Analysing the Bitcoin Scaling Landscape

Executive Summary

1. Bitcoin is seeing a wave of innovation with technologies like Ordinals, Inscriptions, BRC-20 tokens, and Runes. These developments are expanding Bitcoin's functionality by enabling metadata attachment and introducing new token standards, drawing comparisons to Ethereum’s token ecosystem.

2. Ethereum’s Layer-2 (L2) solutions account for about 10% of its total value locked (TVL), whereas Bitcoin’s L2 adoption remains significantly lower, with only 0.13% of its total value in L2 solutions. This highlights the need for Bitcoin to adopt more scalable solutions to support the increasing demand for its ecosystem.

3. State channels, which operate similarly to Bitcoin’s Lightning Network, provide off-chain transaction capabilities that can alleviate the burden on the main blockchain. Although the Lightning Network has improved Bitcoin’s scalability, its current success rate is around 50%, with issues around routing and liquidity management.

4. Sidechains like the Liquid Network offer a promising solution for scaling Bitcoin by enabling faster transactions and asset management without congesting the main chain. Liquid provides features such as confidential transactions and digital asset issuance, making it a valuable tool for enhancing Bitcoin’s functionality. However, adoption remains slow due to limited awareness and reluctance from exchanges and wallet providers to integrate it.

5. The upcoming Nakamoto Release on the Stacks network is poised to significantly enhance transaction throughput, finality, and security. This release will phase out the need for miner elections and introduce faster, more secure transaction processing, making Stacks more robust for future applications.

6. Looking ahead, the adoption of rollups on Bitcoin remains promising but faces several hurdles. While rollups like Optimistic and ZK-Rollups can dramatically increase transaction throughput, challenges such as fraud-proof verification, governance and pricing of proof verification on Bitcoin must be addressed before rollups can be fully integrated into Bitcoin’s ecosystem.