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

Crypto asset management giant Grayscale says there’s a “renaissance” in Bitcoin development, with several new Layer 2s (L2s) worthy of keeping an eye on.

In a new investor report, Grayscale analyst Michael Zhao argued how these technologies may both bring new use cases to Bitcoin and foster more market demand for BTC.

Rollups On Bitcoin

Zhao first named Bitcoin Virtual Machine (BitVM) among Bitcoin’s “most anticipated” next generation of applications.

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

One of the leading applications of BitVM in development is optimistic Bitcoin rollups, letting users batch fast, cheap transactions together in off-chain environments before settling them back to Bitcoin in one piece.

“While still in its early stages, projects like Build on Bitcoin aim to incorporate BitVM for future settlement,” the report stated. Late last month, developers at BitcoinOS published a whitepaper explaining a practical Bitcoin rollup system that would let users bridge BTC back and forth between rollups in a decentralized manner.

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

Users’ pegged Bitcoin assets are secured by a rotating subset of 100 ”orchestrators” that manage the layer 2 chain, which can feature any functionality seen on other blockchains, like Bitcoin.

Bitcoin Staking With Babylon

Babylon is also expanding the Bitcoin “staking” world through its BTC re-staking technology. This would allow BTC holders to stake their coins and earn yield on them by using them to secure other blockchain networks, like Solana or Ethereum, if the latter networks were upgraded to allow for it.

Finally, projects like Taproot Assets seek to bring tokenization – specifically stablecoins – to one of Bitcoin’s most popular current L2s: the lightning network.

“With numerous projects vying 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 on other smart contract platforms,” Grayscale wrote.

Given Bitcoin’s underdeveloped smart contract ecosystem, Grayscale believes it could be a massive untapped market. For example, while roughly 17% of Ethereum’s total market cap ($360 billion) is currently used in applications, the value locked in Bitcoin dapps is still just 0.2% of its total market cap ($1.2 trillion).

“If the latest wave of development results in more adoption for these use cases, it would imply a larger addressable market and potentially a higher market value over time,” Grayscale concluded.