How Bitcoin Halving Will Lead to Level 2 Action

Welcome to «Era V» Bitcoin. On April 20, Bitcoin underwent its fourth successful halving—a programmed reduction in the amount of new Bitcoin (BTC) coming into circulation through mining.. While the event itself is a BIT event—a moment for people around the world to celebrate virtually and in person—many people are looking ahead to what's to come.

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The launch of Runes, a new protocol that allows the creation of meme coins in Bitcoin, coincides with the halving. Hundreds of tokens have already been launched, generating over $80 million in commissions for Bitcoin miners.. According to TokenTerminal, this increased trading activity has also resulted in increased costs associated with sending a Bitcoin transaction, with the current average price exceeding $70, which is 1,395.8% higher than the average over the past 30 days.

While it's hard to say whether this activity will level off, there are some who believe that «Era V», or the period of time leading up to the next halving in 2028, will be the moment when Bitcoin Layers 2, such as the Lightning Network, finally then they will take root. . On April 20, Bitcoin fees reached a record high of $128.

“Anything that leads to higher fee rates is likely to force people to look for other solutions,” Bitcoin CORE AVA developer Chou told CoinDesk.. “Lightning is ONE of the options. There are also sidechains such as Fedimint, Ark and a bunch of Layer 2. High commissions will encourage people to take a closer look.”

Cm. See also: Bitcoin transaction fees plummet after halving

This view is supported by a recent report from Messari, which argues that as the level of activity on the network increases, “layer-2 solutions for Bitcoin are becoming not just a luxury, but a necessity,” wrote analyst Nikhil Chaturvedi. Bitcoin is no longer just “digital gold”, but a platform on which you can build.

This change in thinking was sparked by the launch of the Ordinals protocol last year, which enabled new ways to store data in the smallest units of BTC called satoshis.. Ordinal's NFT-like signatures have already generated more than $3 billion in sales, and trading activity is trending upward, with the average number of transactions approaching 2 million.

But Ordinals is far from the only company that increases Bitcoin fees . BitVM, a way to move computation off-chain, allows people to create Ethereum-like smart contracts on Bitcoin. Babylon Creates a Way to Stake and Earn Income on BTC Assets . And Layer 2s like Stacks and Merlin are becoming home to a number of decentralized applications and meme coins.

Interestingly, within a few days of the halving, tokens associated with Bitcoin L2 outperformed BTC. For example, Elastos' ELA token grew by 11%, and SatoshiVM's SAVM by 5%. Stack token STX rose nearly 20% to $2.87 — although this could also be due to the expected Nakamoto network upgrade, which began rolling out today.

While market forces will likely drive action on Bitcoin's secondary layers, this may not always be a good thing. At ONE, those with low Bitcoin balances may be prevented from using platforms like Lightning if they want to use them without storage 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 “input power” needed to fund a Lightning account . Lightning users must also pay for the on-chain closing transaction. “In a high fee environment, this means it will be difficult for BIT to start using these things.”

Cm. See also: Stacks OG Bitcoin L2 is undergoing a major overhaul

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

“I am concerned that higher BTC fees will force users to turn to Lightning custodial services… taking away the sovereignty or anonymity of BTC users over their BTC holdings,” pseudonymous Bitcoiner and Lightning critic Sovereign Matt told CoinDesk . “Lightning custodial services will become the new banks/intermediaries that people will need to trust with their savings as it will be too expensive to hold and transact using Bitcoin on the main chain themselves.”

To some extent, this is all a consequence of the so-called block size wars over how to scale Bitcoin many years ago, when it was decided instead of increasing the size of Bitcoin blocks to scale the chain through the second level. This set Bitcoin on the path it is now on.

“There are two points of view on increasing the number of transactions per block. You can increase blocks or decrease transactions,” Chou said, adding that increasing the block size is like “brute forcing” a decision.

There are ways to make Bitcoin transactions smaller and more compact, but until that happens, Layer 2 will continue to grow.