Research Summary
The report discusses the challenges and potential of Bitcoin Layer 2 (L2), comparing it with Ethereum L2. It explores the technical limitations of Bitcoin’s ecosystem and the potential routes for its scalability, including sidechains, client-side validation, and state channels.
Key Takeaways
Bitcoin’s Technical Limitations
- Stateless nature of Bitcoin: The report highlights that Bitcoin is a stateless chain, unlike Ethereum which implements complex financial business logic based on smart contracts. This makes it challenging to replicate Ethereum’s diverse financial applications on the Bitcoin chain.
- Bitcoin’s limited computation capability: Bitcoin’s core computation capability is limited to unlocking conditions in the ScriptPubkey script of UTXOs, making it difficult to express complex business logic.
- Verification limitations: The Bitcoin network can only verify basic UTXO balances and script signatures, but cannot verify specific execution results of these logics.
Bitcoin’s Scalability Routes
- Sidechain Stacks: Sidechain Stacks supports smart contracts and has a wide range of applications. However, it is an independent consensus outside of Bitcoin and is challenging to gain unanimous acceptance.
- Client-side validation RGB: RGB adheres to the mainnet UTXO model, allowing off-chain clients to handle more complex transactions. However, it lacks bidirectional verification and constraint capabilities with the Bitcoin mainnet, and its development momentum is not yet mature.
- State channel Lightning Network: The Lightning Network is considered a relatively orthodox scaling track due to its proximity to Bitcoin core developers. However, its development is slow, and its actual implementation in the Lightning Network is still uncertain.
Comparing Bitcoin’s Scalability Routes
- Protection by the mainnet: The report ranks Lightning Network higher than Client-side validation and Sidechains in terms of protection by the mainnet.
- Scalability effect: Sidechains are ranked higher than Client-side validation and Lightning Network in terms of scalability effect.
- Contractual features: Sidechains are also ranked higher than Client-side validation and Lightning Network in terms of contractual features.
Bitcoin Layer 2’s Vision
- Sidechains: The report questions the logic of creating an entirely new Bitcoin sidechain when Ethereum, a super smart contract verification network, already exists.
- Client-side validation: RGB’s client-side validation performance is more suitable for mainstream Bitcoin scaling, but its potential development remains unknown.
- State channels: The Lightning Network was once highly anticipated for scaling Bitcoin. However, it is challenging to become a Layer 2 that can handle various financial gameplay scenarios.
Actionable Insights
- Understanding Bitcoin’s limitations: Stakeholders should understand the technical limitations of Bitcoin’s ecosystem before investing in its scalability solutions.
- Exploring Bitcoin’s scalability routes: Investors should explore the potential of Bitcoin’s scalability routes, including sidechains, client-side validation, and state channels.
- Assessing the potential of Bitcoin Layer 2: Stakeholders should assess the potential of Bitcoin Layer 2 in terms of protection by the mainnet, scalability effect, and contractual features.
