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Bitcoin Halving Sparks Layer 2 Surge

Welcome to “Epoch V” of Bitcoin. The fourth successful halving of Bitcoin occurred on April 20, marking a programmed reduction in the amount of new bitcoin entering circulation through mining. As celebrations ensue worldwide, attention turns to what lies ahead.

Coinciding with the halving was the launch of Runes, a protocol facilitating the creation of meme coins on Bitcoin. This launch saw hundreds of tokens introduced, contributing over $80 million in fees to bitcoin miners. This surge in trading activity has driven transaction costs on Bitcoin to over $70 on average, a staggering 1,395.8% increase over the trailing 30-day average, according to TokenTerminal.

Some foresee “Epoch V,” leading up to the next halving in 2028, as the period when Bitcoin layer 2 solutions like the Lightning Network will gain traction. Bitcoin fees hit an all-time high of $128 on April 20, prompting many to explore alternative solutions. Bitcoin Core developer Ava Chow stated, “High fee environments will prompt people to look into them,” referring to Lightning and other layer 2 options.

A recent Messari report emphasized the necessity of layer-2 solutions for Bitcoin amidst rising on-chain activity, signaling a shift from Bitcoin as merely “digital gold” to a platform for innovation.

The launch of the Ordinals protocol last year, enabling new data storage methods on Bitcoin’s smallest units (satoshis), has catalyzed this shift. BitVM allows off-chain computation, Babylon facilitates staking and earning yield on BTC, while layer 2s like Stacks and Merlin host decentralized apps and meme coins.

Post-halving, tokens associated with Bitcoin layer 2s have outperformed BTC. For instance, Elastos  rose 11%, SatoshiVM  climbed 5%, and Stacks  gained nearly 20% to $2.87, partly driven by the anticipated Nakamoto upgrade.

While market dynamics may drive action to Bitcoin’s secondary layers, challenges persist. Higher BTC fees may price out users with low balances from platforms like Lightning, necessitating workarounds such as custodial services. Concerns arise over the erosion of sovereignty and anonymity with custodial Lightning solutions.

This landscape reflects the legacy of the Blocksize Wars, where the decision to prioritize layer 2 scaling over block size increases set Bitcoin’s current trajectory.

As Chow remarks, the choice between block size and transaction size adjustments represents a fundamental divide in Bitcoin’s scaling debate, shaping its evolution to date.

Featured Image: Freepik

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