Bitcoin L2s: Hot or not?
Peer-to-Peer Cash, an alternative to the existing traditional financial system that so badly failed us in 2008, was the promise of Bitcoin.
For many years, the innovation continued, but the more interesting dApps found a home on smart contract chains, something that Bitcoin, designed for simplicity and payments, couldn’t offer.
It also grew too expensive for mainnet payments, and lightning network, an intricate net of p2p channels, hasn’t been able to deliver on the promised scalable payment experience either.
But Bitcoin is far from a quiet, peaceful oasis of laser eyed maxis dreaming of the citadel.
Ever since the Taproot update, activity has picked up, starting with Ordinals to developers building entire rollups on top of Bitcoin. That’s why we were excited about Bitcoin.
We still are, but it’s also worth asking: Do we need all those L2s on Bitcoin?
A Socratic question, if you will. Is it really worth it? Only by examining can we find out.
“Wisdom begins by wonder” - Socrates
To discuss this question with us, we invited Sam from Bitfinity and Talip from Citrea - both working in the Bitcoin ecosystem.
You can listen to the whole discussion here - or read on for the most important insights.
When people got into Bitcoin
For SQD CEO Dmitry, the first time he bought Bitcoin was in 2014 on a Runescape game server. But he forgot about it and lost the wallet. Only three years later, he spent time understanding it and concluded that it wasn’t a scam after all but decentralized money.
Sam shared that his career in tech recruitment meant staying on top of tending technologies. After his first encounters with Bitcoin, he realized that there wasn’t much people could build on top, so his focus shifted to Ethereum.
“Ultimately, I came back to Bitcoin when a lot of innovation started happening, such as the introduction of new token standards since the Taproot upgrade.”
That said, he believes that while there is still a difference in tooling and such, Bitcoin’s resilience has been proven over time, making it a solid foundation on which to build.
Talip first came across Bitcoin as part of an interest in computers in high school.
“I was trying everything, and I also got into Bitcoin. I still remember the emergence of Bitcoin Cash as well.”
After a break, it was friends who brought him back into the ecosystem, and now he’s a DevRel engineer in crypto.
What even is a Bitcoin L2?
Although the term Bitcoin L2 is frequently thrown around, it’s come to cover a wide range of very different technologies.
For Talip, a real Bitcoin L2 would:
- Have a Bitcoin-backed system (use BTC as an asset)
- Increase BTC throughput
- Do not allow anyone to steal funds.
“In my opinion, there should not be any ability to steal or freeze funds from users on an L2. That’d be a true L2. At least users should be able to withdraw at any time.”
Ethereum L2s, for example, often still have an escape hatch, which serves as a tool of last resort for users to withdraw their funds from the L2 without requiring consent from the L2 sequencer.
On Bitcoin, L2s are built differently, leading to different bridging technologies. What makes matters more complicated is that Bitcoin L2s also include side chains, not per definition, but at least in marketing terms.
Sam echoes that sentiment, saying that “L2 has become a generic term used to class all of the projects building on Bitcoin.”
Why build on Bitcoin?
There is a set of Bitcoiners who are happy with Bitcoin as digital gold. They can be quite vocal. But that shouldn’t keep people from building. The one aspect that isn’t great is privacy, but that’s the same for all the other major chains.
For Talip, it’s largely a question of driving innovation. Sure, all these things have centralized sequencers for now, maybe a lack of users, but who knows what they will pave the way for? The Lightning Network, as imperfect as it may be, at least opened the door for discussions of building on Bitcoin.
“We should just try doing things, not stop emerging ideas before they appear. When we started building Citrea, not much was happening, but now there are many interesting discussions around Opcodes, consensus proofs, and more.”
Sam adds that Bitcoin has proven itself over time, and now is the moment to start as financial institutions are getting ready to allocate portions of their funds to Bitcoin.
