Phase 1 of the Bitcoin journey is complete. Over the past 10 years we have seen the Bitcoin network rebuff questions as to whether it would survive as a concept. Today, we see the bitcoin cryptocurrency gaining monetary premium as prominent institutional investors identify it as the ultimate inflation hedge. As we transition into 2021, observers are turning their attention to what a financial market built around the world’s first cryptocurrency will end up looking like.
The talk of the town over the past year has been focused on the potential of decentralized finance (DeFi) for digital assets and financial smart contracts, protocols and applications built on Ethereum. A development with equally promising potential to shake up crypto markets are layer 2 technologies, the overlaying network of services that expand on a blockchain’s capabilities.
This post is part of CoinDesk’s 2020 Year in Review – a collection of op-eds, essays and interviews about the year in crypto and beyond. Edan Yago is a neuroscientist and entrepreneur who dropped everything nine years ago to focus on Bitcoin. He has most recently contributed to bitcoin-native DeFi platform Sovryn. Previously, Yago founded Cement DAO and Epiphyte to provide global remittance with bitcoin.
This year has seen the rollout of the first layer 2 projects. In fact, Ethereum co-founder Vitalik Buterin himself has stated that layer 2 is now the roadmap for Ethereum, and by extension other blockchains, too. This means that other scaling solutions, or ways to improve a blockchain’s functionality such as tokens – application specific bits of code – could become obsolete.
Will the success of layer 2 developments mean the demise of altcoins?
2020: The high watermark for altcoins
In the beginning there was only Bitcoin, and it did something quite remarkable – it created value out of nowhere. The Bitcoin blockchain had been designed to create only one thing – bitcoin. As others jumped onto this alchemist bandwagon, a multitude of alternative coins were created that were meant to function in a specific application like health care, identity or gaming. In reality, almost all of these projects ended up going nowhere.
There was one notable exception. Ethereum, and its provision of smart contracts provided real functionality even if the results of its open system are dubious. Its native currency, ether, is the second-most popular cryptocurrency after bitcoin and it is rapidly growing. Ethereum’s first “killer app” was the initial coin offering, a way to create more tokens.
However, with the rise of DeFi in 2020 Ethereum’s technological flaws have come into relief.
Ethereum is notorious for being incredibly slow, expensive to use and inefficient to the point where it is sometimes difficult to even get a transaction in. Progress has been frustratingly slow on Ethereum 2.0, the blockchain upgrade designed to address these issues. As a result, Ethereum developers in 2020 turned to…