Bitcoin Layer 2 may just be a false proposition

When I put forward this point, I realized it might provoke some controversy. But perhaps it just states a universally existing yet seldom acknowledged fact.

Since June 2023, I have conducted in-depth research on Bitcoin scaling technologies and the Layer 2 sector, focusing on several teams that I believe have technical strength, such as Stacks, BEVM, Bihelix, Bool Network, etc., while also studying the solutions of BitVM and RGB.

However, after some exploration, I have come to the conclusion that BTC Layer 2 seems to be a false proposition. There are three reasons:

First of all, Bitcoin itself does not need Layer 2. On the contrary, it is the cryptocurrency industry that needs Bitcoin.

Secondly, Layer 2 is essentially just a business model, rather than a true blockchain technology.

Finally, and most importantly, Layer 2 cannot actually help the main chain achieve scalability. It merely finds some application scenarios for the main chain tokens, most of which are simple imitations of Layer 1 and lack true innovation.

The earliest validation of my point of view comes from the BEVM team. I started paying attention to this Bitcoin startup team since June last year. They are one of the earlier teams promoting Bitcoin Layer 2 in the Chinese-speaking region. However, in 2024, they made a 180-degree turn and completely denied the Bitcoin Layer 2 track, instead launching a new strategy called Super Bitcoin.

Why did the team that first promoted Bitcoin Layer 2 suddenly abandon this direction completely? Here are some of my insights:

1. Layer 2 is an imagined need and has not truly helped Layer 1 scale.

The concept of Layer 2 originally comes from Bitcoin. Satoshi Nakamoto mentioned the Simple Payment Verification (SPV) scheme in Chapter 8 of the Bitcoin white paper. This scheme allows transaction verification to be completed without downloading the entire Bitcoin blockchain, and can be seen as an efficient off-chain transaction verification method.

Based on this concept, the Lightning Network was born. The Lightning Network is entirely implemented based on SPV and has significant importance. It is fast, low-cost, and, more importantly, fully inherits the network security of Bitcoin, achieving true "scalability" in transactions.

Ethereum's Layer 2 has drawn on this model, but the results are quite different. Although Ethereum Layer 2 can share Ethereum's security, it cannot truly help Ethereum achieve scalability, only adding some application scenarios for Ether.

The reason the Lightning Network can achieve "scalability" for Bitcoin based on SPV is that Bitcoin uses the UTXO model. In contrast, Ethereum adopts a unified account model, and no Layer 2 solution can address the issues brought about by the account model.

In simple terms:

The UTXO model of Bitcoin simulates cash transactions between individuals. Anyone can transact with multiple parties simultaneously, and both parties can directly verify the transaction without the need for global consensus. This allows Bitcoin to achieve concurrent transaction processing and local state changes without a unified world state tree to update the state.

In contrast, Ethereum adopts a unified account model, similar to traditional bank accounts. When processing transactions, it relies on a global state tree to update the balances of the addresses involved in each transaction. This means that the state of each transaction needs to be completed and changed before the next transaction can take place, otherwise issues such as double spending or transaction failures may occur.

To achieve scalability, Ethereum essentially needs to improve the efficiency and capacity of state changes. However, currently, all Ethereum Layer 2 solutions have failed to make any improvements in this regard for Ethereum. This is not a problem that Layer 2 can solve, but rather an issue inherent to Ethereum itself.

Recently, the Ethereum community proposed the BeamChain solution, which introduces SNARK (Succinct Non-interactive Argument of Knowledge). This is similar to Bitcoin's SPV goal and can enhance Ethereum's verification efficiency. However, it has not yet completely resolved the issue of parallel processing of transactions caused by the Ethereum account model, as it still relies on the world state tree to unify state changes.

For example: Bitcoin's UTXO model is a parallel multi-lane system, while Ethereum has only a single lane. The BeamChain solution simply increases the traffic speed of this single lane. Moreover, this solution is essentially not closely related to Ethereum Layer 2.

From this perspective, Ethereum Layer 2 cannot help Ethereum to achieve scalability at all; ultimately, Ethereum still needs to solve the problem itself. The unified account model design of Ethereum is the biggest obstacle on its path to scalability.

The Lightning Network of Bitcoin does not rely on its own technology to help Bitcoin scale, but rather utilizes the local state change and concurrent processing capabilities inherent in the Bitcoin UTXO model. The Lightning Network merely demonstrates Bitcoin's inherent off-chain scaling solution based on this foundation, through client software and a mechanism to prevent double spending. Therefore, aside from the Lightning Network, there are almost no other true Layer 2 solutions. It can even be said that the Lightning Network is not a Layer 2 of Bitcoin, but rather an application for fast transactions of Bitcoin created based on the Bitcoin UTXO model and SPV technology.

Therefore, whether it's Ethereum Layer 2 or Bitcoin Layer 2, they essentially cannot help Layer 1 achieve scaling. They merely find some use cases for Layer 1 tokens and do not fundamentally change Layer 1.

Layer2 is merely a narrative, under the guise of helping Layer1 scale, but in reality, it is just doing its own business.

2. Layer2 is just a business for the project party and has nothing to do with retail investors.

There is an obvious fact: almost all Layer 2 solutions are centralized. Layer 2 itself has no consensus mechanism and no concept of nodes. The operation of Layer 2 relies solely on an official sequencer.

All Layer 2s are essentially private chains without a consensus mechanism and without "miner participation in consensus."

Typically, the tokens of a chain using the POS consensus mechanism can be used for node staking, paying GAS fees, and participating in on-chain governance. However, Layer2 tokens do not have node staking requirements (since there is no consensus mechanism and nodes), and on-chain GAS fees also use Layer1 tokens. The only value that can be said is for so-called governance. But Layer2 is essentially centralized, so what can be governed?

