Bitcoin Layer 2 Hype Collapses as Assets and Tokens Plummet

The excitement around layer 2 scaling solutions is waning as investors realize these are essentially new blockchains.

Merlin’s blockchain, once touted as a top ‘Bitcoin layer 2,’ has seen a sharp 63% decline in assets since July 1, according to DefiLlama. This drop is much steeper compared to Bitcoin’s 5% loss in the same timeframe.

MerlinSwap, the primary exchange on this blockchain, has experienced an even more severe downturn, with its total value locked (TVL) falling by 88%. Additionally, Merlin’s proprietary tokens, MERL and MP, have faced significant losses, with MERL down 84% from its peak and MP dropping 90%.

Since its Mainnet debut in February 2024, Merlin has undergone several rebrands. It now reports a TVL of $2.1 billion for Merlin Seal, though this figure may include inflated or double-counted assets. This represents a 44% decrease from the $3.8 billion value claimed for Merlin Chain on June 6.

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Instead of relying on Bitcoin’s proof-of-work for security like many layer 2 solutions, Merlin uses a proof-of-stake system. It primarily uses Bitcoin to demonstrate proof of stake and occasionally updates Bitcoin’s blockchain with aggregated data.

Despite these setbacks, the decentralized finance (DeFi) sector continues to thrive. TVL across DeFi platforms has grown by 54% this year, and the market cap of DeFi tokens has increased fourfold. Merlin could still recover if it shifts away from its outdated ‘layer 2’ branding and embraces a new approach.