Investors continue to research the winning digital asset in the expansive realm of layer-1 blockchain networks. Ethereum, Solana, Elrond, and countless other networks offer smart contract solutions for digital transactions.
American computer scientist Nick Szabo coined the term "smart contracts," calling them "computerized transaction protocols that execute terms of a contract." For smart contracts to be effective and revolutionary, they must settle on a layer-1 network where no trust is required from a third party to execute the contract. The base settlement layer needs to be incredibly secure and decentralized to accomplish this. Enter Bitcoin.
Bitcoin's characteristics give itself an immense claim to become the primary base settlement layer of the world's financial system versus all other layer-1 blockchain networks.
Understanding Layered Networks
"Layer-1" refers to the primary network where transactions are validated and settled. As mentioned earlier, this includes protocols such as Bitcoin and Ethereum. The networks can be scaled using "layer-2" systems that operate on the base layer. An example of layer-2 is Bitcoin's Lightning Network, where smart contracts are issued to enable instant bitcoin payments and are later inscribed on Bitcoin's immutable layer-1 blockchain. This infrastructure allows for faster transaction times and energy efficiency while maintaining the bitcoin network's security.
Think of layered networks as a real-estate development. Layer-1 is the land, and the buildings on the property are layer-2. The land must be secure and reliable to build upon for the real estate to scale. Investors should seek the same features when searching for a reliably profitable layer-1 solution. If layer-1 network security becomes compromised, the value built on top of the network becomes severely at risk.
Bitcoin is Premium Digital Property
Bitcoin's traits make it the premiere digital property. Its durability, divisibility, fungibility, portability, verifiability, and scarcity make it an excellent choice for a layer-1 foundation. All other major layer-1 networks lack one necessary characteristic Bitcoin has; durability.
While Bitcoin's proof of work (PoW) method receives criticism for its energy use, this expenditure is a feature of its security, not a liability. Miners on the Bitcoin network need to purchase computational equipment and run their machines indefinitely to function on the network. Proof of stake (PoS) networks simply need validators to buy large amounts of the network's tokens to win blocks on the system. The latter's incentive structure substantially increases the risk of a 51% attack compared to a proof-of-work system such as Bitcoin.
Complexity is also a detriment to durability. Other PoS networks are widely known for their smart contract capabilities, such as issuing NFTs, Defi applications, and managing Decentralized Autonomous Organizations (DAOs). The trouble is, this is all happening on layer-1. This complexity leads to severe scaling bottlenecks, where transaction costs become overwhelmingly high, or transactions are not being completed at all. And constant short-term protocol changes at the base layer could cause more problems for layer-2 and layer-3 applications.
As a base layer, Bitcoin does not need to have these functionalities to scale. Layer-2 networks can take the capabilities of NFT applications or DAOs without compromising the base layer's security. One example of a new bitcoin layer-two application is The Impervious Browser.
This April, Impervious Technologies is set to announce its Impervious API, where users can build applications similar to Zoom, Google Docs, Medium, and so on without a centralized authority. The Impervious API acts as "a programmatic layer that sits on top of the Bitcoin Lightning Network, i.e. 'Layer 3.' Developers can leverage the Impervious API to easily build secure p2p data transmissions and payments into their applications and services."
In truth, we're still in the discovery phase over which innovations will stand the test of time when it comes to layer-2/layer-3 applications. Some may grow, others may die out. But the trend is clear: the strongest layer-1 network will survive, and that network is Bitcoin.
Growing Demand for a Secure, Neutral Settlement Layer
In February of 2022, Russia violated Ukraine's sovereignty by invading its country - and the conflict is still ongoing today. Western nations have unleashed an unprecedented financial sanction program on Russia in response. Russian financial institutions have been partially banned from using SWIFT, a global messaging network used to execute international financial transactions. $300 billion in its foreign currency reserves are frozen. Recently, Severstal was the first Russian firm to run out of time to pay its debt due to Citigroup blocking its $12.6 million coupon payment.
It's important to note: Bitcoin is transparent. It is pseudonymous. Bad actors can still be traced by investigators and prevent them from accessing traditional finance systems. But what this new financial paradigm is revealing is that the reliance on third parties to store value or act as intermediaries is not as immutable as once believed.
Cyberattacks are also an attack vector. Because of their centralized nature, bank processing systems can be at risk of an attack. A January 2020 report from the Federal Reserve Bank of New York suggests that an "impairment of any of the five most active U.S. banks will result in significant spillovers to other banks, with 38% of the network affected on average."
A secure, neutral layer-1 network offers a solution. Imagine a world where nations' fiat currency transactions are composed of layer-2 smart contracts, and the transactions are later settled on Bitcoin's layer-1 network. U.S. digital dollars or Euros can be sent internationally without an intermediary by using Bitcoin as a payment rail.
From citizens to nation-states, accounts can use self-custody solutions to store their Bitcoin savings and have an even greater level of security compared to a traditional centralized entity. The opportunity for a more neutral and secure financial network for all is immense.
Bitcoin still has an extensively long way to go before it can reach such global use to be part of the mainstream financial network and base layer of decentralized web applications. It is currently too volatile and needs more liquidity. Yet, bitcoin could become the world reserve asset, payment rail, and apex base layer of the internet for the global community.
This article, along with all content and opinions from BTC Examiner, is for educational purposes only and is not financial advice. Please reach out to your financial advisor before making any investment.