Merlin holds the leading position among Bitcoin L2 chains

Merlin is still the leader among Bitcoin L2 chains based on BTC deposited. Merlin is also moving closer to a decentralized chain with ZK proofs. 

Bitcoin’s L2 is growing at a slower pace, but already singling out some of the winners. Merlin, with its first-mover advantage, is one of the most well-funded chains in terms of locked BTC. 

Based on different reports, Merlin holds between 7K and upward of 9K BTC, with more than 11K BTC locked during its peak a few months ago. In 2024, Merlin Chain retained its position as the leading L2 chain, though its native MERL token has underperformed, with no significant breakouts.

Stacks, another high-profile protocol, reports 3,242 BTC in its deposits. The protocol incentivizes usage by sharing fees with its BTC depositors. L2 projects aim to tap existing BTC owners and offer larger ecosystems with additional activities, which can bring passive income. Merlin Chain has partnered with Particle Network to allow the usage of native BTC wallets on other EVM-compatible networks. 

Merlin is also an EVM-compatible chain, offering decentralized apps and its native DEX. As of October 17, the DEX accrued around $24M in liquidity. A recent Messari report on the state of Merlin points out the project uses a side-chain architecture, but in the future, aims to offer full ZK proofs, depending on overall technological advancements. 

While L2 on Bitcoin remain niche, renewed interest may signal a revival of investments. L2 have also raised some scrutiny on their exact mode of consensus, as some of the projects may be centralized, instead of building a distributed network.

Bitcoin L2 try to take off again

Bitcoin L2 projects expanded in the first half of 2024, but stalled as other narratives took all the attention. Ethereum’s L2 achieved much faster growth, mostly due to rewards and airdrop promises. Additionally, locking up BTC is seen as riskier and too expensive for retail buyers. Bitcoin L2 is also not clearly defined, with some analysts claiming the Lightning Network counts as a L2. 

The other chief reason is that BTC itself does not require that much scaling. The existence of Ethereum L2 is mostly due to constraints on speed and expenses for using apps, games, DEX, lending and other protocols. BTC has much fewer apps, and is still used as a store of value or as a coin for simple transfers. 

Bitcoin L2 tokens have a market cap of $6.67B as of October 18. The sector is considered undervalued, as it is still in the early experimental stages. 

So far, Internet Computer (ICP) has been one of the most successful projects, after rebranding itself as a Bitcoin L2. ICP brings in regular fees in the past three months, while the market price draws in speculation for an eventual breakout.

Bitcoin L2 chains do not start out with existing apps on the main net. Instead, projects like Bitlayer first build their network, then grow their app space. L2 chains also try to create demand for their apps, generate fees, then potentially draw in bigger BTC deposits.

The activity and user count of L2 also does not depend on the number of BTC deposited. Some protocols like Lightning Network grow in terms of volumes between well-used routes affects the results of specific node operators. Some professional nodes like LQWD Technologies achieved 600% year-on-year growth based on specific highly liquid payment gateways for North America. 

Interest in BTC staking remains, though not all projects can attract stakers at the same pace. Babylon Labs was the latest project to tap unused BTC, locking in more than 23K coins. The goal of Babylon Labs is to offer non-custodial staking, where depositors are in full control of their assets. Babylon Labs uses the locked BTC as a proof of safety for its planned side products, while also promising fees to its stakers and validators.