Can the Bitcoin ecosystem spawn a Layer2 Summer?

Can the Bitcoin Ecosystem Spark a Summer of Layer2?

Author: Haotian, Twitter, @tmel0211

After the inscription market became popular, many people had too many expectations for BTC Layer 2, thinking that BTC Layer 2 would be as splendid as Ethereum’s Layer 2?

However, the fact is that the “success” of the Bitcoin ecosystem may remain stagnant in the “asset issuance” narrative stage for a long time, and it may be impossible to replicate the diverse ecosystem of Ethereum.

Why? Let me share a few technical logics:

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Logic 1: Differences in programmable underlying layers

BTC and Ethereum belong to two different chain types. The former is a “stateless” chain, while the latter implements complex composability financial business logic based on smart contracts.

In order to bring various financial gameplay such as DEX, Lending, Derivatives, and Aggregator 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, which are the basic states that make up contracts and cannot be implemented.

Computation: The unlocking conditions of Bitcoin’s ScriptPubkey script can be regarded as its core computational ability, but this computational ability is highly limited and difficult to express complex business logic.

Verification: Bitcoin full nodes can verify UTXO balances and script signatures and other information, but they are limited to these basic verifications themselves. Bitcoin network cannot even verify the specific execution effects of these logics.

In short, in order to achieve complex financial applications on Bitcoin, we need to build a programmable framework based on Bitcoin’s limited “capabilities” to extend and create a “state + computation + verification” framework.

Logic 2: Comparing Ethereum’s scalability roadmap

If we look back at Ethereum’s scalability roadmap, it has gone through various explorations such as Plasma, Rollup, Validium, and finally chose Rollup as the mainstream. On the other hand, Bitcoin’s scalability, which initially appeared with block size adjustments and SegWit segregated witness, has already been settled. Currently, it is mainly entangled in disputes over the orthodox validation of sidechains like Stacks, client verification of RGB, and state channel verification of Lightning Network.

Since Plasma’s sidechain cannot support smart contracts and Validium is too independent to inherit the security of the main network, the Rollup roadmap was able to break through precisely because it can maintain the security of Ethereum L1 and is flexible enough to increase the upper limit of TPS. The key is that the main network Rollup contract can be verified by main network Validators, and Layer 2 users have the right to initiate challenges and withdraw funds. Although some aspects of the practical implementation may be unsatisfactory, the Rollup solution theoretically has gained mainstream market consensus.

In comparison, Bitcoin’s sidechains, client verification, and state channel verification are currently developing in different directions:

The sidechain Stacks supports smart contracts, and its application types are diverse, but it belongs to an independent consensus outside of Bitcoin, making it difficult to gain unanimous recognition from the public;

The client verification RGB adopts the mainnet UTXO model, and off-chain clients can handle more complex transactions, but it lacks the bidirectional verification and constraint capabilities with the Bitcoin mainnet, making its development momentum still uncertain;

The Lightning Network, due to its proximity to Bitcoin’s core developers, is currently seen as a relatively orthodox scalability solution. However, the development of the Lightning Network is too slow. Recently, a new Taproot Assets has been released, but it is still running on the mainnet, making it difficult to fully implement on the Lightning Network.

If we compare it to the Ethereum model, a mature layer2 solution should be protected by the mainnet in terms of security and have a noticeable scaling effect. The most crucial aspect is the ability to run smart contracts in a variety of scenarios. Based on this standard, it seems that sidechains, client verification, and state channels do not meet the criteria.

Protected by the mainnet: Lightning Network > Client verification > Sidechains;

Scalability effect: Sidechains > Client verification > Lightning Network;

Contract characteristics: Sidechains > Client verification > Lightning Network.

The comparison of the new doctrine of scalability routes is quite clear: If security is paramount, then we have to wait for the Lightning Network to develop on a large scale. If we only pursue scalability, there’s no need to try to reform Bitcoin. A suitable sidechain can solve all problems, and if you want to consider all three options at once, client verification RGB is the best solution.

Logical Three BTC Layer2 Vision Direction

The question is, which route is worthy of entrusting Bitcoin’s layer2 vision?

1. Sidechains, although both can achieve it, are independent consensus chains, similar to Ethereum. This creates a logical contradiction. We already have a super smart contract validation network like Ethereum. Why should we create a brand new Bitcoin sidechain? Let Bitcoin remain as a value storage chain and expand development imagination with other Ethereum-like chains. Wouldn’t that be more perfect? Why go backward?

2. Client verification, similar to Ethereum’s Rollup, the comprehensive performance of RGB client verification is more suitable for mainstream Bitcoin scalability. This market, just like its name, is still a “black box,” and how far it can develop is still unknown, so it is too early to draw conclusions;

3. State channels, due to the legitimacy of Lightning labs, the Lightning Network was once given high hopes for scaling Bitcoin. However, after Taproot Assets, the Lightning Network tends to have payment network characteristics, ultimately leading to a sidechain solution similar to Ethereum’s Plasma payment network, which may be difficult to become a second layer that can accommodate various financial playbooks as imagined.

Essentially, trying to directly copy Ethereum’s diverse financial gameplay to Bitcoin might be a bit hasty. The expansiveness of the Bitcoin ecosystem may be great, but it may not necessarily replicate Ethereum.

Just imagine, when innovating on Ethereum, you are still influenced by its underlying dogmatism. Not to mention, the dogma and doctrines of Bitcoin are even more stringent.

That’s it.

Driven by VCs or retail investors, value accumulation is ultimately necessary.

The flourishing state of Ethereum layer2 is due to the infinite combinability of its smart contracts, like building with endless Lego blocks. The biggest risk in this process is consensus overload, but the diverse gameplay within the payload is already enough to provide developers with a vast stage.

On the other hand, the Bitcoin layer2 ecosystem has weak basic functionality and an overly abundant scalability, yet its security consensus is too strict. Consensus has both made and limited Bitcoin’s ecosystem innovation fundamentally.

Therefore, chaos and contradictions are why many capitals, institutions, and mainstream user groups find it incomprehensible.

VCs from outside the Bitcoin ecosystem hold large funds but cannot enter because they have no idea how to narrate the narrative of Bitcoin Build to make logical sense. Meanwhile, developers within the Bitcoin ecosystem hesitate between various paths and lack a unified development direction.

Although retail investors are excited about the FOMO sentiment, everyone only cares about the potential wealth myth created by trading tokens, and no one pays attention to the building aspect.

Although the asset issuance routes in the Ethereum ecosystem are diverse, they ultimately revolve around the underlying thread of “value capture.” Whether driven by VCs or retail investors, value accumulation is essential.

The same applies to the Bitcoin ecosystem. The market cannot always stay in the prosperous stage of pure “asset issuance.” Eventually, there needs to be continuous technological breakthroughs, ongoing building efforts, and project development.

This market cannot be entirely filled with MEMEs.

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