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Author: F.F from LBank Labs Research team
Table of Contents
Renaissance of Bitcoin Scaling
Scaling Market Landscape
An Example: Stacks
Nakamoto Upgrade and sBTC
Ecosystem and Stats
Currently, dApps and Web3 innovation are generating more excitement than Bitcoin. However, we expect this perception to change. Web3 is still in its early stages. Bitcoin, as the largest and strongest cryptocurrency, remains a solid foundation for builders, entrepreneurs, and startups to build on. Its minimalist approach limits functionality to keep the network simple, robust, secure, and trustless. While limited throughput, lack of smart contract capability, and non-turing completeness come at a cost, these trade-offs have allowed Bitcoin to survive ups and downs over the past years.
After the waves of Ordinals, we are looking forward to the renaissance of Bitcoin, with the builder culture leading to the improvement of cryptocurrency. We may see more scaling solutions complementing Bitcoin to create a robust modular network.
Therefore, we are introducing the “Renaissance of Bitcoin Scaling” series. In this series, we will go through the current scaling solutions case by case, exploring the possibilities and finding the most promising solution that inherits Bitcoin and offers greater expressiveness.
In the first essay, we will describe the origin of the scaling demand, the landscape of Bitcoin scaling, and provide our analysis framework and thoughts on the key points of scaling solutions. Then, we will deeply research the most discussed scaling solution, Stacks, as an example, to clarify what matters about Bitcoin scaling.
Renaissance of Bitcoin Scaling
Throughout its long history, the narrative of Bitcoin has undergone significant changes, transitioning from being used for global payments to being regarded as digital gold in the most recent cycle. However, its underlying architecture has remained mostly unchanged. Although many projects have attempted to make Bitcoin more programmable, very few of them have been accepted by the Bitcoin community. This is because the community believes that Bitcoin should remain clean and simple, sticking to its original design. With Ethereum’s increasing overhead and migration to the settlement layer, as well as the rise of modular design, it is clear that Bitcoin has established its role from the very beginning. More computing-intensive work should be delegated to upper layers, similar to how L2s work for Ethereum.
Despite Bitcoin’s scaling problems, few in the community discussed them until the Ordinals inscription this year. During the period of Ordinals and Brc20, the Bitcoin network experienced unprecedented levels of congestion due to pending transactions in the mempool and an increase in transaction fees. Bitcoin users recognized the need for a scaling solution that could efficiently address the backlog without compromising security. Additionally, Bitcoin needs increased demand for blockspace in order for the system to thrive as the block subsidy asymptotes to zero.
Looking back on the early days of DeFi summer, it caused congestion on Ethereum and motivated the community to create alternative Layer 1 and Layer 2 solutions. These notable Layer 2 solutions were built from scratch over the last two years. At present, Layer 2s have a TVL of 10B, which is equivalent to 5% of Ethereum’s market cap. In terms of market cap, the total of Layer 2s has already reached 10%. If we expect Bitcoin’s scaling solutions to be similar to Ethereum’s, that represents a 100B blue-ocean market. However, the notable Lightning Network only reached 5,000 BTC at its all-time high, while other scaling solutions have much less than the Lightning Network. There is still untapped potential for Bitcoin, and as new projects emerge, the case for Bitcoin becomes stronger.
Layer2 Market Cap(Source: CoinGecko)
Scaling Market Landscape
From the above perspective, it appears that the Bitcoin scaling market still has a long way to go before settling down. At the moment, no one entity dominates the market, and there are many interesting avenues to explore in terms of scaling Bitcoin or improving the capital efficiency of BTC. This is why we have decided to delve deeper into this market to determine which solutions may ultimately prevail in the future.
However, it must be acknowledged that Layer2 solutions in Ethereum may not be practical in the context of Bitcoin. While Ethereum is capable of verifying the state transition in Layer 2, Bitcoin can only ensure the validity of the signature. Consequently, scaling solutions for Bitcoin will require more complex innovations and modifications to be tailored to the specific needs of Bitcoin. Therefore, some migrations from Ethereum may not make sense, and the term “Layer2” may not be appropriate in this context.
The Bitcoin landscape below classifies solutions into Meta-protocols, Layer2s, Sidechains, and Cross-Chain Bridges. Additionally, there are other definitions such as sovereign rollups, TAP, zk-rollups, Ark, Drive Chains, Space Chains, Soft Chains, and so on. While this landscape provides a comprehensive overview of what is happening within the Bitcoin community, we acknowledge that its classification may not be entirely accurate, and we do not delve into the technicalities of these terminologies.