Bitcoin’s Blockspace Challenges for Data Availability and Rollups

Bitcoin’s
blockspace
is
extremely
scarce
with
the
size
of
each
block
capped
at
4MB.
This
scarcity
presents
a
significant
challenge
for
Rollups
seeking
to
leverage
Bitcoin
as
a
data
availability
layer.
The
emerging
landscape
of
Rollups
built
on
Bitcoin,
predominantly
ZK-based,
aims
to
post
ZK-Proof
outputs
and
state
differences
every
6-8
blocks.
However,
this
approach
faces
a
critical
obstacle;
each
data
post
consumes
up
to
400KB
(0.4MB)
of
blockspace,
effectively
occupying
10%
of
an
entire
block.

Given
Bitcoin’s
consistently
full
blocks
since
January
2023,
competition
for
block
inclusion
among
multiple
Rollups
will
intensify,
potentially
straining
Bitcoin’s
transaction
fee
market
to
unsustainable
levels.
The
current
limitations
of
Bitcoin’s
base
layer,
combined
with
the
proliferation
of
Rollups
in
development,
may
create
an
environment
where
L2s
struggle
to
afford
data
posting.
To
remain
viable,
Rollups
on
Bitcoin
will
need
to
generate
substantial
revenue
from
transaction
fees,
driven
by
useful
applications.
This
report
analyzes
the
economic
viability
of
Rollups
on
Bitcoin
by
examining
data
from
Ethereum
ZK-Rollups
and
projecting
costs
for
Rollups
using
Bitcoin
for
data
availability.
The
analysis
explores
the
potential
impacts
on
Bitcoin’s
block
composition
once
these
projects
launch
on
mainnet,
as
well
as
discuss
alternative
strategies
Rollups
might
employ
if
posting
data
to
Bitcoin
is
too
costly.

Is
Bitcoin
L1
a
Data
Availability
Layer?

Rollups
on
Bitcoin
that
post
data
to
the
base
layer
will
face
a
significant
problem:
the
cost
to
post
data.
Bitcoin
blockspace
is
the
most
expensive
per
byte
of
any
chain.
Additionally,
Bitcoin’s
block
size
is
firmly
capped
at
4MB,
and
fees
are
tied
to
the
data
weight
of
a
transaction,
making
any
data
intensive
transaction
expensive
to
execute.
The
emergence
of
Ordinals,
which
are
inscriptions
attached
to
individual
Satoshis,
highlight
that
transactions
that
occupy
a
significant
portion
of
the
blocksize
cost
a
premium
and
drive-up
transaction
fees.
For
example,
the
first
4MB
Bitcoin
transaction
inscribed
by
the
Taproot
Wizards
team
(block
774,628)
cost
$147k
in
fees.

Based
on
conversations
with
several
teams
building
ZK-Rollups
on
Bitcoin,
Rollups
are
expected
to
post
ZK-Proof
outputs
and
state
differences
every
6-8
blocks
(1hr
–
1.2hr)
to
Bitcoin
L1
in
the
form
of
an
inscription,
arbitrary
data
stored
in
the
segregated
witness
section
of
a
transaction.
This
data
will
enable
any





participant
running
a
Bitcoin
node
to
reconstruct
the
most
recent
state
of
the
Rollup.
Based
on
testnets,
and
conversations
with
developers,
we
estimate
that
proof
outputs
and
state
differences
will
require
at
most
400KB
(0.4MB)
each
time
they
post
to
Bitcoin’s
Layer
1
blockchain.

When
comparing
the
megabytes
processed
per
second
on
Bitcoin
to
Ethereum
and
Celestia,
it’s
clear
that
Bitcoin
was
never
designed
to
be
a
DA
layer.

Cost
to
Verify
Proofs
–
Ethereum
ZK-Rollups

Drawing
insights
from
Ethereum’s
Rollup
ecosystem,
ZK-Rollups
emerge
as
capital-intensive
operations
due
to
their
use
of
validity
proofs.
This
approach
requires
the
Prover
to
post
a
ZK-Proof
along
with
transaction
data
or
state
differences
for
each
L2
state
change.
Unlike
Optimistic
Rollup
scaling
solutions
that
only
pay
verification
costs
in
the
event
of
a
fraud
dispute
(rare
occurrence),
ZK-Rollups
pay
verification
costs
upfront
by
posting
validity
proofs.
The
higher
upfront
costs
of
ZK
rollups
enable
immediate
finality
(vs.
~7
day
challenge
window
for
optimistic
rollups).
Below
is
a
chart
showing
the
weekly
data
posting
costs
for
ZK-Rollups
on
Ethereum.

