Exploring the Landing Paths for Bitcoin Layer 2 Ecosystem

Jan 12, 2024

Author: @tmel0211

Source:

https://twitter.com/tmel0211/status/1742053195109830734?s=19

In the midst of the frenzy surrounding the inscription FOMO, I’ve had encounters with some “true” Bitcoin developers. Surprisingly, they don’t exhibit overheated enthusiasm and talk about disrupting Ethereum with Bitcoin Layer 2, as one might expect.

Instead, there seems to be a consensus: the Bitcoin ecosystem has potential, but it will be distinct from Ethereum’s DeFi Lego-like paradigm. Moving forward, based on technical reasoning, let’s delve into how the Bitcoin ecosystem should be implemented.

Indeed, this new asset issuance method, like the inscription, has drawn many people back to the ICO era of 2017, igniting enthusiasm once again. This wave of inscription enthusiasm has brought new users, new application scenarios, and additional funds. To some extent, it’s justified to call this a Bitcoin bull market.

Subsequently, various directions such as sidechains, the Lightning Network, Taproot Assets, RGB, BitVM, etc., are crowded with “coveters” of Bitcoin’s orthodox Layer 2. They often loudly proclaim their intention to replicate everything from Ethereum in the Bitcoin ecosystem, creating quite a stir.

Just like the unsustainable nature of the ICO asset issuance boom, the inscription market also yearns to take on a brand-new Bitcoin Layer 2 trend as the FOMO tide subsides.

Having such ambitions and aspirations is not wrong. However, if one wants to replicate the diverse gameplay of Ethereum’s ecosystem in Bitcoin, it’s not feasible (see the top article for details). The Bitcoin ecosystem needs to explore a landing path that aligns with its inherent characteristics.

The core logic is that the native characteristics of the Bitcoin chain impose “constrained” computing and verification capabilities. Even the storage capacity in the Taproot address SegWit is subject to controversy regarding dust attacks.

The limited computing power means that more complex transaction logic must be implemented off-chain. For example, bitVM envisions a Turing complete computation based on off-chain circuits and on-chain logical gates (0, 1), implemented based on the optimistic Rollup concept. While this idea is ambitious and the technical logic is reasonable, the engineering effort required is impractical.

The limited verification capability makes Bitcoin more suitable for asset settlement than global state verification. The Schnorr signatures and MAST data structure features of Bitcoin nodes currently provide some verification capabilities. However, Schnorr only aggregates multiple signatures, limited to multi-signature scenarios, and MAST allows the creation of more complex scripts, but relying on the UTXO model can only perform asset settlements and cannot achieve global state verification. Building a complex light node matrix can enhance the interactivity between sidechains and the main chain, improving the security and response speed of asset settlements.

The storage dispute is undeniable. Bitcoin has developed on an extremely minimalistic path, a consensus reached after the end of the previous block size war. Therefore, the idea of making significant changes to the script space based on Taproot is certainly impractical. Although it may not reach the extent of the SegWit being castrated, upgrade protocols like Atomicals, RUNE, PIPE tend to compromise and lean towards smaller block directions, such as discarding large JSON data packets and returning to optimizing and applying OP_Return space.

These limitations determine that Bitcoin’s Layer 2 expansion solutions are significantly different from Ethereum:

1.Bitcoin lacks Data Availability (DA) capabilities. Ethereum’s DA is the computational and verification capability of the mainnet validators for layer 2 submissions. Clearly, while Bitcoin can accept a certain amount of data, the mainnet does not possess viable and efficient computing and verification capabilities.

Therefore, Bitcoin’s DA is more like a “bulletin board” where raw data is stored in the Bitcoin block and can only be accounted for and verified by off-chain indexers. This will undoubtedly test the accounting and verification capabilities of indexers. If there are multiple indexers, the challenge will be further increased, leading to confusion and error issues in accounting logic.

