Bitcoin Layer-2 Rollup Sustainability Issues: Galaxy Research Analysis
Date: 2024-08-06 Author: Gabriel Deangelo Categories: CRYPTO PAYMENTS
Analysis of Bitcoin Layer-2 rollup sustainability has become a hot topic following the release of a new report from Galaxy Research. The paper raises important questions about the future of Bitcoin rollups and how constant innovation and optimization may impact their longevity.
The Bitcoin Layer-2 Market and Its Problems
In Galaxy Research’s latest report, which was released on August 2, analyst Gabe Parker emphasized that many Bitcoin Layer-2 networks, especially those using “rollup” technologies, may face sustainability issues in the long term. Despite the promise of these technologies for cheap, fast, and decentralized Bitcoin payments, they may have serious flaws.
Data Publishing Challenges
One of the main issues Parker highlighted is the cost of publishing data. In order for Bitcoin rollups to function effectively, they need to generate significant revenue from transaction fees within these networks. This revenue must come from the many users willing to pay for transactions on the second-layer networks.
Cumulative transactions aggregate a large number of transactions, compress them into a single batch, and then send a summary of this batch back to the main blockchain. This process uses the blockchain as a “data availability layer,” publishing enough information that any Bitcoin node can reconstruct the current state of the summary network at any time.
However, there is a limit to the storage capacity of Bitcoin blocks, which is 4 megabytes (MB). Storing data on the Bitcoin blockchain requires significant amounts of space. Each transaction can take up to 400 kilobytes (0.4 MB) of block space, which is 10% of the total block capacity.
Economics and the survival of Bitcoin rollups
The issue of scalability and the cost of publishing data affects the survival of Bitcoin rollups. In a low-fee environment, where typical transactions cost ten satoshis per vByte (a unit of block space data), maintaining the security of the Bitcoin network can cost up to $460,000 per month. At high fees, 50 satoshis per vByte, the costs can rise to $2.3 million per month.
To ensure long-term sustainability, rollups must demonstrate significant transaction revenue to compete for space in Bitcoin blocks. This creates a situation in which only the most successful and profitable solutions can survive and sustain their operations.
Alternative approaches and opinions
Alexey Zamayatin, co-founder of the Build on Bitcoin (BOB) platform, which is a hybrid rollup that combines Ethereum and Bitcoin technologies, expressed his point of view on the issue under discussion. He believes that Bitcoin rollups can be cost-effective, like their Ethereum counterparts, but is against using the Bitcoin main chain to ensure data availability.
Zamayatin suggests an alternative solution — using Celestia or Bitcoin sidechains with merged mining. While this approach may be cheaper, it sacrifices some of Bitcoin’s full decentralization and security.
In response to Galaxy Research’s tweet, Zamayatin emphasized: “Nobody will use Bitcoin L2 if they are 100x more expensive than Ethereum L2, just because “it’s on Bitcoin”. Good news: they won’t be more expensive.”
The Galaxy Research report highlights that while Bitcoin Layer-2 solutions like rollups hold promise, there are many challenges related to scalability and the cost of publishing data. It is important to consider that continued development and innovation are necessary for the survival and longevity of these technologies. Alternative approaches like Celestia and sidechains may offer solutions to existing problems, but the tradeoffs between cost and decentralization must be weighed.
