Why is BTC Layer2 a false proposition?

When I typed out this title, I knew it would offend a large number of people, but I might just be a mouthpiece for everyone, saying a fact that no one is willing to admit.

Since June 2023, I have started to pay attention to the Bitcoin Layer2 track, spent a lot of time researching Bitcoin expansion technology, and followed up on some teams that I think are more technically advanced, such as: Stacks, BEVM, Bihelix, Bool Network, including BitVM and RGB solutions, etc.

After some research, I found that BTC Layer2 seems to be a false proposition, because Bitcoin does not need Layer2 at all, but the Crypto industry needs Bitcoin; and Layer2 itself is just a business, not a blockchain at all; the most critical problem is that Layer2 cannot help the main chain expand its capacity at all, it just finds some application scenarios for the main chain tokens, and these scenarios are copied from Layer1 without any innovation.

The first team to verify my idea and resonate with my idea was the BEVM team. I have been following this Bitcoin startup team since June last year. They are also the first team to promote Bitcoin Layer2 in the Chinese-speaking region. However, they suddenly made a 180-degree turn in 2024, completely denying the Bitcoin layer2 track and launching a new strategy called Super Bitcoin. I will not go into details here. If you are interested, you can read their latest white paper, which is still very interesting.

Why did the team that first promoted Bitcoin Layer2 suddenly abandon this direction and turn to another direction? Here, let me talk about some of my views:

1. Layer 2 is an imaginary requirement and does not really help Layer 1 expand capacity

The concept of Layer2 originated from Bitcoin. Satoshi Nakamoto specifically mentioned the Simple Payment Verification (SPV) solution 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 entire Bitcoin blockchain. We can understand this as an efficient off-chain transaction verification.

Based on this concept, the Lightning Network was born. The Lightning Network is completely based on the simple payment verification proposed by Satoshi Nakamoto. This solution makes sense because the Lightning Network is fast enough and cheap enough. More importantly, it completely inherits the network security of Bitcoin, helping Bitcoin to achieve true "capacity expansion" in transactions.

Later, Ethereum Layer2 copied this model. However, although Ethereum's Layer2 can share the security of Ethereum, it cannot help Ethereum truly achieve expansion. It only adds some application scenarios for the Ethereum token.

The reason why the Lightning Network can achieve Bitcoin "expansion" based on simple payment verification is because Bitcoin uses the UTXO model, while Ethereum uses a unified account model. Any Layer2 solution cannot solve the problems caused by the Ethereum account model.

Let's put it simply:

The Bitcoin UTXO model is a model that simulates cash transactions between people. When anyone uses cash to trade, they can trade with multiple people at the same time, and both parties can verify the transaction with each other. It is not necessary to reach a global consensus before trading. During the transaction, there is no need for a centralized organization to uniformly change the data of both parties. Therefore, the Bitcoin UTXO model can realize concurrent processing of transactions and local state changes, and does not require a unified world state tree to update the state.

Ethereum uses a unified account model, which is the traditional bank account model. When processing transactions, the account model needs to rely on a global state tree to add and subtract the balance of each address involved in the transaction to achieve state changes.

Therefore, the status of each transaction in Ethereum needs to be changed before the next transaction can be carried out, otherwise there will be problems such as double spending or inability to trade. In layman's terms, the account model of Ethereum requires a central world state tree to uniformly process transactions and uniformly change the status of all accounts. Although this world state tree is driven by a decentralized mechanism. It is precisely because of the decentralized way to drive this world state tree that the state change ability is very poor and the efficiency is very low.

In order for Ethereum to achieve capacity expansion, it essentially needs to improve the efficiency and ability of state changes. However, all current Ethereum Layer2s have not made any changes or improvements to Ethereum in this regard. Of course, this is not a problem that Ethereum Layer2 can solve, but a problem of Ethereum itself.

Recently, the Ethereum community proposed the BeamChain solution, the most important of which is the introduction of SNARK, which stands for Succinct Non-Interactive Argument of Knowledge, or "Succinct Non-Interactive Proof of Knowledge". This is almost the same as Bitcoin's Simple Payment Verification, or SPV, which we mentioned earlier. This can indeed improve Ethereum's verification efficiency, because the content of the verification is compressed, and there is no need to verify all the content, so it can partially improve Ethereum's state change capabilities. However, this still does not completely solve the problem of the inability to process transactions in parallel caused by the Ethereum account model, because it still relies on the world state tree to uniformly change the state.

