Why is it said that BTC Layer 2 is a false proposition?

Is BTC Layer2 a False Proposition?

When I typed this title, I knew I would offend a large number of people, but I might just be the mouthpiece for everyone, stating a fact that no one wants to admit.

Since June 2023, I have started to pay attention to the Bitcoin Layer2 space, spending a lot of time researching Bitcoin scaling technologies, and following some teams that I believe have significant technical expertise, such as: Stacks, BEVM, Bihelix, Bool Network, including solutions like BitVM and RGB, etc.

After researching, I found that BTC Layer2 seems to be a false proposition because Bitcoin does not need Layer2 at all; rather, the Crypto industry needs Bitcoin. Moreover, Layer2 itself is just a business, not a blockchain at all; the key issue is that Layer2 cannot help the main chain scale; it merely finds some application scenarios for the main chain tokens, and these scenarios are just copies of Layer1, with no innovation whatsoever.

The earliest validation of my thinking, and the team that resonated with my ideas, was the BEVM team with their release of the Super Bitci white paper. I started following this Bitcoin startup team since June last year, and they were among the first to promote Bitcoin Layer2 in the Chinese-speaking community. However, in 2024, they suddenly made a 180-degree turn, completely denying the Bitcoin Layer2 track, and instead launched a new strategy called Super Bitcoin. I won't go into detail here; those interested can check out their latest white paper, which is quite interesting.

Why did the team that initially promoted Bitcoin Layer2 suddenly abandon this direction and turn to another? Is Layer2 really a false proposition? Where is the ultimate narrative of Bitcoin? Today, I want to share some of my insights:

1. Layer2 is an imagined demand and does not genuinely help Layer1 scale

The concept of Layer2 originated from Bitcoin, where Satoshi Nakamoto specifically mentioned the Simple Payment Verification (SPV) scheme in Chapter 8 of the Bitcoin white paper. This means that SPV nodes, or light nodes, can complete transaction verification without downloading the entire Bitcoin blockchain, which we can understand as an efficient off-chain transaction verification method.

Based on this concept, the Lightning Network was born, which is entirely based on Satoshi's proposed simple payment verification. This solution is meaningful because the Lightning Network is fast enough, cheap enough, and, more importantly, it fully inherits Bitcoin's network security, helping Bitcoin achieve a true sense of "scaling" in transactions.

Later, Ethereum Layer2 copied this model, but while Ethereum Layer2 can share Ethereum's security, it cannot genuinely help Ethereum achieve scaling; it merely adds some application scenarios for the Ethereum token.

The reason the Lightning Network can achieve Bitcoin's "scaling" based on simple payment verification is that Bitcoin uses the UTXO model, while Ethereum uses a unified account model. No Layer2 solution can solve the problems brought by Ethereum's account model.

To put it simply:

The Bitcoin UTXO model simulates cash transactions between people. Anyone can transact with cash simultaneously with multiple parties, and both parties can verify the transaction without needing global consensus to transact. During the transaction, there is no need for a centralized entity to unify the data changes of both parties. Therefore, Bitcoin's UTXO model can achieve concurrent transaction processing and partial state changes without needing a unified world state tree to update the state.

In contrast, Ethereum uses a unified account model, which is akin to a traditional bank account model. The account model relies on a global state tree to calculate the balance changes for each address involved in a transaction to achieve state changes.

Thus, the state of each Ethereum transaction must be changed completely before the next transaction can occur; otherwise, issues like double spending or transaction failures may arise. In layman's terms, Ethereum's account model requires a centralized world state tree to uniformly process transactions and change all account states. Although this world state tree is driven by a decentralized mechanism, the decentralized nature of this world state tree results in poor state change capabilities and low efficiency.

To achieve scaling, Ethereum essentially needs to improve the efficiency and capability of state changes. However, none of the current Ethereum Layer2 solutions have made any changes or improvements in this regard. Of course, this is not a problem that Ethereum Layer2 can solve; it is an issue inherent to Ethereum itself.

Recently, the Ethereum community proposed the BeamChain solution, which introduces SNARK, short for Succinct Non-Interactive Argument of Knowledge. This is similar to Bitcoin's simple payment verification (SPV) mentioned earlier, aiming to achieve similar effects. This can indeed improve Ethereum's verification efficiency because the verification content is compressed, and not all content needs to be verified, thus partially enhancing Ethereum's state change capability. However, it still does not fundamentally solve the problem of Ethereum's account model that prevents parallel transaction processing, as it still relies on the world state tree to uniformly change states.

To use an analogy: Bitcoin's UTXO model is like a multi-lane (in fact, infinite lanes) highway that allows for parallel processing, while Ethereum has only a single lane. Currently, Ethereum's BeamChain merely enhances the speed of this single lane. Moreover, this solution is fundamentally not closely related to Ethereum Layer2.

From this perspective, Ethereum Layer2 cannot help Ethereum achieve scaling; ultimately, it still relies on Ethereum itself to save itself. Of course, Ethereum's unified account model design is the "biggest obstacle" on its path to scaling.

The Lightning Network of Bitcoin does not rely on its own technology to help Bitcoin scale; rather, the Bitcoin UTXO model itself possesses the ability for partial state changes and concurrent processing of state changes. The Lightning Network merely presents this inherent off-chain scaling solution of Bitcoin using a client and a mechanism to prevent double spending. Therefore, apart from the Lightning Network, there is basically no second true Layer2 in a meaningful sense. In fact, the Lightning Network is not even Bitcoin's Layer2; it is merely an application created based on Bitcoin's UTXO model and SPV technology that allows for fast Bitcoin transactions.

Thus, we say that whether it is Ethereum Layer2 or Bitcoin Layer2, neither can genuinely help Layer1 achieve scaling; they merely find some application scenarios for Layer1 tokens without bringing any real change to Layer1!

Layer2 is merely a narrative, and it is a narrative that claims to help Layer1 scale while actually conducting its own business.

2. Layer2 is just a business for the project parties, unrelated to retail investors

There is an obvious issue: almost all Layer2 solutions are centralized. Layer2 itself lacks a consensus mechanism and has no concept of nodes; the operation of Layer2 relies solely on an official sequencer.

All Layer2 solutions are essentially private chains without a consensus mechanism and without "miners participating in consensus."

Generally, a chain with a POS consensus mechanism allows its tokens to be used for node staking, serving as GAS, and participating in some governance on the chain. However, Layer2 tokens have no staking requirements (there are no consensus mechanisms and nodes, so what is there to stake?), and the chain's GAS is also based on Layer1 tokens. The only value that can be discussed is the so-called governance, which is quite vague. Since Layer2 is essentially centralized, what can it govern?

Moreover, as mentioned earlier, Layer2's sequencer is solely official, so all GAS on the chain is collected by the official party, which is also the primary source of income for all Layer2 project parties apart from issuing tokens. For example, before the token TGE of Layer2 like ZKsync, they created a frenzy of airdrop expectations for users. ZKsync's monthly GAS revenue is around $3 million to $5 million, and after two years of continuous PUA, the GAS revenue alone amounts to $72 million to $100 million, which might even exceed what they earn from exchanges.

So, I say, Layer2 is just a business; you want the project party's token airdrop, and the project party profits from the GAS you spend. In the end, they give you a worthless token as an airdrop, and that's it.

This business model has been increasingly understood by more and more commercial entities, which is why you see more large projects starting to create their own Layer2 solutions, including traditional commercial entities like Samsung and Visa, as well as crypto projects like Uniswap's Unichain, which is a typical example. Everyone has realized that there are only so many users, and since I have my own "private domain users," why should I let others earn this money when I can earn it myself?

In the future, more and more commercial entities will create their own Layer2 solutions, relying on a Layer1 with consensus capabilities to share security, setting up their own sequencer, and they can basically get started. They will collect GAS fees themselves, and users will engage on their own chains, forming a traditional business closed loop. From this perspective, commercial entities like Coinbase, which have a large trading user base, creating their own Layer2 is the best and most competitive option.

However, all of this is basically unrelated to retail investors. This is the business of the Layer2 project parties themselves; users are merely consumers. All of this is fundamentally unrelated to consensus and community users, which is why Layer2 tokens struggle to gain consensus. This is the reason why both Ethereum and Bitcoin Layer2 are gradually weakening.

3. Bitcoin does not need Layer2; the Crypto industry needs Bitcoin

Why do I say that Bitcoin essentially does not need Layer2, but rather the Crypto industry needs Bitcoin?

The largest market cap Crypto project surrounding Bitcoin is WBTC, which understands one thing: it is not Bitcoin that needs expansion solutions; it is the entire Crypto industry that needs Bitcoin as a major asset.

