Why is Bitcoin L2 more market potential than Ethereum L2?

Author: Jon Charbonneau Source: DBA Translation: Shan Oppa, Bitchain Vision

introduce

Bitcoin’s top layer two network (L2) will free up one of the largest markets in the crypto space.

This potential is obvious: Bitcoin (BTC) market capitalization is approaching$2 trillion, is gradually surpassing gold and becoming the world’s largest asset.An online platform that can dominate Bitcoin’s use is destined to become a giant in the future.

Currently, most people try to understand Bitcoin L2 through the perspective of Ethereum L2.However, this analogy often leads to false conclusions, including:

1.Underestimate the market size: The lack of programmability of Bitcoin L1 means market opportunities for Bitcoin L2In essence, it is greater thanEthereum L2.

2.Ignore the factors that determine the “winner”: Compared with Ethereum L2, Bitcoin L2 has higher security requirements and security will play a more important role in the early stage.

3.Underestimate the possibility of constructability: Recent technological breakthroughs have made it possible to build Bitcoin zero-knowledge summary (ZK-rollups) with optimistic-ZK bridges (with the trust assumption of “n-choose 1”).What’s even more surprising is that these innovations will arrive earlier than expected.And possible future Bitcoin upgrades may even be completely detrusted (for example, support direct ZK verification and remove the “n-choice 1” mechanism).

In this article, we will use a broader L2 definition, including all types from trust type (such as sidechains) to trust minimization type (such as ZK-rollups), but focus mainly onFully programmable L2, rather than more professional agreements such as payment channels.

The potential market for Bitcoin L2 is greater than Ethereum L2

We start with the first misunderstanding: underestimating the potential market (TAM) of Bitcoin L2.

The market opportunities for Bitcoin L2 are much greater than those of Ethereum L2.This conclusion is obvious in part because Bitcoin’s market value is approximately higher than Ethereum4.7 times, but more importantly, the following fundamental reasons:

1.The purpose of Ethereum L2 is to expand capacity

Ethereum L1 provides a complete programmable execution environment with the state value of its L1 storage far higher than its L2, despite the slow speed and low throughput of L1.The purpose of L2 is to provide the same functionality as L1, but faster and cheaper.L1 is still where “real money” is located, while L2 is more where “testing the waters”.

2.The purpose of Bitcoin L2 is to scale and programmability

Bitcoin L1 lacks programmability.And programmability is the key to unlocking greater privacy, better self-hosting experiences, and basic BTC DeFi.If L1 fails to provide these capabilities, this leaves a huge amount of room for building the dominant execution layer of Bitcoin.

Currently, most market participants use Ethereum L2 as their model to understand Bitcoin L2, but the correct comparison object should beEthereum L1.The winning Bitcoin L2 will become BitcoinExecution layer——Infrastructure that provides core support for the best crypto assets.

Just ask yourself: If Bitcoin L1 is completely programmable, would you use it?I definitely do.Thankfully, however, Bitcoin L1 does not offer this general programmability, as this simplicity is one of the core advantages of Bitcoin as a currency feature.However, the value of superimposing this feature onto L2 is undeniable, and L2 now has a chance to achieve that.

Considering that the execution layer usually shows extremely strongPower law distributioncharacteristic:

•Ethereum: Ethereum L1 is still the most valuable execution layer, dominating in indicators such as income, DeFi lockout (TVL), stablecoin issuance and other indicators.The scale of its L2 is much smaller than that of L1.

•Bitcoin: We can also expect that Bitcoin L2 will have a long tail distribution, and the largest Bitcoin execution layer will gradually widen the gap.However, due to L1’s lack of programmability, dominating the execution layer of BitcoinMust be L2.The only question is: Which L2 will be the winner?

Just as Ethereum L1 does for ETH, I believe the dominant Bitcoin execution layer must:

1.Significantly enhance the functionality of Bitcoin(such as better privacy, more friendly self-hosted user experience and basic DeFi features).

