Bitcoin’s transformation into a layer-2 (L2) solution brings numerous benefits to users. These include increased transaction speeds and volumes, enhanced security, and the ability to execute smart contracts directly within the Bitcoin network. The technical advantages of L2 make it a significant development within the Bitcoin ecosystem.
However, the impact of Bitcoin L2 extends beyond technical improvements. The introduction of Bitcoin staking, which was previously impossible, is a major step towards legitimizing and mainstreaming crypto staking. Staking not only adds value to currency holders but also creates a new type of interest rate determined by users, rather than central banks and government policies. This “people’s interest rate” offers an alternative to the flawed traditional interest rate systems, and the ability to stake a trusted and widely recognized asset strengthens the feasibility and credibility of this concept.
With the implementation of Bitcoin L2, Bitcoin transactions no longer rely on the public internet for data transmission. Instead, they are conveyed through a layer-2 (data-link layer), ensuring consistent data speeds and packet delivery regardless of traffic levels between parties.
From an end-user perspective, complex smart contracts can now be directly developed and implemented within Bitcoin. These contracts contain all the necessary conditions, dependencies, and obligations, making Bitcoin not just a medium of exchange but also a means of compliance that ensures contract integrity.
Another advantage of Bitcoin L2 is the opportunity for staking, which allows users to earn interest or returns from their Bitcoin holdings. While other blockchains like Tezos, Cosmos, Solana, Cardano, and Ethereum have enabled token holders to earn rewards on “dormant” tokens, this has not been possible with Bitcoin. Historically, the only way to create value from saved Bitcoin was through trading based on price fluctuations.
Bitcoin staking has significant implications for the wider economic landscape. It parallels the concept of putting fiat currencies to work through staking, as done by mainstream fund managers, investors, and central banks. The base rate of a country, which represents the interest rate charged by central banks to commercial banks, is theoretically meant to offset inflation and reflect an economy’s productivity gains. However, in practice, interest rates have remained low or zero in leading economies, and there is no correlation between interest rates and investment opportunities.
Bitcoin staking offers an alternative to this flawed system. Unlike traditional financial systems, the interest rate for Bitcoin staking is determined by users themselves, free from political agendas. The interest rate increases with the usefulness of Bitcoin, measured by transaction volume, smart contract adoption, and overall confidence in the currency. Conversely, a decrease in confidence or the availability of more attractive alternatives would lead to a reduction in the Bitcoin interest rate. This decentralized approach to interest rates is comparable to exchange rates, where popular and established economies generate a premium.
Bitcoin staking is a decentralized alternative to the inadequate systems currently in place. It offers the possibility of a new interest rate defined by participants rather than influenced by lobbyists and governmental interests. This represents a promising future for our economic systems.
Jonathan Hargreaves, the global head of growth at Elastos, a blockchain project that developed the Bitcoin layer-2 solution BeL2, emphasizes the significance of Bitcoin staking in mainstream understanding of crypto. The introduction of Bitcoin L2 has far-reaching implications beyond technical improvements, and the new structures enabled by Bitcoin staking should be of interest to everyone, not just those deeply involved in the ecosystem.