To use an analogy: Bitcoin's UTXO model is a multi-lane model that can run in parallel (actually, an infinite lane), while Ethereum has only one single lane. Ethereum's BeamChain now simply increases the speed of this lane. Moreover, this solution essentially has little to do with Ethereum Layer2.

From this perspective, Ethereum Layer2 cannot help Ethereum achieve capacity expansion at all. In the end, Ethereum has to save itself. Of course, Ethereum’s unified account model design is the “biggest obstacle” on the road to Ethereum’s capacity expansion.

In essence, Bitcoin's Lightning Network does not rely on its own technology to help Bitcoin expand. Instead, Bitcoin's UTXO model itself has the ability to locally change state and concurrently process state changes. The Lightning Network is just based on this ability, using a client + a reporting mechanism to prevent double-spending transactions to present Bitcoin's own off-chain expansion solution. Therefore, apart from the Lightning Network, there is basically no second Layer2 in the true sense. In fact, the Lightning Network is not Bitcoin's Layer2, but an application that can quickly trade Bitcoin based on Bitcoin's UTXO model and SPV technology.

Therefore, we say that neither Ethereum Layer2 nor Bitcoin Layer2 can essentially help Layer1 to achieve capacity expansion. It is nothing more than finding some application scenarios for Layer1's tokens, and has not brought any real changes to Layer1!

Layer2 is just a narrative, and it is a platform that claims to help Layer1 expand, but actually does its own business.

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

There is an obvious problem. Almost all Layer2s are centralized. Layer2 itself has no consensus mechanism, let alone the concept of nodes. Layer2 runs with only one official sequencer, namely Sequencer.

All Layer2s are essentially private chains without a consensus mechanism and without "miners participating in consensus."

Generally, the tokens of a chain with a POS consensus mechanism can basically be used for node staking, serving as GAS, and participating in some governance on the chain. However, Layer2 tokens do not have the need for node staking (there is no consensus mechanism and nodes, so what is there to stake), and the GAS of the chain also uses Layer1 tokens. The only value that can be talked about is the so-called governance that is illusory. Layer2 is essentially centralized, so what can it govern?

And as we said before, there is only one official sequencer for Layer2, so all GAS on the entire chain is collected by the official, which is also the main source of income for all Layer2 projects besides issuing coins. For example, before the token TGE, Layer2 such as ZKsync frantically created airdrop expectations for users. ZKsync's monthly GAS income is basically 3 million to 5 million US dollars, and it has been PUA for 2 consecutive years, and the GAS income alone is 72 million to 100 million US dollars, which is probably more than what is earned from listing on exchanges.

So, I say, Layer2 is a business. What you want is the token airdrop from the project party, and the project party earns from the GAS you spend. In the end, the airdrop gives you a useless token, and that’s it.

This business model has been understood by more and more business entities, so you see more and more large projects starting to do Layer2 by themselves, traditional business entities, such as Samsung, Visa, etc.; Crypto projects, such as Uniswap's Unichain are typical examples. Because everyone has figured it out, there are only a few users in total, and I have my own "private domain users", why let others make this money, it's better to make it myself!

In the future, more and more commercial entities will build their own Layer2, relying on a Layer1 with consensus capabilities to share security, and build a sequencer by themselves, and basically they can start working. They collect GAS fees by themselves, and users play on their own chains, forming a traditional commercial closed loop. From this perspective, it is best and competitive for commercial entities like Coinbase, which have a huge number of trading users, to build their own Layer2.

However, all of this has nothing to do with retail investors. This is because this is the business of the Layer2 business entity, and users are just consumers. All of this has nothing to do with consensus and community users, so it is difficult for Layer2 tokens to reach a consensus. This is why Ethereum and Bitcoin Layer2 are gradually weakening.

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

Why do we say that Bitcoin does not essentially need Layer 2, but only the Crypto industry needs Bitcoin?

Among the Crypto projects that are based on Bitcoin, WBTC currently has the largest market value. This project has made one thing clear: it is not Bitcoin that needs an expansion plan, but the entire Crypto industry that needs Bitcoin, a huge gold mine.

