Key takeaways
- Bitcoin’s L2 projects aim to enable smart contracts and improve scalability, but introduce liquidity fragmentation.
- The shortage of talent in blockchain development poses challenges for the growth of Bitcoin’s smart contract ecosystem.
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According to Signal21 Analytics dataThere are 21 Layer 2 (L2) projects currently being built on the Bitcoin (BTC) ecosystem. The idea behind these projects is to enable smart contract functionality for Bitcoin while increasing the scalability of the mainnet without changing its fundamentals.
While this certainly adds more utility to an asset with a market cap of $1.1 trillion, it creates another problem, that of liquidity fragmentation.
Yuriy Yurchenko, CPO at Neon EVM, explained to Crypto Briefing that liquidity fragmentation is about decentralized finance (DeFi) being split into different liquidity pools, rather than becoming a consolidated and easily accessible market.
“Liquidity fragmentation has, over the past two years, created a massive disruption in available liquidity and trading volume across DeFi platforms, blockchains and networks,” he added.
Still, Yurchenko stressed that fragmentation is a consequence of scalability, and thus becomes a necessary problem as the blockchain industry solves its “number one problem”: how to scale a network.
Bitcoin’s base throughput averages seven transactions per second, which Neon EVM’s CPO says renders the blockchain commercially useless, making it redundant.
Neon EVM has partnered with Yona Network to create a parallelized L2 infrastructure compatible with Ethereum Virtual Machine on Bitcoin.
“So yes, today, to evolve the Bitcoin blockchain, it is important to create scalability solutions. This can be best managed by creating a good balance between fragmentation and scaling while creating robust DeFi solutions and projects.”
Scarce resources
The idea of integrating smart contract functionality into Bitcoin also raises another question in the industry related to available talent. With a limited number of blockchain developers, allocating resources to the Bitcoin ecosystem could hamper the development of networks that are already focused and at an advanced stage of smart contract applicability, such as Ethereum and Solana.
Yurchenko acknowledges that another problem should be mentioned, namely the variety of programming languages within the blockchain industry, such as Solidity, Rust, Vyper, etc.
However, Neom EVM CPO pointed out that some teams specialize in developing strong talent to solve such problems.
“We have seen this shortage in both the Ethereum and Solana ecosystems, and at Neon EVM we are in a good position as we have a strong developer team with capabilities on both sides (EVM and SVM). This puts us in a prime position for technology development in this direction.”
Additionally, he added that resource channeling in Web3 exists regardless of whether projects continue with Bitcoin infrastructure developments or not.
“I would say this phenomenon is a global Web3 problem, and a better forecast would include an influx of new talent into the space,” Yurchenko said.
One way to solve this problem is for cryptocurrency companies to foster talent internally, while continuing to hire across the board.
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