Key Points
- Bitcoin’s scalability issues can be addressed through Layer 2 and Layer 3 solutions, enhancing functionality and adoption.
- Layer 2 solutions such as Lightning Network and Stacks can boost transaction speeds and support complex applications.
The most recent halving of Bitcoin (BTC) took place on 19 April 2024, slashing the blockchain’s mining reward to 3.125 BTC.
This reduction in supply forced miners to optimize their hardware, reinforcing Bitcoin’s scarcity and its viability as a store of value.
Bitcoin Trilemma and Scalability Issues
The three key aspects of a blockchain are scalability, decentralization, and security.
One of Bitcoin’s major challenges is scalability. Its Proof of Work mechanism and the ever-growing hash rate mean that Bitcoin is highly secure as a network.
However, the blockchain can only handle about 7 transactions per second (TPS), compared to 15 and 2,600 TPS for Ethereum (ETH) and Solana (SOL), respectively.
This is the blockchain trilemma, highlighting the trade-offs between security, decentralization, and scalability.
Solutions to Scalability
To meet increasing user demand and enhance its utility and value, Bitcoin needs to look towards Layer 2 solutions.
Layer 2 solutions are built on top of existing blockchains and do not need a network-wide consensus to deploy, making them more flexible and attractive.
Existing Layer 2 solutions include the Lightning Network, Stacks, and Merlin Chain.
Stacks aims to bring smart contracts to Bitcoin without altering the original protocol, extending the network’s utility to include smart contracts, DeFi, NFTs, and dApp functionalities.
Lightning Network and its Potential
Lightning Network aims to increase transaction speeds and reduce costs by allowing transactions to occur off the main blockchain.
Despite some challenges, it slashes the transaction fee to around $0.001 and allows transactions to be completed in seconds.
Its expansion in 2025 to use stablecoins for payment apart from BTC could help achieve mass adoption.
Beyond Layer 2 Solutions
While Layer 2 solutions hold great potential, further evolution is possible with Layer 3 solutions.
Layer 3 can enhance interoperability and application-specific functionality, connecting different blockchains and different Layer 2 solutions.
An example of a Bitcoin Layer 3 solution is Impervious, a decentralized browser that uses the Lightning Network to process transactions.
Another Layer 3 solution outside of Bitcoin is Cosmos, designed to integrate independent blockchains into an “internet of blockchains”.
Bitcoin Layer 2 solutions can reshape the usage of the blockchain, fostering public adoption through lower transaction fees and faster speeds.
This would mean that Bitcoin is not just a store of value, but also a practical medium for exchange.
