Galaxy Research has identified significant sustainability challenges for Bitcoin Layer-2 (L2) rollups due to the high expenses associated with data posting.
A recent report by Galaxy Research raises concerns about the long-term viability of Bitcoin Layer-2 scaling solutions, particularly rollups, which have become popular for enabling cheap, fast, and decentralized transactions. The report highlights the economic hurdles these solutions might face due to Bitcoin’s limited blockspace and the costs involved.
High Expenses and Limited Blockspace
Bitcoin’s blockspace is limited to 4MB per block, creating substantial challenges for rollups that intend to use the network as a data availability (DA) layer. Rollups using zero-knowledge (ZK) proofs, for example, try to anchor their data on Bitcoin’s Layer 1 (L1) by posting proof outputs and state differences every 6-8 blocks. These postings can take up to 400KB per transaction, accounting for 10% of a Bitcoin block’s capacity. Since Bitcoin blocks have been consistently full since January 2023, competition for blockspace could lead to prohibitively high transaction fees, making it financially unsustainable for rollups and other users.
The report indicates that rollups relying on Bitcoin for DA need to generate substantial revenue from transaction fees on their networks to cover the high data posting costs. At an average fee rate of 10 sats/vByte, a rollup posting 400KB of data every 6-8 blocks might incur monthly costs of about $460,000, or roughly $5.5 million annually. If the fee rate increases to 50 sats/vByte, these expenses could rise to $2.3 million per month, totaling around $27.6 million annually. To break even, rollups would need a substantial number of users willing to pay transaction fees ranging from $0.05 to $0.23, depending on the fee rate environment.
Considering Alternative DA Layers and Restructuring
To address financial pressures, the report suggests that rollups might need to explore alternative DA solutions like Celestia, Near, or Syscoin, which offer more cost-effective options. However, this change could reduce their alignment with Bitcoin, potentially reclassifying them as Validium chains rather than true BTC rollups.
Another potential solution is for rollups to restructure as Layer 3 solutions, posting state differences to an existing Layer 2 or sidechain. This would lower data posting 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 Bitcoin’s secure infrastructure with the need to attract users and generate sufficient revenue.
