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Tuesday, February 27, 2024

Bitcoin Layer-2 Networks: The Gateway to Decentralized Finance

The Bitcoin decentralized finance (BTCFi) movement is steadily gaining traction as it promises to bring DeFi to the Bitcoin network, with multiple layer-2 solutions arriving to handle the demand. 

The founder of Merlin Chain, a native Bitcoin Layer-2 network, recently shared his insights on the progression of BTCFi during an episode of Cointelegraph’s Hashing It Out podcast.

From BRC-20 to BRC-420: The Evolution of BTCFi

Merlin Chain founder, Jeff, outlined the differences between BRC-20 and BRC-420, crucial technologies for the BTCFi movement. 

bitcoin layer 2
Credit: DepositPhotos

BRC-20 allows developers to create and mint tokens, whereas BRC-420 focuses on modularized data and tokenized modules. 

He demonstrated how an artist could leverage BRC-420 to distribute an album by inscribing each song separately and subsequently packaging them together as one.

“The artist can then tokenize the album into multiple shares, allowing fans to purchase the album on-chain,” said Jeff.

Read More: Is Dai The Best Type of Stablecoin?

The Growing Importance of Layer-2 Networks for Bitcoin

Jeff argues that layer-2 networks hold more significance for Bitcoin than for Ethereum. Bitcoin stands to benefit from new use cases that these networks provide that cannot be built on layer-1. 

Conversely, Ethereum is innately built to host most innovations created on layer-2 networks, without requiring the additional layer.

Unlike Ethereum, Bitcoin can’t deploy smart contracts on its base layer. Jeff emphasizes, “the inability to deploy smart contracts on the Bitcoin network without building a layer-2 is not the case for Ethereum.”

The Current Challenge: Building Ecosystems that Support the Bitcoin Community

Jeff cautions that most Bitcoin Layer-2 platforms aren’t providing ecosystems tailored to support the unique requirements of Bitcoin users. 

This community has already adopted Ordinals and other innovations, but the current offerings are more similar to Ethereum layer-2 solutions and not specifically suited to Bitcoin needs.

“Instead, they are simply taking concepts from Ethereum layer-2s and bringing them over, making it difficult to get the community excited,” Jeff explains.

Also Read: How Cryptocurrency Disrupts the Business World

The Path Forward for BTCFi and Layer-2 Networks

As the BTCFi movement continues to evolve, so does the importance of building ecosystems that cater to the Bitcoin community’s particular demands and preferences. 

bitcoin BTCFi
Credit: DepositPhotos

Layer-2 networks will play a crucial role in unlocking Bitcoin’s potential in decentralized finance and offer a promising gateway to the BTCFi future.

It remains essential that the developers of these innovative solutions keep the peculiarities of the Bitcoin network in mind and create tailored platforms that cater specifically to the needs of Bitcoin users. 

By doing so, the rise of utility built on the Bitcoin network is set to strengthen the entire ecosystem, leading the way in the world of decentralized finance.

Read Next: AquaGoat Crypto Review: Is This The Goat Of The Crypto World? 

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