The report published by the cryptocurrency investment company Galaxy Research raised concerns about the long-term sustainability of Bitcoin Layer 2 (L2) scaling solutions. According to the report, rollup solutions, which have gained popularity for keeping transactions cheap, fast, and decentralized, may face economic challenges due to Bitcoin’s block space limitations and costs.
High Costs and Limited Block Space
Bitcoin‘s block space is limited to 4 MB per block, which poses significant issues for rollup solutions that aim to link their data to Bitcoin’s secure Layer 1 (L1) network. Rollups using zero-knowledge (ZK) proofs aim to use this network by sending data outputs and state differences every 6-8 blocks.
In contrast, these data submissions can reach up to 400 KB per transaction, equivalent to 10% of a Bitcoin block’s capacity. Given that Bitcoin blocks have been consistently full since January 2023, competition for block space leads to skyrocketing transaction fees, making rollups economically unsustainable.
Economic Issues
The report highlighted that rollups using Bitcoin as a data availability (DA) layer need to generate significant revenue from transaction fees on their networks to cover data submission costs. For instance, a rollup sending 400 KB of data every 6-8 blocks at an average fee rate of 10 sats/vByte could incur monthly costs of approximately $460,000 or $5.5 million annually.
If the fee rate rises to 50 sats/vByte, these costs could escalate to $2.3 million monthly or approximately $27.6 million annually. To break even, rollups need a large user base willing to pay transaction fees ranging from $0.05 to $0.23, depending on fee rates.
Due to these financial pressures, the report suggests that rollups should consider using more cost-effective alternative data availability solutions like Celestia, Near, or Syscoin. However, this would reduce their compatibility with Bitcoin and potentially turn them into Validium Blockchains rather than true Bitcoin rollups.
Another potential solution is for rollups to evolve into Layer 3 solutions by sending state differences to an existing Layer 2 or sidechain. This approach could reduce data submission costs while maintaining some connection to the Bitcoin network.
The report concludes that the future of Bitcoin rollups will depend on their ability to balance the high costs of using the network’s secure infrastructure with the need to attract users and generate sufficient revenue. Rollups will need to develop innovative and sustainable strategies to overcome these challenges.