ZK-Rollups
finance
their
data
posting
expenses
through
revenue
generated
from
L2
transaction
fees.
Since
its
launch,
ZK-Sync
Era
has
demonstrated
the
viability
of
this
model,
generating
$66.9m
in
total
revenue
from
L2
transaction
fees.
Of
this,
$51.2m
was
allocated
to
ZK
verification
and
L1
call
data
costs.
ZK-Sync
has
successfully
processed
over
417.6m
transactions
for
5.4
million
users,
maintaining
an
average
cost
of
$0.16
per
transaction.
This
efficient
operation
has
resulted
in
a
total
profit
of
$15.7m.

Estimating
Cost
to
Post
Data
to
Bitcoin

At
400KB
per
data
post
on
Bitcoin
L1
every
6
blocks
at
a
low
10
sat/vByte
level,
Rollups
on
Bitcoin
would
be
paying
$2,640
per
posted
block.
With
data
posting
occurring
every
6
blocks,
Rollups
on
Bitcoin
will
pay
up
to
$1.9m
per
month
to
post
to
730
blocks
($23m
annually).
Using
a
50
sat/vByte
level
would
increase
the
monthly
data
posting
cost
to
almost
$9.6m
($115m
annually).
It
should
be
noted
that
estimating
future
sat/vByte
levels
is
extremely
difficult
as
Bitcoin’s
fee
rate
environment
is
now
increasingly
more
volatile
with
the
emergence
of
Ordinals,
BRC-20s,
and
Runes.

To
offset
the
high
costs
of
data
posting
in
a
world
where
each
post
is
400KB,
ZK-Rollups
using
Bitcoin
for
data
availability
will
need
to
generate
approximately
between
$1.9m
and
$9.63m
in
revenue
from
L2
transaction
fees
per
month.
The
sensitivity
table
below
estimates
the
transaction
activity
and
fee
rate
levels
required
for
Rollups
on
Bitcoin
to
break
even
after
data
posting
costs.
Our
model
projects
weekly
costs
for
a
Rollup
posting
400KB
of
data
to
Bitcoin
L1
every
6
blocks
at
10,
20,
and
50
sats/vByte
as
of
July
23,
2024.
In
a
scenario
where
a
Bitcoin
Rollup
processes
20m
transactions
monthly—comparable
to
ZK-Sync’s
weekly
volume
over
the
past
year—it
would
need
to
charge
transaction
fees
of
$0.096,
$0.193,
and
$0.482
to
break
even
at
the
respective
10,
20,
and
50
sats/vByte
levels.
It
should
be
noted
that
due
to
the
lack
of
available
data
on
testnet,
this
sensitivity
table
assumes
that
the
400KB
data
posting
size
is
fixed
from
1m
–
80m
transactions
per
month.
We
understand
that
the
data
posting
size
can
be
larger
or
smaller
than
400KB
based
on
the
number
of
transactions
included
in
the
state
difference.

Bitcoin
Blockspace
When
Rollups
Launch

Since
the
emergence
of
Ordinals
and
BRC-20s
in
early
2023,
Bitcoin’s
daily
mean
block
weight
has
consistently
sat
just
below
its
4m
weight
unit
limit
(4MB
of
data).
Block
weight
is
a
dimensionless
measurement
of
the
“size”
of
a
block
which
was
introduced
in
the
SegWit
upgrade
to
include
discounted
witness
data.
The
average
daily
Block
weight
has
significantly
increased
from
the
large
influx
of
inscription
related
transactions,
which
include
arbitrary
data
(text,
image,
etc)
in
the
Segregated
witness
field
of
a
transaction.
Since
February
2023,
the
average
fullness
of
a
Bitcoin
block
stands
at
98%.