2.Not significantly weaken Bitcoin’s core advantages(such as secure self-hosting, confiscation resistance and unlicensed use).

Therefore, safety will be the decisive factor.

L2 Security

Ethereum L2: Speed ​​takes precedence over security

Let’s look at the second misunderstanding now: It doesn’t matter if Bitcoin L2’s high security is high, because Ethereum L2 users are not sensitive to security.

Observe the current Ethereum L2:

•Safety type L2: The three second stages of the current online summary (Stage 2 Rollups) are almost ignored.

•Unsafe L2: Users did not hesitate to invest billions of dollars in “L2” deposit contracts, which were controlled by unidentified 3/5 multi-signatures, without verification mechanisms and no chains.Even Base is only in the first stage (Stage 0).Optimism and Arbitrum have entered the first phase (Stage 1), but have taken many shortcuts (for example, Optimism has not had a validation mechanism for years, while Arbitrum still has a whitelist).

From this, many people concluded that the success of Bitcoin L2 requires priority to speed and neglecting security to quickly attract users.This is called “speed > security”.

Some even go further, believing that Rollups and verification bridges are failed experiments.Users don’t seem to care about L2 security, and L2 doesn’t seem to have enough motivation to achieve full decentralization.

Is there a higher security requirement for Bitcoin L2?

A common rebuttal is that the security of Bitcoin L2 is more important because Bitcoin holders are more sovereign and risk aversion than Ethereum holders.

I do not fully agree with the above two views:

• The conclusions drawn from the current usage patterns of Ethereum L2 users are misleading.The security of Bitcoin L2 will be more important than Ethereum L2 and needs to be valued earlier.

• But this is not because there are significant differences in risk preferences among Bitcoin and Ethereum holders.I don’t think there is any essential difference in this regard.No matter what assets are held, large capital holders are mostly rational when assessing risks.

Therefore, I believe that BTC and ETH holders are quite sensitive to security risks.Furthermore, due to excessive focus on those early ETH L2 users, many underestimate the risk of most capital to bridge securitySensitivity.

If capital is really highly sensitive to bridging security, why do a large amount of ETH still flow to unsafe bridging?

The answer is actually very simple-Users demonstrate their preference for high security by not performing bridging!

Currently, only2.5% ETH supplyis bridged to L2, and the number of ETH ETFs held has exceeded this proportion.Even hardcore Ethereum proponents understand that the current security of L2 (just for holding ETH) is actually not as secure as ETFs.Security issues are hindering large capital flows to L2.

The risk of bridging being hacked may lead to zeroing of assets, which brings high hidden costs to capital.Low security = high risk = high cost of capital = fewer capital inflows.

The reality is that most capital is acting quite cautious and risk averse here.You may be gambling on L2 with your risky funds (degen funds) but will leave the main funds (a more risk-averse capital) at L1.

So when we look at the current usage pattern of L2 bridges, we actually only see the preferences of this small portion of venture capital:

1. We cannot conclude that “L2 bridging security does not matter” just because mainstream L2 prioritizes speed over security and these “not very secure” L2 attract more ETH.Most capital expresses its high demand for security by avoiding bridging.

2. We can conclude that in this small portion of venture capital, the security differences between existing L2 are not decisive.

Prioritizing speed over security is indeed the right strategic decision for these early Ethereum L2.They need to be online quickly to gain market share.In its target market (risk-loving), incremental improvements in L2 security are not important.

For example: When friend.tech is first launched, if you want to try it, you might put a few dollars on Base.If you want to chase a new AI concept coin on Base, you will put some cash in.Whether Base has complex ZK verification mechanisms or time lock contract upgradeability has little impact in this case.

There is a reason Ethereum L2 targets smaller risk markets, because Ethereum L1 always attracts more serious capital (at least in the early stages).

• You can complete basic ETH DeFi operations on L1.

• You don’t need another high gas limit, same application copy of EVM to get the ETH profit.

