How Layers Can Secure Bitcoin’s Future
Published by Stacks Foundation on June 14, 2023
With its limited supply, Bitcoin has become a highly coveted asset for value preservation, compelling users to embrace a steadfast buy-and-hold approach. However, this strategy has led to minimal transaction activity, a trend that could pose a challenge to the future sustainability of the network.

Historically, miners have relied on the block subsidy for profits, but as more halvings occur, the block subsidy will diminish leaving only the transaction fee as a means of incentivization. Even Satoshi Nakamoto, Bitcoin’s pseudonymous creator, recognized and acknowledged this phenomenon in 2010 stating that "In a few decades when the reward gets too small, the transaction fee will become the main compensation for [miners]." Source

Changing the narrative

To preserve long-term profitability for miners and stability of the network, it becomes crucial to strike a balance between Bitcoin's role as a store of value and the need for increased transaction activity. While the buy-and-hold strategy underscores Bitcoin's strength as a highly reliable form of currency, this perspective has traditionally constrained transaction fees.

As the next halving approaches in 2024, Bitcoin miners are confronted once more with the undeniable significance of transaction fees in sustaining long-term profitability. A recent jointly published research report by the prominent Bitcoin mining company Riot Blockchain, Inc. and on-chain analytics research firm, Blockware, highlights this growing recognition that “With each halving of the block subsidy, the importance of transaction fees for miner revenue increases.”

To fulfill Nakamoto's vision of sustainable miner support through fees, it is essential to drive up transaction volumes. This requires expanding the use cases of Bitcoin beyond a store of value and harnessing its full potential as the cornerstone of a decentralized economy. By broadening Bitcoin's utilization, we can stimulate fresh demand for block space, generate increased fees, and adequately incentivize miners to uphold the security of the network.

The art of simplicity

Limitations in smart contract functionality on the Bitcoin network are widely acknowledged and pose substantial challenges to the development of the aforementioned innovative applications. Due to their vital role in programming decentralized applications, novel uses of cryptocurrencies such as NFTs, stablecoins, Web3, and decentralized finance have been primarily limited to blockchains with robust smart contract capabilities.

Critics often point to this as a flaw in Bitcoin’s configuration, but in actuality it is one of its greatest strengths. Bitcoin’s blockchain is relatively simple and this is by design. This inelaborate configuration keeps the costs and resources to run a node minimized, thereby increasing network participation. Moreover, a lack of complexity at the base layer prevents the likelihood of hacks and malfunctions further preserving Bitcoin’s core tenets of decentralization and security.

However, there is a way we can keep Bitcoin’s blockchain in its simple, secure, and flawless form just as Satoshi Nakamoto intended, while also integrating smart contract functionality to develop new applications on the decentralized economy.

How layer 2s boost Bitcoin

To achieve this, smart contract capabilities can be added via Layer 2 solutions. With L2s like Stacks, Bitcoin effectively becomes programmable and helps tap into its full potential to create innovative use cases. Best of all though, this approach of layering maintains compatibility with the Bitcoin blockchain without adding complexities and ensures there aren’t any sacrifices in decentralization or security.

In addition to smart contracts, L2s also help address Bitcoin’s scalability limitations. By offering increased capacity, improved speeds, and lower fees, L2s create cost effective means to accommodate increased transaction volumes.

Ordinals: A timely example

The recent introduction of the Ordinals Protocol illustrates how L2s can meet the demand for new use cases of Bitcoin outside of a store of value, while also serving as a scaling solution to facilitate more timely and cost effective transactions.

To the delight of miners, renewed demand for Bitcoin block space due to Ordinals caused total transaction fees to surpass last year’s totals in just the first five months of the year, hitting levels not seen since April 2021.

But with this increased demand, transaction finality and costs for users have taken a significant hit. Today, the average transaction fee is up 213% compared to last year as users have been clamoring to have transactions validated and settled.

The advent of Ordinals and their subsequent rise proves there is appetite for Bitcoin outside of just a store of value. With a carefully crafted layered strategy, L2s not only unleash hundreds of billions of dollars in latent value to participate across use cases encompassing DeFi, Web3, and payment solutions, but also ensures Bitcoin doesn’t become bogged down and plagued with costly fees hindering the network’s performance.

Perhaps most importantly, this transformative shift doesn’t just pave the way for a thriving ecosystem built on Bitcoin but also incentivizes miners with the promise of profitability via transaction fees, preserving the network's security and longevity for years to come.

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