Bitcoin fees are up 200x today. Given the fee hikes, Bitcoin L2s will emerge as a significant category in 2024.

Bitcoin fees have hovered around 1-3 sats/vB in 2022 and early 2023 (before Ordinals). It was not uncommon to easily get your 1 sat/vB transaction in if you were willing to wait a bit. Since Ordinals, we've seen fees do a 20x to 500x increase, depending on the week.

At 500 sats/vB, the Bitcoin L1 becomes hard to use for average users. Users will need to pay approx $50 to move $100 in BTC, and transactions below $50 would not make financial sense. Same for Lightning channels, closing Lightning channels where the economic value is $100 or so would not make sense. At even higher fee rates like 1000 sats/vB, things break more.

𝗛𝗶𝗴𝗵𝗲𝗿 𝗳𝗲𝗲𝘀 𝗮𝗿𝗲 𝗵𝗲𝗮𝗹𝘁𝗵𝘆 𝗳𝗼𝗿 𝗕𝗶𝘁𝗰𝗼𝗶𝗻 in the following ways:

(1) Higher fees improve the long-term security budget of Bitcoin. This is one of the biggest criticisms of Bitcoin from Ethereum circles, and real-world data on fees today counters the security-budget arguments.

(2) Higher fees show user demand for Bitcoin block space and revive the Bitcoin builders culture. Bitcoin L1 is alive with activity again!

(3) Higher fees will force our industry to build better Bitcoin L2s. 𝗕𝗶𝘁𝗰𝗼𝗶𝗻 𝗟𝟮𝘀 𝗮𝗿𝗲 𝗻𝗼 𝗹𝗼𝗻𝗴𝗲𝗿 𝗮 𝗻𝗶𝗰𝗲-𝘁𝗼-𝗵𝗮𝘃𝗲 𝗯𝘂𝘁 𝗮 𝗺𝗲𝗱𝗶𝗰𝗶𝗻𝗲 𝗳𝗼𝗿 𝗿𝗲𝗮𝗹 𝘂𝘀𝗲𝗿 𝗽𝗮𝗶𝗻.

Point (3) is the most important. Bitcoin L2s might be doing 20-30% of all BTC transactions in the coming years (right now, this number is small compared to Bitcoin L1 use). At some point, more BTC will move on L2s than Bitcoin L1. Bitcoin will likely be worth trillions in the coming years, and Bitcoin L2s will play a critical role in the success of BTC.

Relative to their importance, 𝘁𝗵𝗲 𝗕𝗶𝘁𝗰𝗼𝗶𝗻 𝗟𝟮𝘀 𝗰𝗮𝘁𝗲𝗴𝗼𝗿𝘆 𝗿𝗲𝗺𝗮𝗶𝗻𝘀 𝘂𝗻𝗱𝗲𝗿𝗳𝘂𝗻𝗱𝗲𝗱 𝘁𝗼𝗱𝗮𝘆. Ethereum L2s have raised billions of dollars and have a market cap of $50-$60 billion today. The largest funding rounds for Bitcoin companies working on L2s are in the $100-$200M range (Lightspark and Trust Machines are two recent examples), and only a few of them exist. 𝗪𝗲 𝗻𝗲𝗲𝗱 𝗱𝗼𝘇𝗲𝗻𝘀 𝗼𝗳 𝗕𝗶𝘁𝗰𝗼𝗶𝗻 𝗟𝟮 𝗲𝘅𝗽𝗲𝗿𝗶𝗺𝗲𝗻𝘁𝘀.

The Bitcoin L2s category will likely be in the 10s of billions in the coming years and could flip the Ethereum L2s market. It's relatively early for Bitcoin L2s, and they have much catching up to do. Developers are already showing a lot of interest, which is a leading indicator of demand. Hundreds of devs signed up for the sBTC developer release, for example (sBTC is the 1:1 BTC-backed asset for Stacks L2). Lighting, Stacks, Rootstock, and Liquid are the "Big Four" Bitcoin L2s today, with various upgrades in the pipeline (e.g., Stacks Nakamoto release). I'm excited to see what else developers are building, especially new works that reduce trust assumptions for BTC L1<>L2 movement (like BitVM).

𝗧𝗵𝗲 𝘁𝗵𝗿𝗲𝗲 𝗰𝗮𝘁𝗲𝗴𝗼𝗿𝗶𝗲𝘀 𝘁𝗼 𝘄𝗮𝘁𝗰𝗵 𝗳𝗼𝗿 𝗱𝗲𝘃 𝘁𝗿𝗮𝗰𝘁𝗶𝗼𝗻 will be:

(1) Alternate L1s like Solana and Avalanche.

(2) Ethereum L2s like Arbitrum and Optimism.

(3) Bitcoin L2s like Lightning and Stacks.

Given their relatively small size today, Bitcoin L2s likely have the most room to grow in the coming years. I'm bullish on Bitcoin L2s and can't wait to see more developers using them. It's time to build!

@muneeb