Here Are The Bitcoin Layer 2s To Watch Out For, According To Grayscale

Crypto asset management giant Grayscale says there is a “renaissance” in Bitcoin development, with several new layers (L2s) worth keeping an eye on.

In a new report to investors, Grayscale analyst Michael Chow discussed how these technologies could bring new use cases to Bitcoin and foster more market demand for Bitcoin.

Accumulations on Bitcoin

Zhao Named Debut Bitcoin Virtual Machine (BitVM) Among Bitcoin's 'Most Anticipated' The next generation of applications.

Published by Robin Linus in October, BitVM is a new computing model for verifying calculations on Bitcoin, opening the network to the smart contract functionality more common on Ethereum.

One of the leading applications of BitVM in development is Bitcoin optimistic pooling, allowing users to string together fast and cheap transactions in off-chain environments before returning them to Bitcoin in one piece.

“While still in their early stages, projects such as Building on Bitcoin The report stated that the company aims to integrate BitVM for future settlement. Late last month, developers at BitcoinOS published a whitepaper explaining a practical Bitcoin accumulator system that would allow users to transfer BTC back and forth between accumulators in a decentralized manner.

Another technology highlighted by Grayscale is Spiderchains, developed by Botanix Labs. Spiderchains are layer 2 chains secured by Bitcoin (BTC) inside multi-signature decentralized wallets.

Bitcoin assets linked to users are secured by a rotating subset of 100 “coordinators” who manage the layer 2 chain, which can feature any functionality seen in other blockchains, such as Bitcoin.

Bitcoin staking with Babel

Babylon is also expanding the world of Bitcoin staking with its Bitcoin re-staking technology. This would allow Bitcoin holders to stake their coins and earn a return on them by using them to secure other blockchain networks, such as Solana or Ethereum, if the latter networks are upgraded to allow it.

Finally, projects like Taproot Assets seek to bring tokenization — specifically stablecoins — to one of Bitcoin's currently most popular L2s: the fast network.

“With so many projects competing for attention and liquidity simultaneously, the Pareto Principle suggests that only a select few will emerge as successful projects in the coming years, similar to patterns observed in other smart contract platforms.” Gray wrote.

Given Bitcoin's underdeveloped smart contract ecosystem, Grayscale believes it could be a huge untapped market. For example, while approximately 17% of Ethereum's total market capitalization ($360 billion) is currently used in applications, the value locked in Bitcoin decentralized applications still represents only 0.2% of the total market capitalization ($1.2 trillion).

“If the recent wave of development leads to greater adoption of these use cases, it will mean a larger addressable market and potentially a higher market value over time,” Grayscale concluded.