoin as a settlement mechanism, and demonstrate a functional dependence on Bitcoin. Everything else is just affinity marketing.