Moreover, there is only one official sequencer for Layer 2, so all GAS fees are collected by the official entity. This is the main source of income for Layer 2 projects aside from issuing tokens. For example, some Layer 2 projects attract users by creating expectations for airdrops before the token TGE, with monthly GAS revenue reaching 3 to 5 million USD, potentially earning 72 million to 100 million USD over two years, which could be more profitable than listing on an exchange.

So, Layer 2 is essentially a business. Users expect token airdrops from the project parties, while the project parties earn the GAS fees paid by users. In the end, the project parties airdrop a nearly useless token to users, and that’s the end of it.

This business model has been increasingly recognized by more and more commercial entities. Therefore, we see more and more large projects starting to develop their own Layer2 solutions, including traditional commercial entities like Samsung and Visa, as well as cryptocurrency projects like a certain DEX's Unichain. Because everyone understands that the total number of users is limited, and they have their own "private domain users", why not earn this money themselves instead of giving it to others?

In the future, more business entities will create their own Layer 2 solutions, relying on a Layer 1 with consensus capability to share security. They can start operating by building their own sequencer. They will collect the GAS fees themselves, and users will interact on their own chain, forming a traditional business closed loop. From this perspective, for certain business entities with a large number of trading users, creating their own Layer 2 is the most suitable and competitive choice.

But all of this is basically unrelated to retail investors. This is the business of the Layer 2 commercial entity itself, and users are merely consumers. This is essentially unrelated to consensus and community users, which makes it difficult for Layer 2 tokens to gain consensus. This is the reason why projects, including Ethereum and Bitcoin Layer 2, are gradually weakening.

3. Bitcoin does not need Layer 2, the cryptocurrency industry needs Bitcoin

Why is it said that Bitcoin essentially does not need Layer 2, but the cryptocurrency industry needs Bitcoin?

Among the cryptocurrency projects centered around Bitcoin, the one with the largest market value is a certain BTC cross-chain project. This project understands one thing: it is not Bitcoin that needs expansion plans, but the entire cryptocurrency industry that needs Bitcoin as this major gold mine.

Before this project, the financial market of a certain smart contract platform was completely isolated from Bitcoin, the world's largest digital gold mine. Bitcoin accounts for over 50% of the global cryptocurrency market share, and other financial markets need such high-quality assets for significant development, which is why this project came into being. Of course, the risk of this project lies in its centralization. Therefore, relatively decentralized solutions were later born, including various cross-chain BTC solutions that many institutions have personally developed in this round, all aimed at solving one problem - moving Bitcoin, this super gold mine, into their own ecosystem or to other ecosystems.

However, in any case, it is the industry that needs Bitcoin, not Bitcoin that needs these scaling solutions. Bitcoin is inherently self-sufficient and does not require any scaling solutions. Over the years, the scaling solutions surrounding Bitcoin have lacked innovative significance, and most of them are just reinventing the wheel.

Therefore, when I realized this issue, from now on, I am not interested in any proposals to improve Bitcoin or to help Bitcoin scale. Bitcoin does not need any scaling solutions; it is the industry, and even all of humanity, that needs Bitcoin.

When we think from this perspective, our minds and horizons immediately open up!

Someone raised a question: After Bitcoin becomes a national reserve, is there a higher-dimensional narrative that can push the price of Bitcoin above 1 million dollars?

This is an excellent question.

The possible answer is: When Bitcoin serves as digital gold reserves in the treasury of various countries, its value is infinitely close to gold. However, to push Bitcoin above 1 million dollars, the concept of digital gold is insufficient to support that. The narrative of digital gold has basically grounded after Bitcoin becomes a national currency reserve. The next stage of Bitcoin's value is: to become the currency of on-chain AI and a decentralized control system for AI consensus issues.

This idea truly opens up the upward narrative of Bitcoin.

This kind of thinking is not limited to Bitcoin itself, but rather steps back to consider the relationship between the Bitcoin network, humanity, and AI. This is a cognitive upgrade; only from a higher vantage point can one see a different landscape.

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

The Super Bitcoin white paper of a certain project also proposed similar ideas and solutions:

Bitcoin is a decentralized state change machine, a decentralized control system driven by an ever-growing mechanical consensus. The consensus capability of this system continuously grows (by absorbing computing power and energy), making it the only system that can meet the governance and security needs of future AI. Because Bitcoin is the most decentralized system globally, not controlled by any single party, the "state change transactions" it has reached consensus on 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, able to meet the increasing security and decentralized governance needs of both humans and AI. What Super Bitcoin aims to do is to share this limitless growing mechanical consensus capability and decentralized state change ability of Bitcoin with various public governance and AI security needs of future humanity.

This is an extremely innovative entrepreneurial direction, far surpassing the small-scale entrepreneurial thinking of Bitcoin Layer 2 and others.

First of all, this idea has found the second curve of value growth for Bitcoin, realizing the transformation of Bitcoin from "digital gold" to "on-chain AI currency and on-chain AI governance system". This is the direction that is most worth exploring at present.

Secondly, by combining Bitcoin with the future development of humanity and the demand for on-chain AI, the value of Bitcoin has truly been maximized. Prior to this, people regarded BTC as digital gold, aimed to perform cross-chain BTC transactions, and sought to expand Bitcoin through Layer 2 solutions. This only reflects the value of BTC as a token, without considering the intrinsic value of the Bitcoin network itself and its deeper significance for humanity. After all, BTC is merely the incentive token of the Bitcoin network, not the entirety of Bitcoin.

Summary

Bitcoin Layer 2 has become an outdated and meaningless entrepreneurial direction. After Bitcoin became a national currency reserve, it entered a whole new stage of development. The value of Bitcoin has increased, and the consensus.