The inscription market is hot. Will BTC layer 2 shine like Ethereum layer 2?

Is BTC Layer 2 Set to Rival Ethereum Layer 2 in the Booming Inscription Market?

Author: Haotian, Crypto Observer Source: X @tmel0211

After the inscription market became popular, many people had too high expectations for BTC L2, thinking that BTC Layer 2 would be as brilliant as Ethereum Layer 2?

However, the fact is that the “success” of the Bitcoin ecosystem may be stuck in the “asset issuance” narrative stage for a long time, and it may not be feasible to replicate the diverse gameplay of Ethereum’s ecosystem. Why? Let me share a few technical logics:

BTC and Ethereum belong to two different chain species, with the former being a “stateless” chain and the latter implementing complex composability financial business logic based on smart contracts.

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To replicate various financial gameplay such as DEX, lending, derivatives, aggregator, etc. from Ethereum to the Bitcoin chain, it is crucial to build programmable “state + computation + verification” capabilities for Bitcoin.

– State: Currently, the Bitcoin UTXO set can only calculate real-time “balances”, historical balances, and historical records, but it cannot achieve the basic states that constitute contracts;

– Computation: The unlocking conditions of the Bitcoin ScriptPubkey script can be regarded as its core computational ability, but this computational ability is very limited and difficult to express complex business logic;

– Verification: Bitcoin network full nodes can verify UTXO balances and script signatures, but it is limited to these basic verifications themselves. The Bitcoin network cannot even verify the specific execution effects of these logics.

In short, to achieve complex financial applications on Bitcoin, it is necessary to build a programmable framework with limited “capabilities” on Bitcoin, and to do so, we need to rely on Ethereum’s scalability roadmap. Ethereum has gone through explorations of various routes such as Plasma, Rollup, Validium, and eventually chose Rollup as the mainstream. On the other hand, Bitcoin’s scalability started with block size adjustments and SegWit Segregated Witness, which have already been concluded. Currently, it is mainly in the orthodox dispute between sidechains Stacks, client validation RGB, and state channel validation Lightning Network.

Since Plasma sidechains cannot support smart contracts, and Validium is too independent to inherit the security of the main network, Rollup can break through precisely because it can inherit the security of Ethereum Layer 1 and is flexible enough to increase the upper limit of TPS. Crucially, the Rollup contracts on the main network can be validated by the main network validators, and Layer 2 users have the right to initiate challenges to withdraw funds. Although some aspects of its implementation may not be satisfactory, the Rollup solution theoretically also obtained mainstream market consensus.

With these considerations, Bitcoin sidechains, client validation, and state channel validation have developed their own factions:

– Sidechains Stacks: Supports smart contracts, and the application types are also diverse, but it belongs to independent consensus outside of Bitcoin, making it difficult to gain unanimous recognition from the public;

– Client-side validation RGB: It uses the mainnet UTXO model, and off-chain clients can handle more complex transactions. However, it lacks the bidirectional verification and constraint capabilities of the Bitcoin mainnet, so its development is not mature yet;

– Lightning Network state channels: Due to its close association with Bitcoin core developers, it is currently seen as a relatively orthodox scaling solution. However, the development of the Lightning Network is too slow, and recently, a new Taproot Assets feature was introduced, but it only runs on the mainnet, making it difficult to fully integrate into the Lightning Network.

If we compare this with the Ethereum model, a mature layer 2 solution should at least have security protection from the mainnet and show noticeable scalability effects, and most importantly, it should be able to run smart contracts in diverse scenarios. Based on this standard, sidechains, client-side validation, and state channels all seem to fall short.

– Security protection: Lightning Network > Client-side validation > Sidechains;

– Scalability effects: Sidechains > Client-side validation > Lightning Network;

– Contractual features: Sidechains > Client-side validation > Lightning Network.

Comparing these scaling options makes it clear: if security is the priority, then waiting for the Lightning Network to develop on a large scale is the way to go. If scalability is the main goal, then trying to modify Bitcoin is not worth it. A suitable sidechain can solve all the problems. If you want to consider all three aspects simultaneously, client-side validation with RGB is the optimal solution.

Now the question is, which path is truly worthy of entrusting Bitcoin layer 2’s vision?

1. Sidechains: Although it is feasible, it creates a separate consensus chain, similar to Ethereum. This creates a logical paradox. We already have Ethereum as a super smart contract verification network. Why do we need a completely new Bitcoin sidechain? It would be better to let Bitcoin focus on its position as a value storage chain and let other Ethereum-like chains expand the development imagination. Reverting back doesn’t make sense.

2. Client-side validation: Similar to Ethereum’s Rollup, RGB’s client-side validation is more suitable for mainstream Bitcoin scaling. This market and its name are still a “black box” at the moment, and its potential is unknown, so it is too early to draw conclusions;

3. State channels: Due to the legitimacy of Lightning Labs, the Lightning Network was once highly anticipated for scaling Bitcoin. However, after the introduction of Taproot Assets, the Lightning Network tends to lean towards a sidechain solution with payment network characteristics similar to Ethereum’s Plasma, making it difficult to become a second layer that can support a variety of financial activities.

Essentially, trying to replicate Ethereum’s diverse financial applications onto Bitcoin seems a bit hasty. Bitcoin’s ecosystem may have a large growth potential, but it may not necessarily copy Ethereum entirely.

Imagine playing with innovation on Ethereum, also influenced by its underlying dogmatic ideology, not to mention the stricter dogma and doctrine of Bitcoin?

Above all.

The prosperity of Ethereum Layer2 is due to the infinite combinability of its smart contracts, which can be stacked like LEGO blocks. The biggest risk in the whole process is actually consensus overload, but the various gameplay within the payload is enough to provide developers with a broad stage.

Bitcoin Layer2 ecology, on the other hand, is weak in its basic functionality and has too much room for scalability, but its security consensus is too strict. Consensus both makes and breaks Bitcoin, creating an absolute barrier, but it is also the fundamental limitation for ecological innovation.

So, chaos and contradictions are why most capital, institutions, and mainstream user groups feel confused.

The VCs outside of the Bitcoin ecology hold massive funds but cannot enter because they don’t know how to narrate the Bitcoin build in a logical way that makes sense. Meanwhile, developers within the Bitcoin ecology are hesitant between various routes, lacking a unified development direction.

Although retail investors are FOMOing, everyone only cares about the wealth myth that the inscription issuance may create, and no one bothers with the building of things.

Although the asset issuance path in the Ethereum ecosystem is diverse in form, it ultimately revolves around the “value capture” thread. Whether driven by VCs or retail investors, there must ultimately be value accumulation.

The Bitcoin ecosystem is the same. The market cannot always stay in the prosperous phase of “asset issuance”. It must eventually have continuous technological breakthroughs, continuous building, and continuous project development.

This market cannot be all MEME.

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