“As everywhere, there will be winning solutions, and when larger institutions start investing, we’ll see a trickle through of the liquidity and developers wanting to tap into it. Bitcoin staking, microtransactions, or prediction markets, I don’t see why they shouldn’t be successful on Bitcoin, too.”
Challenges building on Bitcoin
Despite the potentially stable foundation of Bitcoin, its network design differs starkly from the EVM, not least in the fact that Bitcoin is not turing-complete.
Dmitry thinks that’s part of its beauty, but it also means builders end up having to run a lot of their infrastructure off-chain to make their dApps usable.
“Next-gen L2s use tooling to bypass the Turing-incompleteness, a complex challenge drawing in many cryptography nerds. What happens on Bitcoin is pretty bullet-proof, but as soon as you build around it, how do you structure the cryptography and tech to guarantee similar security and reliability? I’m not saying it’s impossible; it’s just an area where things quickly get blurred.”
Another technical challenge mentioned by Talip is that Bitcoin Script isn’t great for building L2s, requiring complex setups even to verify transactions. Moreover, Bitcoin blockspace is limited, meaning L2s must carefully consider what to publish and fine-tune to ensure they use up as little blockspace as possible.
Tech challenges aside, after all, real people in the real world don’t care all that much about the ins and outs of cryptography - as long as stuff works.
Sam thinks that much more education is required to explain the different units of accounts of the bridging tech and sensitize the public that not all L2s are built equally. He believes that eventually, we’ll see a handful of “wrapped Bitcoin” alternatives deemed credible.
Quick aside: wrapped Bitcoin fell out of favor when the entity currently custody-ing Bitcoin announced that they’d be moving the holdings from their US-based entity to their international company - which happens to be owned partly by Justin Sun. You can sign a pledge to save wBTC by freeing it from its current centralized setup here.
Convincing developers to build on Bitcoin L2s isn’t a piece of cake either, as those interested in Bitcoin want to do Bitcoin Core stuff, and those who know Solidity want to work on Ethereum because it’s familiar. It’s a struggle to gain adoption, as Talip puts it.
Lastly, Dmitry points out that Bitcoiners are more conservative and will not be moving their holdings just for an additional 5% yield onto a perceived less secure L2. It’ll require more meaningful apps that embed Bitcoin and leverage it in ways the current wrapped BTC + Co doesn’t accommodate.
Centralization
Even though Bitcoin maxis like to tell everyone around them that you’re a shitcoiner and should use Bitcoin as a role model in decentralization, it’s a fact that mining has centralized over time.
Two mining pools alone make up over 50% of the Bitcoin hashrate (the computing power put into Bitcoin mining) - and despite the occasional reports recently of solo miners mining a block, this is sheer luck and not an indication that solo-mining is on the rise.
Mining solo is not feasible with the high hardware requirements. It might become as hardware accelerates, but that’s uncertain.
Still, Dmitry believes that as long as there is decent light client software allowing people to verify the state of the network without running a full node, it’s not all that bad. What is important though is to consider maintaining similar guarantees as Bitcoin offers in the tooling chosen to develop apps on top of it.
Centralization isn’t great. It’d be nicer to have more mining participants, but eventually, it comes down to social consensus.
“If something bad happens, then we might see hard forks. The blocksize wars taught us that it’s possible, even though it’s not easy. A fork isn’t the end of the world.” - Talip
Quick aside: If you weren’t around for the blocksize wars, it was two fractions in the Bitcoin community who had differing opinions on how to scale Bitcoin. As the name suggests, one fraction wanted to increase the blocksize significantly, and the others didn’t. The latter group led by Roger Ver - aka Bitcoin Jesus - would fork Bitcoin and create Bitcoin Cash. The other one is the Bitcoin current L2s are building on. It’s an interesting piece of crypto history, and even though we’ve not seen many forks recently, as WordPress says, forking is beautiful.
Thanks to our speakers and everyone reading and listening!
Also, our CEO did mention we’ll be adding Bitcoin raw data to the data lake after portals release, so stay tuned for that.
You can follow the projects Sam and Talip are working on here: