The Bitcoin L2 infrastructure is on the rise, detailing the ecological panorama and project landscape
The design limitations of Bitcoin are particularly evident in ensuring the security of withdrawals in Layer 2 solutions.Written by: Caliber
Compiled by: Deep Tide TechFlow
Original link: Bitcoin Layer 2 Landscape --- Caliber (mirror.xyz)
In the complex field of fintech, Bitcoin, as an innovative digital currency, enables peer-to-peer direct transactions by bypassing traditional financial intermediaries. However, as it evolves, Bitcoin faces a series of inherent challenges, particularly those related to scalability and transaction throughput, which are major obstacles on its path to broader adoption.
These challenges are not unique to Bitcoin; Ethereum, while designed with more flexible application development capabilities, also faces similar issues. To address these challenges, many solutions have been proposed, such as sidechains, Layer 2, or payment channel networks. In Ethereum, the Layer 2 ecosystem is rapidly expanding, with various solutions emerging, such as EVM rollups, sidechains transitioning to rollups, and projects pursuing different degrees of decentralization and security. The security issues of Layer 2 solutions, particularly regarding asset protection and their ability to read and adapt to changes in the Ethereum blockchain, highlight a key trade-off: higher security often comes at the expense of scalability and cost-effectiveness.
While Bitcoin has made remarkable progress in improving its functionality, it still faces significant challenges in developing Layer 2 solutions similar to Ethereum. The design limitations of Bitcoin are particularly evident in ensuring the security of withdrawals in Layer 2 solutions. Its scripting language has limited functionality and lacks Turing completeness, which restricts its ability to execute complex computations and support advanced features. This design choice prioritizes Bitcoin's security and efficiency but limits its programmability compared to more flexible blockchain platforms like Ethereum. Additionally, probabilistic finality may undermine the reliability and speed required for Layer 2 solutions, potentially leading to issues such as chain reorganization, affecting the permanence of transactions. Although Bitcoin's design principles make it reliable and secure, these factors make its Layer 2 systems slow to adapt to new changes.
Segregated Witness (SegWit) and Taproot are transformative for Bitcoin. SegWit optimized Bitcoin's infrastructure by separating signature data, improving transaction speed, and supporting rapid payment processing via the Lightning Network. The subsequent Taproot introduced efficiency and privacy improvements by compressing transaction data and concealing transaction complexity. Together, SegWit and Taproot ignited a new wave of Layer 2 innovation, laying the foundation for future Layer 2 designs and significantly expanding Bitcoin's functionality as a digital currency.
Understanding Bitcoin's Layer 2 Solutions
The Bitcoin Layer 2 Trilemma
In the increasingly expansive Layer 2 solutions for Bitcoin, we see many different systems emerging aimed at enhancing scalability and increasing adoption. These solutions offer unique approaches to overcoming Bitcoin's inherent limitations. Trevor Owens proposed a classification method that categorizes these solutions based on how they address the Bitcoin Layer 2 trilemma, dividing them into off-chain networks, decentralized sidechains, and federated sidechains, each with unique approaches and trade-offs:
Off-chain networks: Prioritize scalability and privacy but may pose challenges to user experience. For example, ++Lightning++ & ++RGB++.
Decentralized sidechains: Introduce new tokens and consensus mechanisms, expanding functionality but potentially complicating user experience and increasing centralization concerns. For example, ++Stacks++, ++Babylon++, ++Interlay++, etc.
Federated sidechains: Simplify operations through trusted federations, providing efficiency but potentially sacrificing Bitcoin's foundational decentralization. For example, ++Liquid++, ++Rootstock++, ++Botanix++.
This trilemma provides a useful framework for categorizing Bitcoin's Layer 2 solutions but may not fully capture all the complexities of their designs. Moreover, it highlights the trade-offs of current solutions rather than insurmountable barriers, indicating that these trilemma elements are part of the developers' decision-making process.
For instance, decentralized sidechains issue new tokens to enhance security and promote network participation, which may complicate user interactions and may not be welcomed by Bitcoin purists. On the other hand, federated sidechains opt to skip new tokens, providing a smoother user experience and reducing friction within the Bitcoin community. Another option is to use full VM/global state, which allows for the implementation of complex functionalities, including the creation of new tokens on smart contract platforms. However, this approach complicates the system and often increases its vulnerability to attacks.
Technical Classification
From another technical perspective, we classify Bitcoin's Layer 2 solutions based on their primary technical characteristics. This different classification method examines various technical details and structures, providing a detailed understanding of how each solution contributes to enhancing Bitcoin's scalability, security, and functionality. Each method has its unique purposes, which do not conflict and do not create a trilemma. However, each method has its own strengths and weaknesses regarding security and scalability. Therefore, some systems may combine these methods. We will discuss this in detail in the next part of the article. Let's explore these categories:
Sidechains using bi-directional peg protocols. These sidechains connect to Bitcoin like Layer 2 through a method called bi-directional pegging. This setup allows Bitcoin to transfer between the main chain and the sidechain, supporting experimentation and the implementation of functionalities not directly supported by the main chain. This method enhances Bitcoin's ability to handle more transactions and different types of applications by supporting a broader range of use cases. The bi-directional peg mechanism plays a crucial role in transferring BTC value to the sidechain. On these sidechains, developers set up various environments; some choose to use EVM-compatible ecosystems, while others opt to create VM environments with their own smart contracts. For example, ++Stacks++, ++Rootstock++, ++Liquid++, ++Botanix++, etc.
Blockchain rollups. This method uses Bitcoin as a layer for storing data, providing inspiration for rollup technology. In this setup, each UTXO acts like a small canvas that can hold more complex information. Imagine each Bitcoin can store its own detailed dataset, which not only increases value but also expands the types of data and assets Bitcoin can handle. It opens up a wide range of possibilities for digital interactions and representations, making the Bitcoin ecosystem richer and more diverse. For example, ++B2 network++, ++BitVM++.
Payment channel networks. These networks act like express lanes in the vast landscape of Bitcoin. They help accelerate a large number of transactions on the Bitcoin side road, reducing congestion and ensuring transactions are both fast and economical. For example, Lightning & RGB.
By breaking it down this way, we can gain a clearer understanding of how each tool helps improve Bitcoin, making it more scalable, secure, and multifunctional. Let's delve deeper into these tools:
Bi-directional Peg Protocol
Bi-directional pegging allows assets to transfer between two independent blockchains (typically the main chain and the sidechain). This system enables assets to be locked on one chain and then unlocked or minted on another, maintaining a fixed conversion rate between the original and pegged assets.
Understanding the Pegging Process
Imagine you want to transfer assets from the main chain (like Bitcoin) to the sidechain. The pegging process is your starting point. Here, your assets are securely locked on the main chain, similar to depositing them in a vault for safekeeping. Subsequently, a transaction is created on the main chain to solidify this lock. Once the sidechain recognizes this transaction, it mints an equivalent amount of pegged assets. This process is akin to receiving a voucher of equal value in foreign land, allowing you to use your wealth in the new environment while ensuring your original assets remain intact and secure.
Guiding the Unpegging Process
When you decide to restore your assets to the original main chain, the unpegging process begins. This return process involves "burning" or locking the pegged assets on the sidechain, indicating that these assets are set aside and no longer in circulation. You then provide proof of this operation to the main chain. Once the main chain verifies your claim, it releases an equivalent amount of original assets to you. This mechanism ensures the integrity and balance of asset distribution between the two blockchains, preventing duplication or loss.
Implementation of Bi-directional Peg Systems
Rootstock
RSK's bi-directional peg system is an advanced framework designed to seamlessly integrate Bitcoin with smart contract functionality through the RSK platform. By using SPV for efficient transaction verification, employing a robust federated model for transaction approval, and integrating SegWit and Taproot, RSK not only enhances transaction efficiency but also closely aligns with Bitcoin's security model. Additionally, the merged mining approach increases the system's security and incentivizes more miners to participate.
RSK Federated Model. Pegnatories (a selected functional group) act as the bridge guardians or trusted custodians in this federated model, ensuring that every peg-in and peg-out adheres to the protocol. They can be viewed as a guardianship committee, each holding a key to a collective vault. Their role is crucial—they ensure that every cross-bridge transaction follows integrity and consensus, maintaining the secure and orderly flow of digital assets in this critical channel.
SegWit and Taproot. SegWit reduces transaction size and increases processing speed by separating signature information from transaction data. Furthermore, combining Schnorr signature schemes and MAST (Merkelized Abstract Syntax Trees) with other enhancements from Taproot can make transactions more efficient and private.
RSK Merged Mining. In RSK's merged mining approach, miners simultaneously secure both the Bitcoin and RSK networks without additional computational demands, thereby enhancing RSK's security. This method leverages Bitcoin's mining strength, providing extra rewards to miners and showcasing an innovative use of existing blockchain infrastructure. However, the success of this integration relies on accurately aligning the tags within Bitcoin blocks with RSK blocks, emphasizing the importance of detailed and precise execution to maintain the security and consistency of the interconnected network.
++Botanix++
Botanix combines proof-of-stake (PoS) consensus based on Bitcoin with a decentralized EVM network, Spiderchain, to manage Turing-complete smart contracts outside the main chain. Bitcoin serves as the primary settlement layer, while Botanix ensures transaction integrity through advanced multi-signature wallets and off-chain cryptographic verification.
Spiderchain is a distributed multi-signature network responsible for safeguarding all actual Bitcoins on Botanix.
Architecture: Spiderchain consists of a group of coordinating nodes (node operators and liquidity sources for the entire chain). It comprises a sequentially arranged multi-signature wallet responsible for managing asset custody within the network. Transactions within each wallet require approval from multiple coordinating nodes to ensure there is no single point of failure.
Dynamic Operations: For each new Bitcoin block, a verifiable random function (VRF) based on the Bitcoin block hash is used to determine the corresponding coordinating nodes for the upcoming "cycle" (defined in the Botanix system as the period between Bitcoin blocks). Subsequently, by hashing the block hash with SHA256 and applying modular arithmetic with the number of active coordinating nodes (N), the fairness and randomness of the coordinating node selection are ensured. This guarantees fair and secure distribution of operational tasks, minimizing centralization risks.
Bi-directional Peg System. The multi-signature wallet plays a crucial role here, requiring consensus among selected coordinating nodes to execute any transaction.
Peg-in Process: Users send Bitcoin to a new multi-signature wallet, which is securely locked. This action mints an equivalent amount of synthetic BTC on the Botanix chain. Creating this wallet requires multiple coordinating nodes, all of whom must agree and sign, ensuring that no one can independently control the wallet.
Peg-out Process: Conversely, for the peg-out, the synthetic BTC is burned, and the corresponding Bitcoin is released back to the user's Bitcoin address from the multi-signature wallet. This process is protected by the same multi-signature protocol, requiring approval from multiple coordinating nodes to authorize the transaction.
PoS Consensus and EVM Implementation
Consensus: In Botanix's PoS system, coordinating nodes stake their Bitcoins to participate in the network. They are responsible for verifying transactions and creating new blocks on the Botanix chain. The selection of these coordinating nodes is based on their stakes and the aforementioned randomization method mentioned in the Spiderchain section.
EVM Implementation: The EVM on Botanix supports all operations compatible with Ethereum, allowing developers to deploy and execute complex smart contracts.
++Stacks:++
The Stacks platform aims to extend Bitcoin's infrastructure through innovative mechanisms such as sBTC bi-directional pegging, Proof of Transfer (PoX), and Clarity smart contracts, supporting smart contracts and decentralized applications (dApps).
sBTC Bi-directional Peg Protocol:
Threshold Signature Wallet: This wallet uses a threshold signature scheme that requires a predefined group of signers (Stackers) to jointly sign pegging transactions. These Stackers are selected based on the amount of STX they lock using a verifiable random function (VRF) and rotate every cycle (usually two weeks), ensuring dynamic membership and continuous alignment with the network's current state. This significantly enhances the security and robustness of the pegging mechanism, preventing dishonest behavior and potential collusion while ensuring fairness and unpredictability in the selection process.
Proof of Transfer (PoX):
In PoX, miners transfer BTC to participate in the Stacks network instead of burning Bitcoin as in Proof of Burn. This not only incentivizes participation through BTC rewards but also directly ties the operational stability of Stacks to the verification security properties of Bitcoin. Stacks transactions are anchored in Bitcoin blocks, with each Stacks block recording a hash value in Bitcoin transactions using the OP_RETURN opcode, which allows embedding up to 40 bytes of arbitrary data. This mechanism ensures that any changes to the Stacks blockchain require corresponding changes to the Bitcoin blockchain, thus benefiting from Bitcoin's security without altering its protocol.
Clarity: The smart contract programming language used on the Stacks blockchain, Clarity, ensures that all operations are executed as defined by enforcing strict rules, avoiding unintended outcomes, thus providing predictability and security for developers. It offers decidability, where the result of each function is known before execution, preventing surprises and enhancing the reliability of contracts. Additionally, Clarity interacts directly with Bitcoin transactions, allowing for the development of complex applications while leveraging Bitcoin's security features. It also supports features similar to interfaces in other languages, aiding code reuse and maintaining a clean codebase.
++Liquid:++
The Liquid Network provides a federated sidechain for the Bitcoin protocol, significantly enhancing transaction capabilities and asset management. The core concept of the Liquid Network architecture is strong federation, composed of a group of trusted functionaries responsible for block validation and signing.
Watchmen: Watchmen manage the peg-out process from Liquid to Bitcoin, ensuring that every transaction is authorized and valid.
Key Management: The hardware security modules of Watchmen protect the keys required to authorize transactions.
Transaction Verification: Watchmen verify transactions by confirming compliance with Liquid's consensus rules through cryptographic proofs, employing a multi-signature scheme to enhance security.
Pegging Mechanism:
Peg-in: Bitcoin is locked on the Bitcoin blockchain (using Watchmen's multi-signature address), and corresponding Liquid Bitcoin (L-BTC) is issued on the Liquid sidechain through cryptographic methods to ensure the accuracy and security of the transfer.
Peg-out: This process involves burning L-BTC on the Liquid sidechain and releasing the corresponding Bitcoin on the Bitcoin blockchain. This mechanism is closely monitored by designated functionaries known as Watchmen, ensuring that only authorized transactions can proceed.
Proof of Reserve (PoR): This is an important tool developed by Blockstream that provides transparency and trust regarding the network's asset holdings. PoR involves creating a partially signed Bitcoin transaction that proves control over the funds. Although this transaction cannot be broadcast on the Bitcoin network, it demonstrates the existence and control of the claimed reserves. It allows entities to prove their holdings without moving funds.
++Babylon:++
Babylon is designed to enhance the security of PoS chains by allowing Bitcoin holders to stake their assets, integrating Bitcoin into the PoS ecosystem, leveraging Bitcoin's massive market cap without requiring direct transactions or smart contract functionality on the Bitcoin blockchain. Importantly, Babylon maintains the integrity and security of staked assets by avoiding moving or locking Bitcoin through vulnerable bridges or third-party custodians.
Bitcoin Timestamp: Babylon uses a timestamp mechanism to directly embed PoS chain data into the Bitcoin blockchain. By anchoring PoS block hashes and key staking events on Bitcoin's immutable ledger, Babylon provides a historical timestamp secured by Bitcoin's extensive proof-of-work. Using the Bitcoin blockchain for timestamps not only leverages its security but also utilizes its decentralized trust model. This approach ensures an additional layer of security against long-range attacks and state corruption.
Accountable Assertions: Babylon utilizes accountable assertions to manage staking contracts directly on the Bitcoin blockchain, allowing the system to publicly disclose the staker's private keys in cases of misconduct (such as double-signing). This design employs chameleon hash functions and Merkle trees to ensure that the staker's assertions are closely related to their stakes, enforcing protocol integrity through cryptographic accountability mechanisms. If a staker deviates, such as signing conflicting statements, their private key will be deterministically revealed, triggering automatic penalties.
Staking Protocol: One of Babylon's key innovations is its staking protocol, which allows for rapid adjustments to staking allocations based on market conditions and security needs. This protocol supports quick unstaking, enabling stakers to move their assets swiftly without the long lock-up periods typically associated with PoS chains. Furthermore, the protocol is built as a modular plugin, compatible with various PoS consensus mechanisms. This modular approach allows Babylon to provide staking services for a wide range of PoS chains without requiring significant modifications to existing protocols.
Payment Channels and the Lightning Network
Payment channels are designed to facilitate multiple transactions between two parties without immediately submitting all transactions to the blockchain. They simplify transactions by:
Opening: A channel is opened with a single on-chain transaction, creating a multi-signature wallet shared by both parties.
Transaction Process: Within the channel, both parties transact privately, adjusting their balances through instant transfers without broadcasting to the blockchain.
Closing: The channel is closed with another on-chain transaction, settling based on the final balances agreed upon in the most recent transaction.
Exploring the Lightning Network
Building on the concept of payment channels, the Lightning Network extends these ideas into a network that allows users to send payments across blockchains through connected paths.
Routing: Just like finding a path through a city using back roads, the network can find a payment route even if you don't have a direct channel with the final recipient.
Efficiency: This interconnected system significantly reduces transaction fees and processing times, making Bitcoin suitable for everyday transactions.
Hash Time-Locked Contracts (HTLCs): The network uses advanced contracts called hash time-locked contracts to protect payments across different channels. This ensures that your delivery arrives safely at its destination through several checkpoints. It also reduces the risk of intermediary defaults, making the network reliable.
Security Protocols: In case of any disputes, the blockchain acts as a judge, verifying the latest agreed balances to ensure fairness and security.
Taproot and SegWit enhance the Bitcoin network, particularly the Lightning Network's privacy and efficiency:
Taproot: Acts like an aggregator for Bitcoin transactions—bundling multiple signatures into one. This keeps off-chain transactions tidy while making them more private and cheaper.
SegWit: Changed how data is stored in Bitcoin transactions, allowing a block to contain more transactions. For the Lightning Network, this means opening and closing channels is cheaper and smoother, further reducing fees and increasing transaction throughput.
Inscriptions-Based Layer 2 Solutions
Inscriptions have sparked a wave of innovation in Bitcoin's Layer 2 ecosystem. With the introduction of two groundbreaking updates (SegWit and Taproot), the Ordinals protocol was introduced, allowing anyone to attach additional data to UTXOs' Taproot scripts, up to a maximum of 4MB. This development has made the community aware that Bitcoin can now serve as a data availability layer. From a security perspective, inscriptions provide a new viewpoint. Data, such as digital artifacts, is now stored directly on the Bitcoin network, making it immutable and protecting it from external server issues or loss. This not only enhances the security of digital assets but also embeds them directly into Bitcoin's blocks, ensuring their permanence and reliability. Most importantly, Bitcoin rollups have become a reality, with inscriptions providing a mechanism to add extra data or functionality to transactions. This allows for more complex interactions or state changes outside the main chain while still relying on the main chain's security model.
Implementation of Inscriptions-Based Layer 2 Solutions
++BitVM:++
BitVM is designed by combining optimistic rollup technology with cryptographic proofs. By moving Turing-complete smart contracts off-chain, BitVM significantly improves transaction efficiency without sacrificing security. While Bitcoin remains the foundational settlement layer, BitVM ensures the integrity of transaction data by cleverly utilizing Bitcoin's scripting capabilities and off-chain cryptographic verification. Currently, BitVM is actively being developed by the community. Additionally, it has become a platform for several top projects, such as Bitlayer and Citrea.
Inscriptions-like Storage Method: BitVM utilizes Bitcoin's Taproot to embed data into Tapscript, similar to the concept of the inscriptions protocol. This data typically includes important computational details, such as the state of the virtual machine at different checkpoints, the hash of the initial state, and the hash of the final computation result. By anchoring this Tapscript in an unspent transaction output (UTXO) stored in a Taproot address, BitVM effectively integrates transaction data directly into the Bitcoin blockchain. This method ensures the persistence and immutability of the data while leveraging Bitcoin's security features to protect the integrity of recorded computations.
Fraud Proofs: BitVM uses fraud proofs to ensure the security of its transactions. Here, the prover commits to the computation result for specific inputs, and this commitment is not executed on-chain but verified indirectly. If the verifier suspects the commitment is incorrect, they can provide a concise fraud proof, utilizing Bitcoin's scripting capabilities to demonstrate the commitment's inaccuracy. This system significantly reduces the computational burden on the blockchain, avoiding fully on-chain computations, aligning with Bitcoin's design philosophy of minimizing transaction load and maximizing efficiency. The core of this mechanism is hash locks and digital signatures, linking claims and challenges to actual off-chain computational work. BitVM adopts an optimistic verification approach—operations are assumed to be correct unless proven otherwise, enhancing efficiency and scalability. It ensures that only valid computations are accepted, and anyone in the network can independently verify their correctness using available cryptographic proofs.
Optimistic Rollups: BitVM employs optimistic rollup technology to significantly enhance Bitcoin's scalability by batch processing multiple off-chain transactions. These transactions are processed off-chain and periodically recorded on the Bitcoin ledger to ensure integrity and availability. In practical operation, BitVM processes these transactions off-chain and intermittently records their results on the Bitcoin ledger to ensure integrity and availability. The optimistic rollups used in BitVM represent a method to overcome Bitcoin's inherent scalability limitations, leveraging off-chain computational capabilities while ensuring transaction validity through periodic on-chain verification. This system effectively balances the load between on-chain and off-chain resources, optimizing the security and efficiency of transaction processing.
Overall, BitVM is not just another Layer 2 technology; it represents a potential foundational shift in how Bitcoin can scale and evolve. It offers a unique solution to address Bitcoin's limitations but still requires further development and refinement to fully realize its potential and gain broader recognition within the community.
