Is BTC Layer 2 a false proposition?

When I typed this title, I knew I would offend a large group of people, but I might just be stating a fact that everyone is unwilling to admit.

Since June 2023, I started paying attention to the Bitcoin Layer 2 track, spending a lot of time researching Bitcoin scalability technology and following some teams that I believe have considerable technical content, such as Stacks, BEVM, Bihelix, Bool Network, as well as solutions like BitVM and RGB.

After researching, I found that BTC Layer 2 indeed seems to be a false proposition, as Bitcoin does not need Layer 2; it is the crypto industry that needs Bitcoin. Moreover, Layer 2 is merely a business, not a blockchain at all; the critical issue is that Layer 2 cannot help the main chain scale; it merely finds some application scenarios for the main chain's tokens, and these scenarios are mere copies of Layer 1 with no innovation.

The first to validate my thinking and resonate with my ideas was the Super Bitcoin white paper. I started paying attention to this Bitcoin startup team since June of last year; they are also one of the earliest teams promoting Bitcoin Layer 2 in the Chinese-speaking world. However, in 2024, they made a sudden 180-degree turn, completely denying the Bitcoin Layer 2 track and launched a new strategy called Super Bitcoin. I won't delve into the details here; if interested, you can check their latest white paper, which is quite interesting.

Why did the team that initially promoted Bitcoin Layer 2 suddenly abandon this direction and turn to another? Is Layer 2 really a false proposition? Where does the ultimate narrative of Bitcoin lie? Today, I would like to share some of my insights:

I. Layer 2 is an imagined demand that does not truly help the main chain scale.

The concept of Layer 2 originally came from Bitcoin, where Satoshi Nakamoto specifically mentioned the Simple Payment Verification (SPV) scheme in Chapter 8 of the Bitcoin white paper. This means that based on Bitcoin's SPV nodes, or light nodes, transactions can be verified without downloading the complete Bitcoin blockchain; we can understand this as an efficient off-chain transaction verification.

Based on this concept, the Lightning Network was born, completely based on Satoshi Nakamoto's proposed simple payment verification. This scheme is meaningful because the Lightning Network is fast enough, cheap enough, and, more importantly, it fully inherits Bitcoin's network security, helping Bitcoin achieve real 'scalability' in transactions.

Later, Ethereum Layer 2 copied this model, but although Ethereum's Layer 2 can share Ethereum's security, it cannot help Ethereum truly achieve scalability; it merely adds some application scenarios for Ethereum tokens.

The reason why the Lightning Network can achieve Bitcoin 'scalability' based on simple payment verification is that Bitcoin adopts the UTXO model, while Ethereum uses a unified account model. No Layer 2 scheme can solve the problems posed by Ethereum's account model.

To put it simply:

The Bitcoin UTXO model simulates cash transactions between people, where anyone can transact with multiple people simultaneously, and both parties can verify the transaction without needing global consensus. There is no need for a centralized institution to unify the data changes between the two parties during the transaction. Therefore, Bitcoin's UTXO model enables concurrent transaction processing and partial state changes without requiring a unified world state tree for updates.

Ethereum adopts a unified account model, which is the traditional banking account model. The account model relies on a global state tree to perform balance calculations for each address involved in a transaction, thus achieving state changes.

Thus, the state of each transaction on Ethereum must be changed completely before proceeding to the next transaction; otherwise, issues such as double spending or transaction failures may occur. In simple terms, Ethereum's account model requires a centralized world state tree to uniformly handle transactions and change the state of all accounts. Although this world state tree is driven by a decentralized mechanism, the decentralized approach results in poor state change capability and low efficiency.

To achieve scalability, Ethereum essentially needs to enhance the efficiency and capability of state changes. However, currently, all Ethereum Layer 2s have not made any changes or improvements to Ethereum in this regard. Of course, this is not a problem that Ethereum Layer 2 can solve; it is an issue inherent to Ethereum itself.

Recently, the Ethereum community proposed the BeamChain solution, one of the most important points being the introduction of SNARK, which stands for Succinct Non-Interactive Argument of Knowledge. This is similar to Bitcoin's Simple Payment Verification (SPV), which we mentioned earlier, and aims to achieve similar effects. This indeed can enhance Ethereum's verification efficiency, as the content being verified is compressed and does not require verification of the entire content, thus partially enhancing Ethereum's state change capability. However, it still does not fundamentally solve the problems of parallel transaction processing brought by Ethereum's account model, as it still relies on a world state tree to uniformly change states.

To put it metaphorically, the Bitcoin UTXO model is a multi-lane (in fact, infinite lanes) parallel system, while Ethereum has only a single lane. The current Ethereum BeamChain merely enhances the traffic speed of this lane further. This scheme essentially has little to do with Ethereum Layer 2.

From this perspective, Ethereum Layer 2 cannot help Ethereum achieve scalability; ultimately, Ethereum must rescue itself. Of course, the design of Ethereum's unified account model is the 'biggest obstacle' on Ethereum's path to scalability.

However, the Lightning Network does not essentially rely on its own technology to help Bitcoin scale; rather, Bitcoin's UTXO model itself possesses the ability to change states locally and process state changes concurrently. The Lightning Network merely presents Bitcoin's inherent off-chain scaling solution using a client and a mechanism to prevent double spending. Thus, fundamentally speaking, the Lightning Network is not Bitcoin's Layer 2 but an application created based on Bitcoin's UTXO model and SPV technology that allows quick transactions of Bitcoin.

