Bitcoin layer-2 staking offers a superior alternative to interest rates


Bitcoin’s (BTC) transformation into a layer-2 (L2) solution benefits every user. From supporting increased transaction speeds and volumes to enhancing security and enabling smart contracts directly within Bitcoin, an L2’s technical advantages alone make it a major development within the Bitcoin ecosystem.

However, the effects of a Bitcoin L2 have the potential to reach far beyond technical improvement. The emergence of Bitcoin staking, which has been impossible until now, is a major step in legitimizing and mainstreaming crypto staking in general. As well as creating value for currency holders, staking creates a new kind of interest rate, defined by users rather than by central banks and government policy. This “people’s interest rate” offers an alternative to the flawed traditional interest rate systems — and the ability to stake a trusted and highly-recognized asset bolsters the feasibility and credibility of this vision.

Essentially, the introduction of a Bitcoin L2 means that instead of relying on the public internet to transmit data, Bitcoin transactions can now be conveyed across a layer-2 (or the data-link layer), guaranteeing data speeds and packet delivery regardless of traffic levels between the two parties.

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From an end-user perspective, complex smart contracts can now be developed and implemented directly in Bitcoin, containing within all the necessary conditions, dependencies and obligations — making Bitcoin not only a means of exchange, but a means of compliance, ensuring contracts’ integrity.

Another benefit offered by a Bitcoin L2 is staking, or the chance to earn interest or returns from the Bitcoin tokens under your management. While blockchains such as Tezos (XTZ), Cosmos (ATOM), Solana (SOL), Cardano (ADA), and Ethereum (ETH) have traditionally enabled “dormant” tokens to earn rewards for their holders, this has never been possible with Bitcoin. Historically, there has been no way to create value from “saved” Bitcoin aside from trading on price fluctuations.

The flawed system of base rates

It’s easy to see why bitcoin staking would be significant news for the Bitcoin “maxi” community — perhaps less obvious are the implications Bitcoin staking has for the wider economic landscape.

Putting Bitcoin to work through staking parallels is what mainstream fund managers, investors, and central banks do with fiat currencies. A country’s base rate — the interest rate that a central bank charges commercial banks for loans — nominally represents the opportunity cost of putting money in a savings account rather than investing it elsewhere. Underpinning this is the idea that returns from interest can offset inflation, which itself is influenced by the productivity and efficiency levels within an economy.

The European Central Bank’s (ECB) fixed interest rate from 2008-23. Source: Statista and the ECB.

As an economy develops, innovation enables companies to produce more with the same or fewer resources, resulting in a fall in the value of resources, including labour. This decrease in valuation is reflected in inflation, which reduces the level of real wages.

Theoretically, interest rates and inflation should offset each other, reflecting an economy’s productivity gains. In this way, savers are rewarded for lending money to finance innovations that should drive productivity.

In practice, however, interest rates do nothing of the sort. Over the past decade, effective interest rates in the world’s leading economies have remained at zero. Between 2010 and 2020 the European base rate remained below 1%, and from 2016 effectively zero. American rates followed a similar trajectory until 2018, when they crossed 1%.

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This was presented as great news for homeowners with mortgages, meaning lower mortgage interest payments, and greater affordability. However, consistently low or zero effective interest rates have mixed effects on different segments of the population as well as the wider economy, and it’s hard to see how denying returns to those prudent enough to have money in the bank could be considered a good, or fair, policy.

Central banks are only as independent as any government allows them to be, and as central bankers themselves are appointed by the government, they are ultimately implementers of policy — and spurious base rates are one of the consequences of this.

What becomes apparent when considering the broader base rate landscape is a detachment from the fundamental ideas that underpin their basic utility. There is no correlation between interest rates and the opportunity cost of investing. Instead, base rates risk becoming nothing more than a political tool that officials can use expediently and opportunistically.

A ‘people’s interest rate’

Bitcoin staking offers an alternative. Just as fiat currencies can create income within savings accounts, unused Bitcoin can also earn rewards for participants. However, unlike within traditional financial systems, the interest rate for Bitcoin staking is determined by users themselves rather than a central bank, unburdened by political agendas.

The more useful Bitcoin is — measured by volume and frequency of transactions, use cases for smart contracts, and wider confidence in the currency — the higher the Bitcoin interest rate will climb. The opposite is also true — a plunge in confidence or sudden availability of a more attractive alternative will lead to a reduction in the Bitcoin interest rate. In this sense, the rate would behave more like an exchange rate in which popular, integral economies generate a premium over others.

This possibility had already been implicit within staking more generally, but Bitcoin’s place in mainstream understanding of crypto boosts the profile and the importance and accessibility of staking. Bitcoin L2s have ramifications that echo far beyond technical improvement, and the new structures enabled by Bitcoin staking should be of interest to everybody, not just those deeply ingrained within the ecosystem.

BItcoin staking is a fresh, decentralized alternative to the inadequate systems currently in place — making possible a new rate defined by participants, rather than lobbyists and governmental interests, forming part of a better future for our economic systems.

Jonathan Hargreaves is the global head of growth at the Web3 ecosystem, Elastos, a blockchain project that developed Bitcoin layer-2 solution BeL2. He previously worked in corporate communications and technology marketing at firms including Edelman, Weber Shandwick, and Burson-Marsteller. He transitioned to Web3 at CreDA before joining Elastos.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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