Galaxy Research Warns: Sustainability Issues Loom for Bitcoin Layer-2 Rollups

Written by Z, Enzo

Last updated: 2024-08-05

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Galaxy Research Warns: Sustainability Issues Loom for Bitcoin Layer-2 Rollups

The future of Bitcoin rollups hangs in the balance of continued innovation and optimization, particularly in data compression and scalability. A recent Galaxy Research report raises concerns about the long-term sustainability of most Bitcoin layer-2 scaling networks, specifically “rollups.” While these rollups are popular as a means to maintain cheap, fast, and decentralized Bitcoin payments, their sustainability is questioned. Analyst Gabe Parker points out in the report that the cost of posting data to the base layer is a significant challenge for Bitcoin rollups.

For these rollups to prosper, they must generate considerable revenue from transaction fees within their networks. This revenue relies on a large user base willing to pay for transactions on the layer-2 networks. Rollups function by bundling numerous transactions, compressing them, and then posting a summarized batch back to the main blockchain. The report underscores the need for substantial user adoption and transaction fee revenue to ensure the viability of Bitcoin rollups in the long run. The industry must closely monitor these developments to assess the true potential and limitations of this scaling solution.

Bitcoin rollups cleverly employ the blockchain as a “data availability layer,” efficiently posting enough data for any standard Bitcoin node to reconstruct the rollup network’s latest state whenever needed. Nevertheless, Bitcoin blocks face a 4MB storage cap, and uploading data to Bitcoin requires considerable data usage. Each data posting transaction can use up to 400KB of block space, which equates to a notable 10% of an entire block. This innovative yet resource-intensive process underscores the balance between data availability and blockchain limitations in the Bitcoin ecosystem.

Fittest Survive: The Essence of Evolution

Fittest Survive: The Essence of Evolution

As multiple rollups are expected to regularly post data every six to eight blocks, there’s a significant potential for base-layer fees to increase, possibly excluding smaller transactions due to cost. To stay afloat, rollups must compete vigorously in generating fee revenue, as this factor will dictate their block priority. According to Galaxy Research, in scenarios where fees are low, with standard transactions costing ten sat/VB (satoshis per vByte – a measure of block space), rollups could incur hefty monthly expenses of around $460,000 to uphold Bitcoin’s security. However, in a high-fee setting of 50 sat/VB, these monthly costs could escalate to a staggering $2.3 million. This intense competition among rollups illustrates the “survival of the fittest” principle, where only the most efficient and profitable rollups will thrive in this environment.

Alexei Zamayatin, co-founder of “Build on Bitcoin” (BOB), a hybrid rollup solution aiming to bridge Ethereum and Bitcoin, strongly believes that Bitcoin rollups can offer cost-efficiency comparable to Ethereum rollups. However, he cautions against relying on Bitcoin’s main chain for data availability, suggesting instead the use of Celestia or a merge-mined Bitcoin sidechain. While these alternatives may be cheaper, they do compromise some of Bitcoin’s inherent decentralization and security. Responding to a Galaxy report on Twitter, Zamayatin emphasized that the cost-effectiveness of Bitcoin L2s is crucial for their adoption. He stated, “No one will use Bitcoin L2s if they are significantly more expensive than Ethereum L2s, just for the sake of being on Bitcoin. The good news is, they won’t be.” Zamayatin’s views highlight the importance of balancing cost and decentralization in the development of Bitcoin rollups.

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