Galaxy Research Warns of Sustainability Threats to Bitcoin Layer-2 Rollups

A recent Galaxy Research report has raised concerns about the long-term sustainability of Bitcoin's Layer-2 (L2) matching solutions, particularly rolls, which have gained popularity for making transactions cheap, fast and decentralized.

Despite the initial promise, the report suggests that these solutions may face economic challenges due to the limitations and costs associated with the Bitcoin blockspace.

High cost and limited block space

Bitcoin's block space is limited to 4MB per block, a limitation that presents significant challenges for packages that want to use the network as a data availability (DA) layer. Rollups, which typically use zero-knowledge (ZK) proofs, commit their data to Bitcoin's secure Layer 1 (L1) blockchain by posting proof results and state differences every 6-8 blocks.

However, these data postings can consume up to 400 KB per transaction, which is equivalent to 10% of Bitcoin's block capacity. Given that Bitcoin blocks are continuously full from January 2023, competition for space could lead to high transaction fees, which would be economically unsustainable for blockchain and other users.

The report highlights that in order to cover the high cost of posting data, Bitcoin will need to generate significant revenue from transaction fees on the network using DA. For example, at an average rate of 10 SAT/Vbyte, a package that posts 400KB of data every 6-8 blocks can cost around $460,000, or about $5.5 million per year.

If the rate is increased to 50 sat/vbyte, these costs could rise to $2.3 million per month, which amounts to $27.6 million per year. To break even, a bundle needs more users willing to pay transaction fees, which range from $0.05 to $0.23 per payment area.

Optional DA layers and reconfiguration

Given these financial pressures, the report suggests that scrolls may need to explore alternative DA solutions such as Celestia, Near or Syscoin that offer more cost-effective options. However, this reduces the binding of scrolls to Bitcoin, potentially turning them into validium chains rather than true BTC scrolls.

Another possible solution is to reconfigure bundles as layer 3 solutions, posting state variations to the existing layer 2 or sidechain. This reduces data posting costs when there is limited connectivity to the Bitcoin network.

The report states that future Bitcoin rollouts will depend on their ability to attract users and generate sufficient revenue to offset the high costs of using the network's secure infrastructure.