Bitcoin Layer-2 (L2) Scaling Solutions May Face Economic Challenges, Report Suggests

A recent report by Galaxy Research has raised concerns about the long-term sustainability of Bitcoin Layer-2 (L2) scaling solutions, particularly rollups

Bitcoin Layer-2 (L2) scaling solutions, such as rollups, have emerged as a popular way to keep transactions cheap, fast, and decentralized. However, a recent report by Galaxy Research raises concerns about the long-term sustainability of these solutions due to the economic challenges they face.

One of the main challenges highlighted in the report is the high cost of data postings on Bitcoin. Due to Bitcoin’s limited blockspace of 4MB per block, rollups that use Bitcoin as a data availability (DA) layer have to pay a substantial amount to post their data.

For instance, rollups that use zero-knowledge (ZK) proofs typically post proof outputs and state differences every 6-8 blocks. Each of these data postings can consume up to 400KB, which is about 10% of a Bitcoin block’s capacity.

With Bitcoin blocks having been consistently full since January 2023, the competition for space could lead to skyrocketing transaction fees, making it economically unsustainable for rollups and other users.

The report notes that rollups using Bitcoin for DA will need to generate a significant amount of revenue from transaction fees on their networks to cover the high costs of data posting.

For example, at an average fee rate of 10 sats/vByte, a rollup that posts 400KB of data every 6-8 blocks would incur monthly expenses of approximately $460,000 or around $5.5 million annually.

If the fee rate rises to 50 sats/vByte, these costs would shoot up to $2.3 million per month, totaling about $27.6 million annually.

To break even, rollups would need a large number of users willing to pay transaction fees ranging from $0.05 to $0.23, depending on the fee rate environment.

Given these financial pressures, the report suggests that rollups may need to explore alternative DA solutions, such as Celestia, Near, or Syscoin, which offer more cost-effective options. However, this would reduce the rollups’ alignment with Bitcoin, potentially transforming them into 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 reduce data posting costs while maintaining some connection to the Bitcoin network.

Ultimately, the future of Bitcoin rollups will depend on their ability to balance the high costs of leveraging the network’s secure infrastructure with the need to attract users and generate sufficient revenue.

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