Before WBTC, the Ethereum financial market was completely isolated from Bitcoin, the world's largest digital gold mine. Bitcoin occupies more than 50% of the global cryptocurrency market share, and for other financial markets to develop significantly, they need such high-quality assets, which is why WBTC was born. Of course, the risk of WBTC lies in its centralization. Therefore, later on, relatively decentralized solutions like TBTC emerged, including various WarpBTC solutions that many institutions are personally developing, all aimed at solving one problem—bringing Bitcoin, this super gold mine, into their own ecosystems or into other ecosystems.

However, regardless of the circumstances, it is the industry that needs Bitcoin, not Bitcoin that needs these expansion solutions. Bitcoin is inherently self-sufficient and does not require any expansion solutions. The expansion solutions surrounding Bitcoin over the years have not been innovative; most are merely reinventing the wheel.

Therefore, once I realized this issue, I became disinterested in any proposals aimed at improving Bitcoin or helping Bitcoin expand. Bitcoin does not need any expansion solutions; it is this industry, and even humanity as a whole, that needs Bitcoin.

When we think from this perspective, our mindset and vision are immediately broadened!

To make this easier to understand, I want to share an article: https://x.com/qiqileyuan/status/1858357959807635854, by the author with the Twitter ID: @qiqileyuan.

This article poses a question:

After Bitcoin becomes a national reserve, is there a higher-dimensional narrative that can push Bitcoin's price above $1 million?

This is an excellent question.

The author's answer is:

When Bitcoin serves as a digital gold reserve in various national treasuries, its value approaches that of gold. However, to push Bitcoin's price above $1 million, the concept of digital gold is insufficient to support this. After Bitcoin becomes a national currency reserve, the narrative of digital gold tends to become grounded. The next stage of Bitcoin's value is: to become the currency for on-chain AI and a decentralized control system for AI consensus issues.

I believe the author has truly opened up the ascending narrative of Bitcoin.

This line of thinking does not limit itself to Bitcoin itself but instead begins to consider the relationship between the Bitcoin network, humanity, and AI. This is a cognitive upgrade; standing at a higher vantage point allows one to see different scenery.

I believe that positioning Bitcoin as the future currency for on-chain AI and the Bitcoin network as the consensus network for future AI governance matters is a very promising direction.

I found corresponding ideas and solutions in the Super Bitcoin white paper released by BEVM and its related interpretation documents.

Super Bitcoin describes it as follows:

Bitcoin is a decentralized state change machine, a decentralized control system driven by a continuously growing mechanical consensus. The consensus capability of this system continues to grow (by consuming computing power and energy), making it the only system that can meet the future governance and security needs of humanity and AI. Because Bitcoin is the most decentralized system globally, it is not controlled by any party, and its consensus-driven "state change transactions" are trustworthy, especially in the future AI world, where AI and we can almost only trust the Bitcoin network. Moreover, the consensus capability and security of this network are continuously growing, meeting the increasing security and decentralized governance needs of humanity and AI. What Super Bitcoin aims to do is to share Bitcoin's infinite growing mechanical consensus capability and decentralized state change ability with various public governance and AI security needs of future humanity.

This is what I consider to be an incredibly cool entrepreneurial direction, far surpassing the small-scale entrepreneurial thinking of Bitcoin Layer2 and similar projects.

First, this idea has found the second curve of Bitcoin's future value growth, achieving a transformation of Bitcoin's identity from "digital gold" to "on-chain AI currency and on-chain AI governance system," which I currently believe is the most worthwhile direction to explore.

Second, by combining Bitcoin with the future development of humanity and the needs of on-chain AI, it truly maximizes Bitcoin's value. Previously, everyone viewed BTC merely as digital gold, aiming to create Warp BTC or Layer2 to help Bitcoin expand; this only recognized the value of BTC as a coin and did not consider the value of the Bitcoin network itself and its deeper significance for humanity. After all, BTC is just the incentive coin of the Bitcoin network, not all of Bitcoin.

Conclusion:

Bitcoin Layer2 has become an outdated and meaningless entrepreneurial direction. After Bitcoin becomes a national currency reserve, it enters a brand new development stage. Bitcoin's value has increased, its consensus has broadened, and its network security has strengthened, all of which are continuously growing. However, the value of the Bitcoin network itself has yet to be fully developed. The most valuable entrepreneurial direction in the future is to think about this infinitely growing decentralized control system, the world's largest decentralized state change machine, and what greater value it can provide in an era where humanity and AI coexist. This is the most promising entrepreneurial direction.

Maximizing the value of the Bitcoin network itself, rather than being limited to the BTC coin itself, may be the greatest wealth that Satoshi Nakamoto has left for humanity!

Satoshi Nakamoto may truly be someone who has traveled back from the future!