2. Bitcoin’s interoperability is limited. Ethereum’s layer 2 submits the state to the mainnet, and the mainnet has contracts that can coordinate with the layer 2 to implement mechanisms such as a 7-day challenge time window and a layer 2 escape hatch to ensure that the mainnet can protect the assets of layer 2 users in the premise of Sequener’s malfeasance. Obviously, Bitcoin, without the capability of smart contracts, does not have this level of security. Users can only trust that Bitcoin Layer 2 will not behave maliciously.

3. Bitcoin’s UTXO security model is limited to “payment” scenarios. Similar to the solution of Ethereum’s Plasma layer 2, if each transaction’s corresponding nonce hash, etc., is synchronized with the mainnet in the form of UTXO by the layer 2, a secure mode can be established based on UTXO. However, just like Plasma is limited to payment scenarios, Bitcoin Layer 2 based on the UTXO model also has this limitation. Any mechanism with a complex smart contract like EVM cannot solely rely on this security mechanism unless additional consensus outside the Bitcoin chain is added.

Given this technical logic and understanding, the narrative space for Bitcoin Layer 2 becomes very clear:

1.Use Bitcoin as a settlement layer, build an independent consensus for Layer 2, and provide a comprehensive set of DA, interoperability, VM virtual machine, and various other capabilities that align with Ethereum’s ecosystem. However, such a powerful chain is essentially recreating an Ethereum execution chain. Many people may not know that Ethereum actually has a Beacon settlement chain, and what we see as the main chain of Ethereum 2.0 can be regarded as a layer 2 of the Beacon chain.

The reason why people have a weak perception of the settlement chain is that the core of the mainnet is the ability to verify interactions. If you only build a settlement chain, the chain that handles a large number of computation and verification operations will become the true “main chain.”

The problem arises: If we use Bitcoin as a settlement chain, can other chains dare to call themselves the main chain? Does the Bitcoin ecosystem allow the existence of such “consensus”?

2. Use Bitcoin for payment solutions, including the Lightning Network, Taproot assets, and client verification of RGB. Essentially, these solutions rely on the UTXO model of the Bitcoin mainnet to provide security. This naturally limits these solutions to payment scenarios.

The Lightning Network provides a smooth experience for the circulation of small amounts of Bitcoin. Similarly, Taproot assets and RGB are also suitable for stablecoin payment channels.

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If you want to overlay some DeFi and EVM states on state channels and client verification, it is equivalent to adding more complex verification logic on the original UTXO model. Naturally, some states that the mainnet cannot verify will be submitted to the mainnet, essentially relying on off-chain consensus. Such solutions may work, but the security level will correspondingly decrease compared to transaction scenarios controlled by a pure UTXO model.

In conclusion, how can the Bitcoin ecosystem land?

If the Bitcoin ecosystem empowered by pure Bitcoin security consensus points to applications and consumption scenarios such as the Lightning Network and Taproot assets, then RGB client verification and other complex application scenarios that can achieve complex Layer 2 smart contracts;

If Bitcoin allows some off-chain consensus outside the main consensus, it points to complex application scenarios of RGB client verification that can achieve complex Layer 2 smart contracts;

If the Bitcoin mainnet only serves as a settlement chain, relying on independent consensus outside the chain, then various solutions such as sidechains, consortium chains, index chains, etc., that can establish consensus and strictly enforce transparent asset settlement seem to be viable.

If groundbreaking Bitcoin Turing computing and verification solutions like BitVM are implemented, and they are cost-effective and lower than Ethereum’s smart contract construction, then the above conclusions may be overturned.

In any case, the impossible triangle problem of security, decentralization, and scalability is more pronounced on the Bitcoin mainnet. The so-called orthodox Bitcoin Layer 2 may be a pseudo-proposition. In my view, choosing orthodox consensus means accepting the “limitations” of expansion. If you want to break through these limitations, don’t wave the flag of an invincible consensus.

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