• Using L1 is safer than bridging to L2, and for large transactions (i.e. using serious capital), the higher fees for L1 are acceptable.

The situation of Bitcoin is completely different:

•Bitcoin L1 essentially does not natively support most basic features.

• This changes the value proposition and target user base of Bitcoin L2 compared to Ethereum L2.

• This also changes the most important attributes of Bitcoin L2 and Ethereum L2.

Absolute and relative security

In the competition for Bitcoin L2,Absolute safetyandRelative securityAll are crucial.

Let’s illustrate this with two examples.To simplify the discussion, assume that we can accurately quantify the “security level” of L2 bridging:

In the first example, assume that Base’s security has improved significantly, but you still choose Ethereum L1.The reason is that the basic DeFi protocol can be used almost anywhere, and the high Gas fee of L1 has little impact on large transactions (incremental costs approach 0).Therefore, most user behaviors (such as lending, token exchange, anonymous transfer, re-staking, etc.) tend to use L1 directly when possible.

In the second example, it is assumed that Bitcoin L2 is as safe as Ethereum L2, but users must use Bitcoin L2.Although limited operations can be performed on Bitcoin L1 through DLC, etc., most features are still not possible.Therefore, users are more dependent on Bitcoin L2.

The optimization direction of L2 depends on the target user group:

•Ethereum: Ethereum L2 has not over-optimized security increments because additional security does not lead to more business growth for its target market (risk-loving).therefore,Speed ​​takes precedence over safetyIt is the main strategy.Security becomes a bottleneck only if L2 starts to compete directly with L1 to attract large amounts of capital.

•Bitcoin: For Bitcoin L2, security will become the key sooner.At present, the basic needs of risk appetite and risk aversion are not met.It will be of great value to occupy the safest Bitcoin execution layer, and this market is still open.

Two key points to winning:

•Absolute safety: Assume that the safest Bitcoin L2 is only 50% secure.Currently, all programmable execution layers using Bitcoin require the “honest majority” assumption (sometimes even rely on more worrying security practices).If the security of L2 is not at my minimum acceptable level, I either choose to stay on L1 to give up the expected operations (such as getting profits or enhancing privacy) or switch to a centralized product (this is a worrying trend at the moment).

•Relative security: If there is an L2 that meets the minimum acceptable security and can complete my target operation, I will choose the safest L2 under other conditions.

Compared to Ethereum, the preferred programmable execution layer for building Bitcoin is itself a huge market, and there are relatively few competitors:

•Less competition: There are not many teams in the world that are capable of driving the cutting-edge development of Bitcoin L2 technology.Developing Bitcoin-related technologies is extremely difficult. In the past year alone, multiple breakthrough research results have been needed to promote current state-of-the-art designs, and more technical difficulties need to be solved in the future.However, most Bitcoin L2s choose shortcuts at the expense of security.

•The market is huge: Head L2 will attract the vast majority of applications, capital and developers.Bitcoin’s limited decentralized capabilities (DA) also determines that only a few execution layers can make full use of their security guarantees.

Although there will still be some risk-loving players in the L2, which has compromised security flows, this market is small and competitive.In fact, the ultimate “winning” security L2 is likely to undertake a lot of such activities as well, as speculation tends to follow projects that seem valuable or interesting.For example, over the past year, the NFT boom on Bitcoin has obviously been dominated by speculation, and Bitcoin has not been optimized for these, but users are still willing to pay high costs to participate because it is “fun”.

Furthermore, the ultimate “winning” L2 is likely to attract more users willing to accept lower security compromises through expansion.For example, they may be extended to selective data availability (volitions) and L3 tiers to provide lower cost non-bitcoin DA options.

Alpen Labs

Bitcoin’s dominance L2 needs to be as close to Bitcoin itself as possible, and security is particularly critical here.Therefore, building this L2 must rely on the team at the forefront of Bitcoin’s expansion R&D.In addition, Bitcoin culture may also play an important role, so the team needs to be truly serious Bitcoin supporters, long-term commitment to realizing Bitcoin’s vision.

