Galaxy Research has cast a shadow over the long-term viability of Bitcoin’s layer-2 scaling solutions, particularly rollups, despite their current popularity for making Bitcoin transactions more affordable, faster, and decentralized. In a comprehensive report released on Friday, August 2, analyst Gabe Parker flagged the high cost of posting data as a critical obstacle for these rollups.
Challenges Facing Bitcoin Rollups
Parker’s analysis underscores that for Bitcoin rollups to sustain themselves, they need to generate significant revenue through transaction fees on their respective networks. This revenue generation is contingent on attracting a substantial number of users willing to pay for transactions. Rollups function by aggregating numerous transactions, compressing them into a single batch, and then posting a summary of this batch back to the main blockchain.
Bitcoin rollups utilize the primary blockchain as a “data availability layer.” They post enough data to ensure that any regular Bitcoin node can reconstruct the most recent state of the rollup network at any given time. However, Bitcoin blocks have a storage capacity limit of 4 megabytes (MB), and posting data to Bitcoin consumes a significant amount of this space. Each data posting transaction can take up to 400 kilobytes (0.4MB) of block space, effectively occupying 10% of an entire block.
Survival of the Fittest
With several rollups anticipated to post their data every six to eight blocks, base-layer fees could escalate considerably, potentially pricing out smaller transactions. For rollups to endure, they must outperform each other in generating fee revenue, which will ultimately determine their priority in the blocks.
Galaxy Research has estimated that in a low-fee environment—where ordinary transactions cost ten sat/VB (satoshis per vByte, a unit of block space data)—rollups would face monthly expenses of $460,000 to maintain Bitcoin’s security. In a high-fee environment of 50 sat/VB, these monthly costs could skyrocket to $2.3 million.
Alternative Solutions
Alexei Zamayatin, co-founder of “Build on Bitcoin” (BOB), a hybrid rollup intended to link Ethereum and Bitcoin, believes Bitcoin rollups can be as cost-effective as Ethereum rollups. However, he argues against using Bitcoin’s main chain for data availability. Instead, Zamayatin recommends using Celestia or a merge-mined Bitcoin sidechain. While these alternatives could be cheaper, they might compromise some of Bitcoin’s full decentralization and security.
Responding to Galaxy Research’s report on Twitter, Zamayatin stated, “No one will use Bitcoin L2s if they are 100x more expensive than Ethereum L2s, just because ‘it is on Bitcoin.’ Good news: They won’t be more expensive.”
The Road Ahead
The future of Bitcoin rollups hinges on continuous innovation and optimization in data compression and scalability. As the blockchain ecosystem evolves, the pressure will be on developers to create more efficient and cost-effective solutions. Only time will tell which rollups will thrive and which will fall by the wayside.
Implications for the Crypto Community
The findings from Galaxy Research serve as a crucial reminder for the crypto community. While layer-2 solutions offer promising avenues for scalability, they also come with their own set of challenges. Stakeholders must weigh the benefits against the potential costs and inefficiencies.
Conclusion
In summary, the sustainability of Bitcoin layer-2 rollups is far from guaranteed. The high costs associated with data posting and the fierce competition for fee revenue present significant hurdles. However, with ongoing innovation and strategic adjustments, there is hope for more efficient and cost-effective solutions in the future. The crypto community will be watching closely as these developments unfold.
