As the broader crypto space warms up to Bitcoin layer-2 scaling networks, a notable warning has been sounded as to their long term sustainability. As per a recent report published by Galaxy Research, “rollups,” despite being popular, may not live up to users’ expectations as a decentralized, cheap and fast way for Bitcoin payments.
According to Gabe Parker, Galaxy analyst, one critical challenge confronting Bitcoin rollups has to do with the cost of posting data to the base layer. The report seems to counter the view held in 2023 by industry stakeholders, Eric Wall and Udi Wertheimer.
The Economics of Bitcoin Rollups
Rollups by design, function by compressing a large number of transactions into a single batch. It then posts a summarized version of the batch on the main blockchain. Now, for the Bitcoin rollups to thrive, considerable revenue should be generated from the transaction fees on their own network. As per Parker’s explanation, the revenue needs to flow from the many users prepared to pay for transactions on the layer-2 network.
Additionally, the blockchain acts as a “data availability layer” for Bitcoin rollups. This facilitates the posting of sufficient data which ensures that any Bitcoin node can reconstruct the most recent state of the rollup network.
Meanwhile, the posting of data to Bitcoin requires substantial data usage. Given that Bitcoin blocks have a storage limit of 4MB in terms of capacity, it therefore means that each data posting uses up 400KB of block space. This infers that 10% of an entire block gets occupied with such posting.
Financial Implications and Competition
The danger here involves the likelihood that smaller transactions will get ignored as base fee soars, prompted by the multiple rollups posting their data every 6 to 8 blocks. The research report maintains that rollups could, by this, engage in unhealthy competition in terms of revenue generation to secure their position on the block.
As per Galaxy Research estimates, rollups may rake up monthly expenses of 460,000 to maintain Bitcoin’s security. This will be for a low fee environment, where ordinary transactions cost ten sat/VB (satoshis per vByte)- a unit of block space data). However, in a high fee scenario, the monthly expenses could soar to a staggering $2.3 million if it is 50 sat/VB.
Alternative Solutions and Future Prospects
Commenting on the Galaxy Research report, Alexei Zamayatin, co-founder of “Build on Bitcoin” noted that Bitcoin layer-2 will get ignored by the community should its cost get 100 times more expensive than Ethereum L2s, just because ‘it is on Bitcoin.’ Zamayatin remains optimistic that the costs will not.
Zamayatin however endorses using Celestia or a merge-mined Bitcoin sidechain, for being cheaper. The downside though is that it does not guarantee Bitcoin’s complete decentralization and security.
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