DBA believes that Alpen Labs is the team.They are building Strata, which we expect will be the dominant execution layer for Bitcoin.Specifically, Strata is a Bitcoin-based zkEVM Rollup (using SP1), equipped with hybrid optimism-ZK bridging technology.

Alpen Labs has been committed to expanding and enhancing Bitcoin with zk-SNARKs since 2022.They are undoubtedly one of the most impressive and principled teams we have ever met.We are very happy to support them.

They have made unparalleled contributions in the field, and these efforts have ultimately led to Strata’s design:

•Trey Del Bonis: In early 2022, Trey released a design plan on how Bitcoin ZK-Rollup works.

•John Light: Later in 2022, John wrote the landmark Bitcoin Validity Rollup Report, which brought Bitcoin Rollup to the public eye, igniting a lot of research work in this field.

•Simanta Gautam: In January 2023, several members of Alpen Labs (including Sims) co-wrote the ZK-Rollup on Bitcoin: Technical White Paper (summary in a BTC++ speech).

•Liam Eagen: In April 2024, Liam co-authored the breakthrough paper, On Proving Pairings (summated in a lecture on the DBA’s annual research day), which is crucial to the implementation of Strata Bridge.He also co-authored other important research such as Shielded CSV: Private and Efficient Client-Side Validation.

In addition, they help popularize concepts with easy-to-understand resources, such as David Seroy’s whiteboard course on Bitcoin Rollup and Strata bridging technology based on BitVM2.The team is growing.

This high-level team is a necessary condition for building the most secure Bitcoin bridging technology, both now and in the future.With possible future soft forks of Bitcoin (such as re-enable OP_CAT), the design will be further evolved and strengthened to provide better bridging solutions.

Strata

Let’s dive into the design of Strata.

ZK-Rollup: Basic functions

In fact, building a ZK-Rollup on Bitcoin is relatively “easy”.You can easily start a sovereign ZK-Rollup, leverage Bitcoin blocks to store Rollup data, and create proofs of its effectiveness.Rollup clients can easily verify data availability and correctness, thus ensuring their security.

However, things are much more complicated if you want to establish a two-way bridge between Bitcoin and Rollup.This kind of bridging is the key to transferring BTC to Rollup, but to achieve this, we need a mechanism for bitcoin nodes to verify off-chain execution.

In October 2023, Robin Linus’s BitVM paper proposed a mechanism for optimistic verification on Bitcoin, which is a major breakthrough.However, the initial implementation was relatively bulky and inefficient, with some open security issues, and the prospect of practicalization was not clear.

This technology has made significant progress over the past year.As technology matures, some early concerns, such as liquidity pressure issues, have been alleviated.Strata BridgeIt is a hybrid optimism-ZK bridging technology inspired by the BitVM2 paper.Alpen Labs worked with other members of the BitVM alliance to lay the foundation for its bridging technology.Strata Bridge is based on the original BitVM design and optimized with a number of latest research results to make it more practical, scalable, capital-efficient and secure.

Ultimately, Strata was able to build a Bitcoin-based ZK-Rollup and implement the 1/n trust assumption of BTC through a hybrid optimism-ZK bridge.This isStrata.

If you want to get a deep dive into the technical details, please refer to David Seroy’s Strata Bridge whiteboard course, as well as Alpen Labs’ blog posts, where they detail design and prototype implementation.

This is no longer the BitVM a year ago, nor is it the “honest majority” side chain today.The 1/n security model is already excellent, and future Bitcoin upgrades (such as OP_CAT) may enable L1 to support direct ZK verification, enabling completely trustless designs.

Strata Devnet has been online and open source for months.The full Strata Bridge implementation will be released within weeks with the Public Test Network, and the mainnet is expected to be launched within this year.

The current market has seriously underestimated the latest advances in Bitcoin L2 technology.

