Bitcoin Layer-2 Rollups Face Sustainability Challenges, Says Galaxy Research

Bitcoin Rollups Face Long-Term Sustainability Challenges

Despite their growing popularity as a promising method to keep Bitcoin payments cheap, fast, and decentralized, a recent Galaxy Research report has raised concerns about the long-term sustainability of most Bitcoin layer-2 scaling networks, especially “rollups.”

The Challenges Facing Bitcoin Rollups

In a report published on Friday, Galaxy analyst Gabe Parker sheds light on the fundamental challenge facing Bitcoin rollups: the cost of posting data to the base layer. Rollups work by taking a multitude of transactions, compressing them into a single batch, and then posting a summary back to the main blockchain. This process is known as using the blockchain as a “data availability layer.” It’s an efficient method that allows any ordinary Bitcoin node to reconstruct the most recent state of the rollup network at any time.

However, Bitcoin blocks have a storage capacity limit of 4MB, and posting data to Bitcoin demands significant data usage. Each data posting transaction can consume up to 400KB (0.4MB) of block space, effectively occupying 10% of an entire block.

To make Bitcoin rollups viable, they must generate substantial revenue from transaction fees on their own networks, sourced from numerous users willing to pay for transactions. In a low-fee environment, where ordinary transactions cost ten satoshis per vByte (sat/VB), rollups would incur monthly expenses of $460,000 to maintain Bitcoin’s security. In a high-fee environment of 50 sat/VB, these costs could escalate to a staggering $2.3 million per month.

Survival of the Fittest

With multiple rollups vying for block space and expected to post their data every 6 to 8 blocks, base-layer fees could rise significantly. This could potentially price out smaller transactions, making it imperative for rollups to outdo one another in generating fee revenue to secure their place in the blocks.

Alexei Zamayatin, co-founder of “Build on Bitcoin” (BOB), a hybrid rollup designed to connect 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 alternatives like Celestia or a merge-mined Bitcoin sidechain. While these options may be cheaper, they compromise some of Bitcoin’s complete decentralization and security.

Zamayatin responded to the Galaxy report on Twitter, stating, “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.”

Implications for the Future

The implications of these findings are significant. To begin with, the success and sustainability of Bitcoin rollups hinge on their ability to remain cost-effective. If rollups become too expensive, they risk losing users to other layer-2 solutions on different blockchains, like Ethereum, which currently offers a lower-cost alternative.

Key statistics and data from the Galaxy Research report present a clear picture of the financial challenges ahead:

Monthly expenses of $460,000 in a low-fee environment (10 sat/VB).

Monthly costs could rise to $2.3 million in high-fee settings (50 sat/VB).

These figures highlight the urgency for rollups to innovate and optimize their fee structures. Otherwise, they risk being outcompeted and rendered obsolete.

Potential Solutions and Innovations

Several potential solutions can be explored to address the challenges outlined in the report. These include:

**Using Alternative Data Availability Layers**: As suggested by Zamayatin, rollups can utilize platforms like Celestia or merge-mined Bitcoin sidechains for data availability, reducing costs.

**Optimizing Data Compression Techniques**: By improving how data is compressed and posted, rollups can reduce the amount of block space consumed, effectively lowering costs.

**Incentivizing Lower-Fee Transactions**: Implementing mechanisms to prioritize lower-fee transactions can attract more users, balancing the cost burden.

**Enhancing Network Efficiency**: By improving the overall efficiency of their networks, rollups can handle more transactions at lower costs, making them more attractive to users.

Conclusion

The Galaxy Research report underscores a critical point: the long-term sustainability of Bitcoin rollups is contingent on their ability to manage data posting costs and generate sufficient fee revenue. As competition heats up and block space becomes increasingly valuable, rollups must innovate and optimize their operations to remain viable.

The future of Bitcoin layer-2 scaling solutions is still promising, but these challenges highlight the need for continuous innovation and adaptation. By addressing these issues head-on, Bitcoin rollups can continue to play a crucial role in maintaining the efficiency, speed, and decentralization of Bitcoin payments.

For a deeper understanding of the ongoing developments in Bitcoin and layer-2 solutions, consider reading more from trusted sources like CoinDesk Research and Bitcoin Magazine. These platforms offer valuable insights and updates on the ever-evolving crypto landscape.