With
each
proof
output
and
state
difference
totaling
400k
weight
units,
a
single
Rollup
posting
data
to
a
block
will
utilize
10%
of
the
block’s
weight
limit
if
the
Rollup’s
data
size
remains
consistent.
Given
that
blocks
are
consistently
full,
the
introduction
of
Rollups
will
change
the
composition
of
transaction
data
within
each
data
posting
block.
The
chart
below
demonstrates
the
block
composition
for
a
sample
of
30
blocks
on
July
18,
2024,
if
two
Rollups
were
live
and
posting
data
every
6
blocks.

The
consistent
demand
for
blockspace
from
Rollups
posting
data
on
Bitcoin
L1
every
6-8
blocks
will
force
time
sensitive
transactions
to
pay
a
premium
before
or
during
the
data
posting
block.
The
chart
below
underscores
how
the
increased
competition
of
on-chain
activity
from
Runes
and
Ordinals
forces
time
sensitive
transactions,
also
known
as
financial
transactions,
to
pay
the
highest
fee
rate
premium.

Why
Bitcoin
DA
is
Important

For
a
Rollup
to
fully
align
with
Bitcoin,
it
must
utilize
it
for
data
availability.
This
choice,
while
costly,
leverages
Bitcoin’s
unparalleled
security,
immutability,
and
decentralization.
Rollups
opting
for
alternative
DA
solutions
introduce
additional
trust
assumptions
outside
the
Bitcoin
network,
potentially
compromising
their
integrity
and
categorization
as
a
“Bitcoin
Rollup”.
The
strength
of
Bitcoin
as
a
DA
layer
lies
not
only
in
its
robust
security
but
also
in
its
extensive
node
distribution
and
low
barrier
to
entry
for
setting
up
light
or
full
nodes.
This
accessibility
ensures
that
anyone
running
a
Bitcoin
full
node
can
reconstruct
the
latest
L2
state
of
the
Rollup,
enhancing
transparency
and
decentralization.

Despite
the
significant
expenses
and
potential
long-term
feasibility
challenges,
Bitcoin’s
role
as
the
pristine
DA
layer
for
Rollups
underscores
a
fundamental
trade-off;
the
high
cost
of
leveraging
Bitcoin’s
infrastructure
versus
the
unmatched
security
and
decentralization
it
provides.
This
balance
between
cost
and
security
will
likely
shape
the
future
landscape
of
Rollup
implementations
on
the
Bitcoin
network.

Outlook
on
Rollups
using
Bitcoin
for
DA

• ZK-Rollups
  using
  Bitcoin
  for
  data
  availability
  need
  to
  generate
  approximately
  between
  $1.9m
  and
  $9.6m
  in
  monthly
  revenue
  from
  L2
  transaction
  fees
  to
  operate
  in
  a
  10-50
  Sat/vByte
  fee
  rate
  environment.
• Fee
  estimating
  engines
  will
  be
  crucial
  for
  Rollups
  on
  Bitcoin
  to
  maximize
  profitability.
• Bitcoin
  blockspace
  simply
  cannot
  facilitate
  4-8
  Rollups
  posting
  400KB
  proofs
  every
  6-8
  blocks.
• The
  teams
  that
  will
  achieve
  building
  a
  sovereign
  Rollup
  on
  Bitcoin
  will
  need
  to
  execute
  the
  go-to-market
  strategy
  with
  applications
  that
  keep
  users
  transacting
  on
  the
  L2.
• Some
  Bitcoin
  L2s
  will
  explore
  L3
  environments
  for
  transaction
  execution
  and
  use
  a
  combination
  of
  L2s
  and
  Bitcoin
  L1
  for
  data
  availability.
• Rollups
  on
  Bitcoin
  will
  increase
  the
  competition
  for
  block
  inclusion,
  thereby
  driving
  up
  layer
  1
  fees
  for
  everyone,
  including
  the
  Rollups
  themselves.
• Bitcoin
  L2s
  using
  Bitcoin
  L1
  for
  DA
  will
  need
  to
  hedge
  against
  unexpected
  volatile
  fee
  spikes
  through
  fee
  rate
  derivative
  markets
  and
  out
  of
  band
  mining
  deals.

Image
source:
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