Make Bitcoin stronger

As a Bitcoin supporter and an investor in Alpen Labs, my goal is not only to make Strata “win” in the existing Bitcoin L2 market, but also hope that the entire market can grow and grow.

Bitcoin is already the best crypto asset.It has a fascinating story (for example, it was the first crypto asset, owning anonymous founder).Its basic economic properties are also impeccable (such as fixed supply).

However, BTC has other functional flaws compared to traditional assets such as gold and other crypto assets such as ETH and USDC.It lacks native strong privacy, scalability, speed, ease of self-hosting, interoperability with other assets, basic DeFi capabilities, and more.These functions are very important.This is why the on-chain dollar stablecoins continue to erode the off-chain dollar.The strength of a given asset as a “currency” depends on many different attributes, while the intensity of a programmable currency is stronger.

Unfortunately, to make BTC scalable and programmable today, some of its other best features must be sacrificed at all—self-custody, seizure resistance and permissionless use.So, can we have both fish and bear’s paw?

Better L2 is needed to bring this functionality and scalability to BTC,Without makingAny sacrifice.They will release BTC in the way the US dollar is released on the cryptocurrency track.They will make BTC a better currency.

Specifically, BTC is currently mainly used as SoV (“digital gold”).It is rarely used as UoA or MoE   (“Electronic Cash”).Adding the features described here will enhance all three currency features of BTC.If BTC is aspiring to be MoE and UoA, it is obviously necessary to make BTC more usable.However, I often hear the argument that if BTC limits its ambitions to SoV (“digital gold”), then it doesn’t need this.I strongly object to it.Even digital gold requires privacy, better self-hosting and scalability.If ownership and use of BTC becomes primarily managed and centralized (even without reliable decentralized fallbacks), it would be hard to beat even the shiny gold.Additionally, you should be able to get your SoV to work – BTC is the original collateral (for example, for DeFi) that is underutilized yet.

If we can’t safely add scalability and functionality to BTC, users will be forced to return to the hands of intermediary financial institutions, which we have struggled to get rid of since the first line of the Bitcoin White Paper:

• If we don’t make BTC self-hosting and private payments easier and more scalable, we will eventually be dominated by the dominant BTC custodians and payment providers.

• If we don’t enable basic BTC DeFi, we will end up with BTC CeFi.

• If we don’t build the L2 bridge that is maximum security and decentralized, we will eventually create centralized bottlenecks like cbBTC, even in the so-called “DeFi” ecosystem.

This is long known, as Hasu described many years ago, “We must ensure that we can meet sufficient market demand with trustless capacity, otherwise the custodial banking system will forever hinder the development of the underlying layer.” Modern L2 technologies such as StrataIt is crucial to make sure that this never happens.

Furthermore, as block rewards disappear, these L2s are the best way to provide a stable and secure budget for Bitcoin miners in the long run.It is unclear whether a simple L1 BTC transfer is sufficient to meet the demand.Expanding Bitcoin’s use as a DA layer seems to be the most effective way to provide stable revenue.It will diversify the types of BTC activity and enable more activities (in the same amount of L1 data, you can accommodate more L2 transactions than L1 transactions), thereby increasing the economic density of L1 transactions.What makes Bitcoin unique is that it can actually continue to charge a premium to DA given the need to use BTC with minimal trust.I think this is likely to happen becausecurrencyThere are the strongest network effects in cryptocurrencies, and BTC is the king.

Whatever type of Bitcoin supporter you are, it is crucial to introduce these features:

•Bitcoin Missionary: The main goal is to make Bitcoin have a positive impact on society.

•Bitcoin Mercenaries: The main goal is to get the $BTC price to rise, even if this may be accompanied by a hosted surveillance social utopia.

For missionaries, privacy, scalability, and ease of use are necessary for Bitcoin to have a positive social impact.

For mercenaries, these features make Bitcoin a better currency, thereby increasing adoption and price.In addition, Bitcoin’s security budget also needs to be addressed, which is crucial to its long-term impact and price growth.