Bitcoin fees went up as much as 200x in 2023. In 2022 and early 2023, Bitcoin fees hovered around 1-3 sats/vB. But by the end of 2023, they had significantly risen, hitting more than 70 sats/vB on multiple occasions.
That trend has largely continued into the start of 2024. As of this writing, they're sitting as high as 85 sats/vB.
And this is all because of Ordinals.
The cultural shift created by the Ordinals protocol has made Bitcoin a serious contender to blockchains like Ethereum and Solana that have active DeFi, NFT and dapp ecosystems on top of them. The only difference? Ethereum users have layer-2 (L2) rollups that are saving them from high fees and long waits. Bitcoin needs rollups to scale.
In the Bitcoin ecosystem, the narrative has shifted greatly this year. From the idea of a store of value to a settlement layer that is ready to be unlocked through the help of L2s. However, unlike the rest of the crypto industry, the Bitcoin community is more skeptical of new tokens, which introduces an interesting technical trilemma for designing Bitcoin L2s or sidechains.
Do Rollups Work?
A November report by blockchain infrastructure platform Chainstack underscores the pivotal role played by L2’s rollups.
Rollups were originally designed to solve the blockchain trilemma — a tradeoff layer 1 networks must make between security, scalability and decentralization. The three desirable properties being an open network, no new tokens and full/global VM capabilities. The trade-off is that developers must pick two.
Blockchains can only offer two of those elements at any one time.
Chainstack's findings reveal that without the intervention of layer-2 rollups, the transaction fees within the Ethereum network would surge to five times their current levels. The wait times might extend to a substantial 114 seconds, a contrast to the minimum 12-second block time for transactions sent between blocks.
Nobody can look at the success of the Ethereum ecosystem and argue that rollups have not become an indispensable component of Ethereum's functionality.
It’s Time for Bitcoin Rollups
Innovations like Optimism, Arbitrum and zero-knowledge (zk) rollups, are now needed to maintain the efficiency of Bitcoin transactions.
The approach taken by any individual sidechain or L2 is a lesser priority to the growth of projects unlocking Bitcoin DeFi.
The Chainstack report posits that layer 2 networks acted as a vital counterbalance, offering a necessary and useful mechanism to mitigate the impending fee increases to the L1. In the world of Bitcoin development, the lessons from Ethereum's rollup success are a beacon for builders and developers seeking to optimize efficiency and scalability without compromising their principles of decentralization and security that brought them to Bitcoin to begin with.
Higher fees can be argued as a healthy aspect of Bitcoin because they improve the long-term security budget, show demand for Bitcoin block space (on-chain activity), and the fees force our industry to build better scaling solutions.
Eventually, those high fees have to be managed. If we want them to remain, then Bitcoin L2’s are no longer a nice-to-have, but an absolute necessity.
Taking data from L2 use on Ethereum, we can expect that viable Bitcoin L2s will grow to do over 20 percent of all BTC transactions in the coming years.
I'm personally in the camp that believes in having an open network where anyone can mine and freely come and go, while giving developers a full execution environment for contracts with global state are essential properties. Most systems like Ethereum and Solana have both these properties, and developers expect them as table stakes.
Progress is Needed in Growing Bitcoin L2s
Understanding how important Bitcoin L2s can become, it is notable that they remain underfunded compared to other chains. Ethereum L2s have raised billions of dollars and have a market cap of around $50 billion. Compared to Ethereum, Bitcoin L2s have only captured about 0.005 percent of the total investment interest in L2s. We need dozens of Bitcoin L2 experiments to truly unlock Bitcoin for everyone.
Developers are already showing a lot of interest, which is a leading indicator of demand. These reports around the success of Ethereum rollups only support the conclusion that just as Ethereum and others took from Bitcoin and innovated outwards – Bitcoin can utilize their lessons to innovate from within.
A general rule of thumb for all Bitcoin builders should be to enable all types of experimentation upon Bitcoin L2s and sidechains. The markets can decide what set of technical tradeoffs are the winner. Taking the lessons and findings from the success of Ethereum and others, we can bring the best version of scalability to Bitcoin.