Before WBTC, the Ethereum financial market was completely isolated from Bitcoin, the world's largest digital gold mine. Bitcoin accounts for more than 50% of the global cryptocurrency market share. Other financial markets need such high-quality assets to develop steadily. Therefore, WBTC was born. Of course, the risk of WBTC is that it is centralized. Therefore, relatively decentralized solutions such as TBTC were born later, including various WarpBTCs that many institutions have personally developed in this round, all of which solve a problem - moving Bitcoin, the super gold mine, to their own ecosystem or to another ecosystem.

However, no matter what, it is the industry that needs Bitcoin, not Bitcoin that needs these expansion solutions. Bitcoin is self-sufficient in nature and does not need any expansion solutions. Over the years, the expansion solutions around Bitcoin have no innovative significance, and most of them are just reinventing the wheel.

Therefore, when I realized this problem, from now on, I am not interested in any plan to improve Bitcoin or help Bitcoin expand. Bitcoin does not need any expansion plan, it is the industry and even the entire human race that needs Bitcoin.

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

In order to make this matter easier to understand, let me share an article first, https://x.com/qiqileyuan/status/1858357959807635854, the author’s Twitter ID: @qiqileyuan.

This article raises a question:

After Bitcoin becomes a national reserve, is there any higher-dimensional narrative that can push the price of Bitcoin to over 1 million US dollars?

This is an excellent question.

The author's answer is:

When Bitcoin is stored as digital gold in the treasuries of various countries, its value is infinitely close to that of gold. However, if Bitcoin wants to continue to break through 1 million US dollars, the concept of digital gold is not enough to support it. After Bitcoin becomes a national currency reserve, the concept of digital gold has basically been implemented. The value of Bitcoin in the next stage is to become the currency of on-chain AI and a decentralized control system for AI consensus issues.

I feel like the author really unlocks the narrative of Bitcoin's rise.

This idea is not limited to thinking about Bitcoin itself, but jumps out to think about the relationship between the Bitcoin network and humans and AI. This is an upgrade in cognition, and only by standing at a higher level can you 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 affairs is a very promising direction.

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

Super Bitcoin describes it this way:

Bitcoin is a decentralized state-changing machine, a decentralized control system driven by a growing mechanical consensus. The consensus capacity of this system is constantly growing (by absorbing computing power and energy), and it is the only system that can match the future AI governance and security needs of mankind. Because Bitcoin is the most decentralized system in the world, it is not controlled by any party, and its consensus "state change transactions" are trustworthy, especially in the future AI world, AI and we can almost only trust the Bitcoin network. Moreover, the consensus capacity and security of this network are constantly growing, which can meet the growing security and decentralized governance needs of humans and AI. What Super Bitcoin needs to do is to share Bitcoin's infinitely growing mechanical consensus capacity and decentralized state change capacity with various public governance and AI security needs of future humans.

This is what I think is an extremely cool entrepreneurial direction, far surpassing the entrepreneurial thinking of small-scale projects such as Bitcoin Layer2.

First, this idea has found the second curve of Bitcoin’s future value growth and realized the transformation of Bitcoin’s identity from “digital gold” to “on-chain AI currency and on-chain AI governance system”. This is the direction I think is most worth exploring at present.

Second, by combining Bitcoin with the future development of mankind and the needs of on-chain AI, the value of Bitcoin is truly maximized. Before this, everyone regarded BTC as digital gold, wanted to make Warp BTC, and wanted to make Layer2 to help Bitcoin expand. This only saw the value of BTC as a coin, and did not think about the value of the Bitcoin network itself and its deeper significance to mankind. After all, BTC is just an incentive coin for the Bitcoin network, not all of Bitcoin.

Summarize :

Bitcoin Layer2 has become an outdated and meaningless entrepreneurial direction. After becoming a national currency reserve, Bitcoin has entered a new stage of development. Bitcoin's value is greater, the consensus is wider, and its network price security is stronger, and all of these are growing. However, the value of the Bitcoin network itself has not been fully developed. The most valuable entrepreneurial direction in the future is to focus on the Bitcoin network itself and think about what greater value this infinitely growing decentralized control system, the world's largest decentralized state change machine, can play in the future era of coexistence of humans and AI. This is the most promising entrepreneurial direction.

To bring out the value of the Bitcoin network itself, rather than just being limited to the BTC coin itself, this may be the greatest wealth that Satoshi Nakamoto left to mankind!

Satoshi Nakamoto may have really traveled back from the future!