++B2 Network++
The B2 Network enhances transaction speed and reduces costs for Bitcoin as the first zero-knowledge proof-validated commitment rollup. This setup allows for the execution of Turing-complete smart contracts off-chain, significantly improving efficiency. Bitcoin serves as the foundational settlement layer for the B2 Network, storing B2 rollup data. This setup allows for the complete retrieval or recovery of B2 rollup transactions using Bitcoin inscriptions. Additionally, the computational validity of B2 rollup transactions is verified through zero-knowledge proofs on Bitcoin.
The Important Role of Inscriptions: The B2 Network utilizes Bitcoin inscriptions to embed additional data into Tapscript, including the storage path of rollup data, the Merkle tree root hash of rollup data, zero-knowledge proof data, and the parent B2 inscription UTXO hash. By writing this Tapscript into a UTXO and sending it to a Taproot address, B2 effectively embeds rollup data directly into the Bitcoin blockchain. This method not only ensures the persistence and immutability of the data but also leverages Bitcoin's robust security mechanisms to protect the integrity of rollup data.
Zero-Knowledge Proofs to Enhance Security: B2's commitment to security is further reflected in its use of zero-knowledge proofs. These proofs enable the network to verify transactions without exposing transaction details, thereby protecting privacy and security. In the context of B2, the network breaks down computational units into smaller units, each represented as bit value commitments in tapleaf scripts. These commitments are linked in a taproot structure, providing a compact and secure method for verifying transaction validity on Bitcoin and the B2 Network.
Rollup Technology Enhancing Scalability: The core of the B2 architecture is rollup technology, particularly ZK-Rollup, which aggregates multiple off-chain transactions into one. This approach significantly increases throughput and reduces transaction fees, addressing Bitcoin's most pressing scalability issues. The rollup layer of the B2 Network handles user transactions and generates corresponding proofs, ensuring that transactions are verified and ultimately confirmed on the Bitcoin blockchain.
Challenge-Response Mechanism: In the B2 Network, after using zk-proofs to batch and validate transactions, nodes have the opportunity to challenge these batches if they suspect they contain invalid transactions. This critical phase utilizes the fraud proof mechanism, where challenges must be resolved before the batch proceeds. This step ensures that only transactions verified as legitimate can continue to final confirmation. If there are no challenges or existing challenges fail within a specified time lock, the batch will be confirmed on the Bitcoin blockchain. On the other hand, if any challenge is validated, the rollup will be subsequently reverted.
Final Thoughts
Advantages
Unlocking the DeFi Market: By enabling EVM-compatible Layer 2 solutions, Bitcoin can enter the multi-billion dollar DeFi market. This not only expands Bitcoin's utility but also unlocks new financial markets that were previously accessible only through Ethereum and similar programmable blockchains.
Expanding Use Cases: These Layer 2 platforms support not only financial transactions but also a variety of applications in fields such as finance, gaming, NFTs, or identity systems, greatly broadening the original scope of Bitcoin as a simple currency【3, 4, 5】.
Disadvantages
Centralization Risks: Some mechanisms involved in Layer 2 solutions may lead to increased centralization. For instance, in mechanisms that require locking BTC value, unlike Ethereum's Layer 2 solutions, the interaction between Layer 2 and Bitcoin is not protected by Bitcoin's security model. Instead, it relies on a smaller decentralized network or federated model, which may weaken the security of the trust model. This structural difference may introduce failure points that do not exist in decentralized models.
Increased Transaction Fees and Blockchain Bloat: Data-intensive uses (such as Ordinals and other inscriptions protocols) may lead to blockchain bloat, slowing down network speeds and increasing users' transaction costs. This could result in higher costs and slower transaction verification times, impacting the network's efficiency.
User Experience and Technical Complexity: The technical complexity of understanding and interacting with Layer 2 solutions may pose a significant barrier to adoption. Users need to manage additional elements, such as payment channels on the Lightning Network or handling different token types on platforms like Liquid.
The Ugly Side
Regulatory and Ethical Issues: The immutability of inscriptions, while a technical advantage, also raises potential regulatory and ethical concerns. If the data is illegal, unethical, or simply erroneous, this will pose significant challenges, leading to permanent consequences with no remedy.
Impact on Fungibility: If certain Bitcoins are "marked" as non-financial data, this could affect their fungibility—each unit should be indistinguishable—potentially leading to situations where some Bitcoins are valued or accepted less than others.
