Key Points
- Bitcoin’s Runes protocol has led to a surge in transaction fees and network congestion, highlighting the need for layer-2 (L2) solutions.
- A variety of Bitcoin L2 solutions are being developed, including Rootstock and Stacks, which aim to increase scalability and functionality.
The launch of the Runes protocol has underscored the need for layer-2 (L2) solutions for Bitcoin.
Runes, a new Bitcoin token standard, allows users to create fungible tokens on the Bitcoin blockchain. This protocol, created by Casey Rodarmor, has led to high Bitcoin transaction fees and network congestion.
The Impact of Runes
The popularity of Runes has resulted in millions of transactions, making up 68% of all Bitcoin transactions since the protocol’s launch. This surge in activity has led to Bitcoin fees increasing by as much as 280% year-to-date by December 2023.
This increase in network activity indicates a demand for Bitcoin L2 scaling solutions. Rena Shah, vice president of products and operations at Trust Machines, believes that a “Bitcoin L2 summer” is unfolding, which will result in a variety of scaling solutions.
Bitcoin L2 Solutions in Development
In response to this need, a number of Bitcoin L2 solutions are being developed. For instance, Rootstock is a Bitcoin L2 solution that combines Bitcoin’s security with the programmability of Ethereum.
Rootstock falls into the “Big Four” category for emerging Bitcoin L2 solutions, according to a report from Spartan Group. The report notes that Rootstock brought Ethereum Virtual Machine (EVM)-compatible smart contracts to Bitcoin through its RSK Virtual Machine, known as RVM.
Another well-known Bitcoin L2 is the Stacks network. The Stacks Bitcoin L2 uses a proof-of-transfer consensus mechanism that runs parallel to Bitcoin’s proof-of-work consensus. Shah stated that the Stacks network is set to receive a major upgrade, making it a more usable Bitcoin L2.
While Rootstock and Stacks are among the longest-standing Bitcoin L2s, more solutions are expected to emerge. Alexei Zamyatin, co-founder of Build on Bitcoin (BOB), estimates at least 40 Bitcoin L2s have recently been announced.
These Bitcoin L2 solutions can extend the functionality of Runes, making them more composable with other Bitcoin data. Knut Arne Vinger, chief technology officer and co-founder of Coinweb Labs, explained that a Coinweb reactive smart contract can be used to monitor transactions involving Runes to add mechanisms such as collateralization and other incentive mechanisms to extend use cases.
However, not all Bitcoin L2 solutions being developed may be beneficial. Some may simply be for marketing purposes, according to Daniel Fogg, CEO of Rootstock Labs. He argued that to be considered a Bitcoin L2, the blockchain must use BTC as its native asset, use Bitcoin as a settlement mechanism to enforce transactions, and demonstrate a functional dependence on Bitcoin.
