Bitcoin layer-2 face uncertain future amid high operational costs

Digital assets firm, Galaxy, has said that most Bitcoin Layer-2 (L2) scaling networks are unsustainable. In a report by Galaxy’s research analyst, Gabe Parker, the firmer rollup networks are unlikely to survive, given the massive cost of operating them on the Bitcoin network.

Although everyone agrees about the high cost, Bitcoin L2 developers are divided on whether to build directly on Bitcoin. Some have suggested that L2s build on Bitcoin and use other solutions for posting data. However, there are questions on whether such L2s could be regarded as true Bitcoin rollups.

Bitcoin rollups are unsustainable because of blockspace scarcity

According to Galaxy’s report , the emergence of rollups layer-2 on the Bitcoin network faces a fundamental challenge in the cost of posting data on the network. The rollups, mostly Zero Knowledge-Proof, rely on Bitcoin as their data availability (DA) layer and would have post data on the Bitcoin network.

However, the size of a Bitcoin block is capped at 4 MB, which makes it unsuitable to serve as a DA layer compared to Ethereum. Per the report, the average cost for rollups posting data on the Bitcoin network will depend on transaction fees, varying between $5.5 million annually when the fee is 10 sats/vByte and $27.6 million annually when the fee is 50 sats/vByte.

Bitcoin Layer-2 Costs (Source: Galaxy Digital)

The cost could be much higher since Bitcoin fees could increase, especially when competition for blockspace is high. With such high costs, the rollups would have to generate a significantly high number of transactions and fees so that their revenue would exceed their costs.

Although no Bitcoin L2 rollup has launched, Galaxy research identified about 65 in development. Their arrival could further increase the transaction fees on the network, affecting all users, including the rollup itself. Gabe wrote:

“The consistent demand for blockspace from a Rollup posting data on Bitcoin L1 every 6-8 blocks will force time sensitive transactions to pay a premium before or during the data posting block. This will, in turn, increase fees for all Bitcoin users, including the Rollups.”

However, the report noted that its research is not definitive as the sector continues to develop. Developers building ZK-rollups for Bitcoin also work tirelessly to optimize data compression, which could help reduce costs.

Developers are divided on how to build Bitcoin L2s

In response to the research, Alexei Zamyatin, the co-founder of Build on Bitcoin, suggested that the rollups should not use Bitcoin as their DA layer and instead opt for other solutions such as Celestia, Bitcoin-native solutions, or merge-mined DA sidechains. He stated:

“Optimistic rollups will be the way to scale for the foreseeable future, unless we get more upgrades. Even OPCAT it will likely be too expensive for new rollups as you need to amortize costs among a large user number to be close to ETH L2 fees. “

This proposal has generated different responses from community members who questioned if the L2s can still be considered Bitcoin rollups if they don’t post proofs on the flagship blockchain network. Alex Thorn, the head of research at Galaxy Digital, said : “If it doesn’t post its proofs and state diffs to the bitcoin L1 blockchain, can a roll up be considered a ‘bitcoin L2’?”

However, Zamyatin opined that it does not matter whether an L2 posts directly to Bitcoin L1, especially if it increases costs. He added , “No-one will use Bitcoin L2s if they are 100x more expensive than ETH L2s, just because “it is on Bitcoin.”

Meanwhile, other developers, including Orkun, the pseudonymous founder of Bitcoin L2 network, Citrea, noted that using Bitcoin as a DA layer is the only “incentive-compatible” way to build on Bitcoin and ensure full security.