Therefore, we say that whether it's Ethereum Layer 2 or Bitcoin Layer 2, they essentially cannot help Layer 1 achieve scalability; they merely provide some application scenarios for Layer 1's tokens without bringing any real change to Layer 1!

Layer 2 is merely a narrative, and it is one that claims to help Layer 1 scale, while in reality, it is conducting its own business.

II. Layer 2 is merely a business for the project parties, unrelated to retail investors.

There is an obvious problem: almost all Layer 2s are centralized, Layer 2 itself has no consensus mechanism and lacks the concept of nodes. The operation of Layer 2 has only one official sequencer.

All Layer 2s are essentially private chains without a consensus mechanism and without 'miners participating in consensus'.

In general, a POS consensus mechanism chain's tokens can be used for node staking, serving as GAS, and participating in some governance scenarios on-chain, etc. However, Layer 2 tokens have no node staking requirements (there are no consensus mechanisms and nodes, so what is there to stake?), and the chain's GAS is also using Layer 1's tokens. The only value it can provide is the so-called governance, which is mere illusion. Layer 2s are essentially centralized; what can they govern?

Moreover, we mentioned earlier that the Layer 2 sequencer is solely operated by the official party; therefore, all GAS on the entire chain is collected by the official party, which is also the main source of income for all Layer 2 project parties aside from token issuance. For example, before the token TGE, Layer 2s like ZKsync created huge expectations for airdrops for users, with ZKsync's monthly GAS revenue amounting to around 3 million to 5 million USD, and after two years of continuous PUA, the GAS revenue alone would be 72 million to 100 million USD, which might even exceed profits made from exchanges.

So, I say, Layer 2 is just a business; what you want is the project's token airdrop, and the project party profits from the GAS you spend. In the end, you get a token that is of no use to you.

What are you waiting for?

End!

This business model has been understood by more and more commercial entities, so you see larger projects starting to create their own Layer 2s, such as traditional commercial entities like Samsung and Visa; crypto projects like Uniswap's Unichain are typical examples. Because everyone has realized that there are only these 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 business entities will create their own Layer 2s, relying on a Layer 1 with consensus capability to share security, setting up their own sequencer, and they can basically get started. They collect GAS fees themselves, users play on their own chains, forming a traditional business closed loop. From this perspective, a commercial entity like Coinbase, which has a large trading user base, creating its own Layer 2 is the best and most competitive option.

However, all of this is basically unrelated to retail investors. Because this is the business of Layer 2's commercial entities; users are merely consumers. Everything here is essentially unrelated to consensus and community users, which makes it difficult for Layer 2 tokens to achieve consensus. This is the reason why both Ethereum and Bitcoin Layer 2 are gradually weakening.

III. Bitcoin does not need Layer 2; it is the crypto industry that needs Bitcoin.

Why say that Bitcoin essentially does not need Layer 2, but rather the crypto industry needs Bitcoin?

The largest crypto project focusing on Bitcoin is WBTC. This project understands that it is not Bitcoin that needs expansion solutions, but the entire crypto industry that needs this gold mine called Bitcoin.

Before WBTC, the financial market of Ethereum was completely isolated from Bitcoin, the world's largest digital gold mine. Bitcoin holds over 50% of the global cryptocurrency market share, and other financial markets require such quality assets for substantial growth; thus, WBTC was born. Of course, the risk of WBTC lies in its centralization. Hence, relatively decentralized solutions like TBTC emerged later, including various WarpBTC solutions many institutions are currently working on, all aimed at solving one issue—bringing Bitcoin, this super gold mine, into their own ecosystems or into other ecosystems.

However, in any case, this is the industry needing Bitcoin, not Bitcoin needing these expansion solutions. Bitcoin is inherently self-sufficient and does not need any expansion schemes; after all these years, the expansion schemes around Bitcoin have lacked any innovative significance, most of them are just repeating the wheel.

Therefore, when I realized this issue, I lost interest in all proposals aimed at improving Bitcoin or supposedly helping Bitcoin expand from now on. Bitcoin does not need any expansion proposals; it is this industry, and even all of humanity, that needs Bitcoin.

When we think from this perspective, our thoughts and horizons immediately expand!

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

This article raises a question:

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

This is an excellent question.

The author's answer is:

When Bitcoin is treated as digital gold reserves in various countries' treasuries, its value approaches that of gold. However, for Bitcoin to break through the 1 million USD mark, the concept of digital gold alone is insufficient to support it. Once Bitcoin becomes a national currency reserve, the narrative of digital gold tends to become grounded. The next phase 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 narrative for Bitcoin's rise.

This line of thought does not limit itself to considering Bitcoin itself, but rather steps back to consider the relationship between the Bitcoin network, humanity, and AI. This is an upgrade in cognition; viewing from a higher perspective allows one to see different scenery.

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

I found corresponding thoughts and solutions in the Super Bitcoin white paper and its related interpretation documents.

Super Bitcoin describes it this way:

Bitcoin is a decentralized state change machine, driven by a continuously growing mechanical consensus system. This system's consensus capability continually grows (by consuming computing power and energy), and is the only system capable of meeting the future governance and security needs of AI. Bitcoin is the most decentralized system globally, not controlled by any one party, and the 'state change transactions' it has consensus on are trustworthy, especially in a future AI world where AI and we can only trust the Bitcoin network. Moreover, this network's consensus capability and security are continuously growing, capable of meeting the increasing safety 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 capability with various public governance and AI security needs of future humanity.