After the Fomo wave, how should the Bitcoin ecosystem land?

Original Author: Haotian (X: @tmel0211)

Editor's Note: After the Fomo wave, can the inscription market sustain a brand new Bitcoin Layer 2 boom? How should the Bitcoin ecosystem land? Crypto researcher Haotian (X: @tmel0211) discusses the landing route of the Bitcoin ecosystem and the narrative space of Bitcoin Layer 2. Haotian suggests that the orthodox Bitcoin Layer 2 may be a false proposition, and the Bitcoin ecosystem needs to explore a landing route that aligns with its native characteristics. The following is a summary:

As the Fomo wave of inscriptions sweeps in, I have interacted with some "real" Bitcoin developers and found that they are not getting carried away, making statements about Bitcoin Layer 2 disrupting Ethereum.

Instead, there is a consensus among them: the Bitcoin ecosystem will have opportunities, but it will definitely differ from Ethereum's DeFi Lego-style combination paradigm. Next, let's explore how the Bitcoin ecosystem should land based on technical logic.

Indeed, the new asset issuance method of inscriptions has pulled many people back to the ICO moment of 2017, and enthusiasm has been completely ignited. This wave of inscriptions has brought new users, new application scenarios, and new capital, to some extent, it is not an exaggeration to call this bull market a Bitcoin bull.

Thus, sidechains, the Lightning Network, Taproot Assets, RGB, BitVM, and other directions are filled with "coveters" of orthodox Bitcoin Layer 2, who often claim to replicate everything from Ethereum when discussing the Bitcoin ecosystem, which is quite exhilarating.

Just like the unsustainability of the ICO asset issuance boom, the inscription market also yearns to sustain a brand new Bitcoin Layer 2 boom as the Fomo wave ends.

Having such ambitions and demands is not wrong, but if one wants to replicate Ethereum's diverse ecological gameplay onto Bitcoin, it really won't work. The Bitcoin ecosystem needs to explore a landing route that aligns with its native characteristics.

The core logic is that the native characteristics of the Bitcoin chain have "limited" computing and verification capabilities. Even the storage capacity in Taproot addresses and Segwit has "controversies" regarding dust attacks.

The limited computing capability determines that more complex transaction logic must be implemented off-chain. For example, BitVM boldly envisions a combination of off-chain circuits and on-chain logic gates (0, 1) to achieve Turing-complete computation based on optimistic Rollup principles. The idea is grand, and the technical logic is reasonable, but the engineering effort is comparable to the Qin Dynasty's human-computer calculations in "The Three-Body Problem," which is impractical.

The limited verification capability makes Bitcoin more suitable for asset settlement rather than global state verification. For instance, the current Schnorr signature and MAST data structure characteristics of Bitcoin nodes provide some verification capability, but Schnorr only aggregates multiple signatures, limited to multi-signature scenarios, while MAST allows for the creation of more complex scripts, but its reliance on the UTXO model can only facilitate asset settlement and cannot achieve global state verification. Building a complex light node matrix can only enhance the interactive operability between sidechains and the main chain, improving the security and response speed of asset settlement.

The storage controversy is undoubtedly present. Bitcoin has developed to this point with an extremely minimalist approach, which is a consensus that emerged after the last round of the block size war. Therefore, attempts to make a big deal out of the script space based on Taproot are bound to fail. While it may not reach the level of Segwit being neutered, upgrade protocols like Atomicals, RUNE, and PIPE tend to compromise towards smaller block directions, such as discarding large JSON data packets and returning to optimizing and applying the OP_Return space.

These limitations determine that Bitcoin's Layer 2 expansion solutions are vastly different from Ethereum's:

1) Bitcoin's Data Availability capability is lacking. Ethereum's DA is the mainnet Validators' ability to compute and verify the data submitted by Layer 2. Clearly, while Bitcoin can accommodate some data, the mainnet does not possess feasible and efficient computing and verification capabilities.

