Decoding the Complex Landscape of Bitcoin Layer 2: Navigating Challenges and Building Narratives

Dec 19, 2023

Author：@tmel0211

Source:

https://twitter.com/tmel0211/status/1733001724598874388

After the boom of the Inscriptions market, many people have placed excessive expectations on Bitcoin Layer 2 (L2), believing that Bitcoin L2 will shine as brightly as Ethereum L2.

However, the reality is that the “success” of the Bitcoin ecosystem may remain stagnant in the “asset issuance” narrative for a long time. Replicating the diverse gameplay of Ethereum, such as DEX, Lending, Derivatives, and Aggregator, on the Bitcoin chain may be fundamentally unfeasible. Why? I will share some technical logics:

Bitcoin and Ethereum are different . The former is a “stateless” chain, while the latter implements complex composability of financial business logic based on smart contracts.

To replicate various financial applications like 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 essential components for constructing contracts. However, it is impossible to achieve these fundamental states.

● Computation: Bitcoin’s core computation capability can be considered as unlocking conditions in the ScriptPubkey script of UTXOs. However, this computation capability is severely limited and challenging to express complex business logic.

● Verification: Full nodes in the Bitcoin network can verify UTXO balances and script signatures, but this is limited to basic verifications. The Bitcoin network cannot even verify the specific execution results of these logics.

In summary, to implement complex financial applications on Bitcoin, it is necessary to extend based on Bitcoin’s limited “capabilities” and build a programmable framework with “state + computation + verification.”

Looking at Ethereum’s scalability roadmap, it has explored various routes such as Plasma, Rollup, Validium, and ultimately chose Rollup as the mainstream. Meanwhile, Bitcoin’s scalability, which initially involved block size adjustments, SegWit segregated witness, has already concluded. Currently, it is primarily engaged in the orthodox disputes of sidechains like Stacks, client-side validation like RGB, and state channel validation like the Lightning Network.

Due to the limitations of Plasma sidechains in supporting smart contracts and the excessive independence of Validium, unable to inherit the mainnet’s security, the Rollup route could emerge as the winner. Even though certain aspects of the Rollup solution may be unsatisfactory in practical implementation, theoretically, it has gained market consensus.

Comparing Bitcoin’s sidechains, client-side validation, and state channel validation, they have each developed their own path:

● Sidechain Stacks supports smart contracts and has a wide range of applications. However, it belongs to an independent consensus outside of Bitcoin and is challenging to gain unanimous acceptance.

● Client-side validation RGB adheres to the mainnet UTXO model, allowing off-chain clients to handle more complex transactions. However, it lacks bidirectional verification and constraint capabilities with the Bitcoin mainnet, and its development momentum is not yet mature.

● State channel Lightning Network, due to its proximity to Bitcoin core developers, is considered a relatively orthodox scaling track. However, the Lightning Network is developing too slowly. The recent introduction of Taproot Assets only runs assets on the mainnet, and its actual implementation in the Lightning Network is still uncertain.

If we follow Ethereum’s template for comparison, a mature Layer 2 should be protected by the mainnet’s security, demonstrate significant scalability improvements, and most importantly, run smart contracts in diverse scenarios. By these standards, sidechains, client-side validation, and state channels seem to fall short.

Protection by the mainnet: Lightning Network > Client-side validation > Sidechains;

Scalability effect: Sidechains > Client-side validation > Lightning Network;

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

Comparing these, the new doctrine of the scaling route becomes clear: if security is paramount, then waiting for the Lightning Network to develop into a large-scale solution is inevitable. If only scalability is pursued, trying to adapt Bitcoin is futile. A suitable sidechain can solve all the problems. If you want to balance all three, client-side validation RGB appears to be the optimal solution.

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The question arises: which route is worth entrusting Bitcoin Layer 2’s vision?

1. Sidechains, although feasible, are an independent consensus chain, not much different from Ethereum. A logical paradox arises: why create an entirely new Bitcoin sidechain when we already have Ethereum, a super smart contract verification network? Let Bitcoin maintain its position as a value storage chain, while other Ethereum-like chains expand the development imagination. Why reverse the logic?

2. Client-side validation, similar to Ethereum’s Rollup, RGB’s client-side validation performance is more suitable for mainstream Bitcoin scaling. This market and its name are currently a “black box,” and its potential development remains unknown.

3. State channels, due to the orthodoxy of Lightning Labs, the Lightning Network was once highly anticipated for scaling Bitcoin. However, after Taproot Assets, the Lightning Network tends to lean towards a payment network similar to Ethereum’s Plasma. It is challenging to become a Layer 2 that can handle various financial gameplay scenarios.

Fundamentally, trying to directly transplant Ethereum’s diverse financial gameplay to Bitcoin may be too hasty. The extension space of the Bitcoin ecosystem may be vast, but it may not necessarily mirror Ethereum.

Consider this: Innovating on Ethereum, influenced by its established dogma, is challenging. What about Bitcoin, where the dogma and doctrines are even more stringent?

The flourishing state of Ethereum Layer 2 is attributed to the inherent composability of its smart contracts, allowing for unlimited stacking and combination, akin to building with LEGO blocks. The primary risk in this entire process is, in fact, consensus overload. However, the diverse gameplay within the effective payload is already providing developers with a vast stage.

On the other hand, the Bitcoin Layer 2 ecosystem faces challenges due to its inherently weak foundational capabilities. Despite its rich expanses for scalability, the stringent security consensus of Bitcoin becomes a double-edged sword. While consensus has built an absolute barrier for Bitcoin, it also forms the fundamental restriction on the innovation potential of its ecosystem.

In conclusion, the majority of capital, institutions, and mainstream user groups in this market may find it perplexing due to the chaos and contradictions. VCs outside the Bitcoin ecosystem hold massive funds but are stuck outside the gate because they don’t know how to logically narrate Bitcoin’s building narrative to make sense. Meanwhile, developers within the Bitcoin ecosystem swing between various routes, lacking a unified development direction.

Although the retail market is eagerly jumping on the “asset issuance” bandwagon, few are interested in building. Ethereum’s ecosystem of asset issuance may have a diverse form, but it ultimately revolves around the underlying “value capture” narrative. Whether driven by VCs or retail, there needs to be value sedimentation.

The Bitcoin ecosystem is no different. The market cannot remain in the prosperity stage of pure “asset issuance” forever. Ultimately, there needs to be continuous technological breakthroughs, continuous building by someone, and continuous development of projects.

This market cannot be entirely composed of MEME.

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