How Bitcoin’s Halving Will Drive Action to Tier 2

Welcome to “Epoch V” of Bitcoin. On April 20, Bitcoin underwent its fourth successful halving, the programmed cut in the amount of new bitcoin (BTC) that enters circulation through mining. While the event itself is a bit of a barn burner – a moment for people around the world to celebrate virtually and in person – many eyes are on what’s to come.

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The launch of Runes, a new protocol that enables the creation of meme coins on Bitcoin, coincided with the halving. Hundreds of tokens have already been launched, contributing more than $80 million in fees to bitcoin miners. This increased trading activity has also driven up the costs associated with sending a transaction on Bitcoin, with the current average price above $70, up 1,395.8% from the 30-day average, according to TokenTerminal.

While it’s hard to say whether this activity will level off, there are some who think that ‘Epoch V’, or the period leading up to the next halving in 2028, will be the time when Bitcoin Layer 2s like the Lightning Network finally catch on. . On April 20, Bitcoin costs reached an all-time high of $128.

“Anything that causes rates to rise will likely push people to look for other solutions,” Bitcoin Core developer Ava Chow said in an interview with CoinDesk. “Lightning is one option. There are also side chains like Fedimint, Ark and some layer 2s. High cost environments will push people to watch it.

It’s a point reiterated in a recent Messari report, which argued that with the rising level of on-chain activity, “layer 2 solutions for Bitcoin are not just a luxury but a necessity,” wrote analyst Nikhil Chaturvedi . Bitcoin is no longer just ‘digital gold’, but a platform on which to build.

This changing mindset was fueled by the launch of the Ordinals protocol last year, which enabled new ways to store data on the smallest units of BTC, called satoshis. There have already been more than $3 billion in NFT-like Ordinal “inscription” sales, and trading activity is trending upward, with the average number of transactions approaching 2 million.

But Ordinals isn’t the only one driving up Bitcoin costs. BitVM, a way to move computation off-chain, allows people to build Ethereum-like smart contracts on Bitcoin. Babylon is building a way to invest and earn returns on BTC holdings. And layer 2s like Stacks and Merlin are becoming home to a number of decentralized apps and meme coins.

Interestingly, the tokens associated with Bitcoin L2s have outperformed BTC in the days following the halving. For example, Elastos’ ELA token is up 11% and SatoshiVM’s SAVM is up 5%. Stack’s STX token is up almost 20% to $2.87 – although that may also be thanks to the network’s expected Nakamoto upgrade, which began roll out today.

While market forces will likely spur action in Bitcoin’s secondary layers, that may not always be a good thing. For starters, those with low bitcoin balances may find themselves overpriced for using platforms like Lightning if they want to go non-custodial and set up their own channels, Chow suggested.

“The problem is that all of these layer 2s require an on-chain transaction,” Chow said, referring to something like the “inbound capacity” needed to fund a Lightning account. Lightning users must also pay for an on-chain closing transaction. “In a high-cost environment, that means it’s going to be a little difficult to actually start using those things.”

Of course, there are solutions to this: custodial Lightning companies that subsidize these surprisingly expensive transactions.

“I worry that higher BTC fees will push users into escrow on Lightning services… leaving BTC users without sovereignty or anonymity over their BTC holdings,” said the pseudonymous bitcoiner and Lightning critic. Sovereign Matt told CoinDesk. “Custodial Lightning services will become the new banks/intermediaries that people will have to trust with their savings because it will be too expensive to manage and transact on their own using mainchain bitcoin.”

To some extent, this is all downstream from the so-called Blocksize Wars over how to scale Bitcoin years ago, where instead of scaling the size of Bitcoin blocks, it was decided to scale the chain through layer 2s. That put Bitcoin on the path it is currently on.

“There are actually two schools of thought on increasing the number of transactions per block. You can make blocks bigger, or you can make transactions smaller,” Chow said, adding that expanding the block size is a kind of “brute forcing” solution.

There are ways to make bitcoin transactions smaller and more compact, but until that happens, it looks like layer 2 will grow.

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