Thus, Bitcoin's DA is more like a "bulletin board," where the original RAW Data is stored in Bitcoin blocks, only for off-chain indexers to index for accounting and rights confirmation. This will inevitably test the accounting and verification capabilities of the indexers, and if multiple indexers exist, the challenges will further increase, leading to potential accounting logic confusion and errors.

2) Bitcoin's interoperability capability is limited. Ethereum Layer 2 submits states to the mainnet, which has contracts that can cooperate with Layer 2 to implement mechanisms like a 7-day challenge time window and Layer 2 escape pods to ensure that the mainnet can protect Layer 2 users' assets in case of malicious actions by Layer 2 sequencers. Clearly, Bitcoin, lacking smart contract capabilities, does not have this layer of security assurance. Users can only trust that Bitcoin Layer 2 will not act maliciously.

3) Bitcoin's UTXO security model is limited to "payment" scenarios. Similar to Ethereum's Plasma Layer 2 solutions, if Layer 2 keeps every transaction's corresponding Nonce Hash in UTXO form synchronized with the mainnet, it can find an absolutely secure mode based on UTXO.

However, just as Plasma is limited to payment scenarios, Bitcoin Layer 2 built on the UTXO model also faces this limitation. Any mechanism with complex smart contracts and multi-state like EVM cannot rely solely on this security mechanism unless additional off-chain consensus is layered on top.

Based on this technical logic and understanding, the narrative space of Bitcoin Layer 2 becomes incredibly clear:

1) Treat Bitcoin as a settlement layer, building an independent consensus on Layer 2, providing a complete set of DA, interoperability, VM, and other capabilities to connect with Ethereum's ecosystem. However, such a powerful chain is essentially akin to recreating an Ethereum execution chain. Many people may not know that Ethereum also has a Beacon settlement chain, and what we see as the Ethereum 2.0 mainnet can also be viewed as Layer 2 of the Beacon chain.

The reason why people have a weak perception of the settlement chain is that the core of the mainnet is interaction and verification capability. If it is only a settlement chain, then a chain that handles a large number of computing and verification operations would become the real "main chain."

The question arises: if we make Bitcoin the settlement chain, would other chains dare to call themselves the main chain? Does the Bitcoin ecosystem allow such "consensus" to exist?

2) Use Bitcoin as a payment solution, including the Lightning Network, Taproot assets, and client-side verification RGB, which essentially must rely on the Bitcoin mainnet UTXO model for security assurance. This actually limits the best application scenarios for these directions to payments.

The Lightning Network has already provided a smooth experience for small transactions, and Taproot assets and RGB are similar, being relatively more suitable for stablecoin payment channels.

If one wants to layer more DeFi and EVM states on state channels and client-side verification, it would mean adding more complex verification logic on top of the original UTXO model. Naturally, some states that the mainnet cannot verify would be submitted to the mainnet, essentially still relying on off-chain consensus. Such solutions may work, but compared to purely UTXO model-controlled transaction scenarios, the security level would correspondingly decrease.

That's it. How should the Bitcoin ecosystem land?

If the Bitcoin ecosystem purely empowered by Bitcoin's security consensus points to subsequent stablecoin application consumption scenarios like the Lightning Network and Taproot assets;

If outside the Bitcoin mainnet consensus, some off-chain consensus is allowed, it points to complex application scenarios like RGB client-side verification that can implement complex Layer 2 smart contracts;

If the Bitcoin mainnet only serves as a settlement chain, relying on off-chain independent consensus, then various sidechains, consortium chains, index chains, and any solutions that can establish their own consensus and strictly enforce asset transparent settlement seem viable.

If solutions like BitVM for Turing-complete verification of Bitcoin truly materialize, without changing Bitcoin's mainnet consensus and at a cost lower than Ethereum's smart contract construction, then the above conclusions could be overturned.

In summary, the impossible triangle of security + decentralization + scalability is more pronounced on the Bitcoin mainnet. The so-called orthodox Bitcoin Layer 2 may indeed be a false proposition. In my view, if one chooses orthodox consensus, they must accept the "limitations" of expansion. If one wants to break through these limitations, they should not wave the banner of universal invincible consensus.