- The Bitcoin trilemma helps explain why the blockchain has very slow transaction speeds
- Scalability improvements can increase functionality and promote BTC adoption
The most recent Bitcoin [BTC] The halving took place on April 19, 2024. The blockchain’s mining reward was reduced to 3,125 BTC, reducing supply and forcing miners to optimize their hardware. It also reinforced Bitcoin’s scarcity, making it a viable alternative as a store of value.
Michael Saylor, co-founder and former CEO of MicroStrategy [MSTR]realized how to use this mechanism to his company’s advantage during the previous cycle. In fact, he sees it as a protection against inflation.
To safeguard his treasury against inflation, he is not afraid to use leverage to buy more Bitcoin. “The only use of time is to buy more Bitcoin. Take all the money and buy more Bitcoin. Then take all your time to figure out what you can sell to buy more Bitcoin,” he said in January 2024. The king of cryptos has risen almost 115% since then.
His legendary belief supports the idea that more and more institutions would add BTC to their treasuries.
What do users expect from the blockchain, other than it being an investment and inflation hedge? What developments have occurred in 2024 and what is 2025 likely to have in store for BTC’s on-chain users?
Bitcoin trilemma
The three most important aspects of a blockchain are scalability, decentralization and security. Scalability refers to the ability to process transactions, decentralization is the distribution of decision-making and control over the blockchain, and security is the network’s ability to defend against fraud and attacks.
One of Bitcoin’s biggest challenges is scalability. The Proof of Work mechanism and the ever-growing hash rate ensure that Bitcoin as a network is very secure. Decentralization is also not one of the biggest drawbacks, although Bitcoin mining has become more centralized over the years due to the rise and growth of mining pools.
The Bitcoin blockchain can process approximately 7 transactions per second (TPS), while Ethereum [ETH] and Solana [SOL] are at 15 and 2,600 TPS respectively. This is the blockchain trilemma. The concept emphasizes the trade-off between security, decentralization and scalability.
To have high throughput, networks must sacrifice security or decentralization and choose to have fewer nodes to enable higher TPS. Meanwhile, highly decentralized networks struggle with efficiency and speed.
Solutions to the scalability problem
Over time, the popularity and number of users on the Bitcoin network are likely to increase. This would lead to increased demand from users, and could also cause the blockchain to increase its usefulness and value to a user.
As a layer 1, Bitcoin is built to have a low TPS and a limited number of use cases compared to chains like Ethereum or Solana, which have a robust decentralized finance (DeFi) ecosystem. To achieve scalability and support more complex applications, the network must look to Layer 2 solutions.
Layer 2 solutions are built on top of existing blockchains and do not require network-wide consensus to implement, unlike Layer 1 solutions. This makes them a more flexible and attractive solution option.
Some of the existing Layer 2s are Lightning Network, Stacks and Merlin Chain. Stacks aims to bring smart contracts to Bitcoin without changing the original protocol. Initially called Blockstack, it was renamed in October 2020. Stacks is a Bitcoin smart contract layer, expanding the network’s utility to include smart contracts, DeFi, NFTs (non-fungible tokens), and dApp functionalities (decentralized application).
Lightning Network and its potential in 2025
Lightning Network was proposed in 2015 and has been operational since 2018. It aims to increase transaction speeds and reduce costs by allowing transactions to take place outside the main blockchain.
And yet it faces a number of challenges. The Lightning Network allows users to switch by creating channels among themselves that can remain open for further payments. It reduces transaction fees, bringing them to $0.001 from the current $2.8 fee per transaction, and can be completed in seconds.
LN had approximately 15,000 and almost 54,000 payment channels as of August 2024, with channel liquidity of just over 5,000 Bitcoin. It has seen the implementation of several new wallets such as Muun and Phoenix that improve the user experience. Increasing adoption in Asia, Africa and Latin America makes e-commerce more viable. The use of LN is being driven by entities such as Bitrefill, a cryptocurrency gift card seller, and OpenNode, a payment processor that allows merchants to accept BTC as payment.
In 2025, expanding Lightning Network to use stablecoins for payments in addition to BTC would help drive mass adoption. This integration with stablecoins can establish real-world payments using crypto stablecoins and allow currency transactions to be settled almost instantly anywhere in the world.
Beyond low 2s
The future of Bitcoin Layer 2 solutions is full of potential, but further evolution is possible. Layer 3 solutions built on top of Layer 2 scalability aim to improve interoperability and application-specific functionality.
Layer 3 can enable customizable functionality by tailoring it to specific needs and optimizing performance and efficiency. They can seamlessly connect different blockchains and different Layer 2 solutions, expanding the possibilities of blockchain technology.
An example of a Bitcoin Layer 3 is Impervious, the browser built on top of Bitcoin. It is decentralized and all data transmitted is done privately, leaving no room for data surveillance. It is also censorship free.
It uses the Lightning Network to process transactions, meaning sending and sharing of documents happens almost instantaneously and is later sent to the blockchain. This would charge a fee for each transaction, but privacy may be worth it.
Another example of a Layer 3 solution outside of Bitcoin is Cosmos. It is designed to tackle the cacophony of blockchains by integrating them into an “internet of blockchains”. It provides secure data transfer between independent blockchains and sharding is used for scalability. This increases the potential for dApps by enabling the use of assets and functionalities from different blockchains.
Read Bitcoin’s [BTC] Price forecast 2024-25
Bitcoin Layer 2 solutions could reshape the use of the blockchain. By encouraging lower transaction costs and faster speeds, it drives public adoption, even for micropayments and informal spending. Progress on this path would mean that Bitcoin would not only be a store of value, but would also be a practical medium of exchange – as it was originally envisioned.