What are the pain points of BTCFi L2/L1 development?

Author: Jan Source: X, @busyforking

First, eliminate three options that I don’t think are pain points:

1. Too many projects divert attention and resources - This is a normal phenomenon for a thriving ecosystem, and no one complains about too many projects on ETH/SOL. Regardless of the number of projects, one must learn to distinguish between signals and noise on their own.
2. No Representative Work - The Lighting Network can definitely be considered a representative work, but the Lighting Network often gives people the illusion of “it has been developed for so long and it’s just like this”. This illusion arises because we easily overlook the limitations of Bitcoin and the caution of Bitcoin developers. Bitcoin L2 can just solve these problems. On the one hand, L2 can provide more powerful contract capabilities, and on the other hand, it is also a good experimental field. Why is the Lighting Network considered a representative work? Because it represents a completely different technical route, and has advantages in privacy, throughput, response time, cost, and all other aspects. The Lighting Network still has many challenging problems to overcome, but its high potential is worth our efforts and resources to overcome the challenges.

Looking at a more fundamental level, UTXO itself is a disruptive architecture. Disruption implies difficulty in understanding and building, which will hinder ecosystem development and make it difficult to create a “representative explosion” landscape. But as long as there is enough time, anything that grows on a new “digital terrain” will carry a strong local color, such as the completely different cash-like properties of UTXO assets compared to ERC20, client-side validation, UTXO sharing protocol, and so on. And Bitcoin’s own status is sufficient to support the growth of an independent ecosystem. Therefore, I believe that the appearance of more representative works is only a matter of time, and the flexibility provided by L2 will accelerate this process. 3. Lack of money and resources to promote - obviously not true, the Bitcoin/Lighting Network ecosystem has sufficient investment.

The lack of Consensus may be the biggest problem. First of all, from the perspective of the entire crypto industry, there is still a lack of understanding of the UTXO architecture and Consensus. The misunderstanding that ‘UTXO on-chain cannot develop dApps without Smart Contracts’ still exists. If there are no Smart Contracts, how can L2 be implemented? It is easy to conclude that Bitcoin L2 is all a scam.

Secondly, even within the Bitcoin ecosystem, there are divergent views: purists believe that we only need BTC and that everything else is a scam, and any changes to the Bitcoin chain are unnecessary. Progressives believe that it is necessary to improve the Bitcoin chain, at least to make BTC more powerful, but there is a huge divergence on the question of ‘how much improvement is reasonable?’. The most radical progressives believe that more assets and even contract capabilities should be supported through soft forks, while conservative progressives believe that only minimal changes should be made to enhance BTC itself, without introducing unnecessary scenarios (such as new assets, MEV) to pollute the Bitcoin chain. L2 progressives believe that Bitcoin L2 should be made more secure through soft forks, making L2 possible.

XXX 1-way peg. Under this definition, Ethereum could potentially be the largest Bitcoin L2 in terms of TVL (Total Value Locked). However, I am not certain and I don’t want to look up the data. It would require a careful analysis because WBTC does not meet the definition of a secure 1-way peg. A progressive and lenient definition would broaden the perspective. If Bitcoin L1 not only has BTC but also other UTXO assets, then would a chain that can achieve a secure 2-way peg for UTXO assets issued on Bitcoin L1 be considered as Bitcoin L2? The loosest definition is to completely abandon the idea of anchoring to L1 security and instead view the Bitcoin chain as M0, where any use of BTC becomes M1, M2, and so on. Under this definition, centralized exchanges (CEX) would also be considered as Bitcoin L2. This definition may seem surprising or even ridiculous at first glance, but I believe it is very meaningful. At the very least, it reminds us that if we cannot create a better and more decentralized Bitcoin L2, then CEX will become the de facto Bitcoin L2. Which future would you prefer to see?

Perhaps due to these reasons, the industry’s views on how the Bitcoin ecosystem should develop are very divided. But this division may just be a normal phenomenon in the early stage of the ecosystem combined with Bitcoin’s bottom-up culture. We believe that with time, Consensus will gradually emerge and form, because we believe in rough consensus and running code.

I personally tend to be more inclined towards a “moderate” progressive approach - the Bitcoin chain needs to enhance its contract capabilities through a soft-fork, and the purpose of the enhancement should be to facilitate the implementation of CSV assets and the Lighting Network. The reason is very simple:

1. L1 needs to serve L2, whether it’s the programming model or the economic model;
2. Bitcoin L1 is a very good asset issuance/storage platform, this scenario can not only maximize the benefits of Bitcoin chain security investment, but also provides a way out for the economic model bug based on transaction fees on L1. And the CSV type asset protocol occupies the least on-chain space, which is the most economical and healthiest for Bitcoin L1; The Lighting Network is currently the most mature Bitcoin L2, and other Bitcoin L2s are just assumptions. Any modification to the Bitcoin protocol for an assumption is irresponsible for Bitcoin’s $1 trillion market capitalization. At this scale, improving the mempool is appropriate, OP_CTV may be appropriate, OP_CAT may be excessive, and ZK primitive or the covenant needed for rollup is clearly excessive.

Why does CKB choose to expand the UTXO model, introduce state and RISC-V Virtual Machine, and bind UTXO assets on CKB with Bitcoin L1 UTXO through RGB++? For Bitcoin in the process of moderate improvement, CKB can be a good complement to Bitcoin, enhance the ability of UTXO assets on Bitcoin, enhance the ability of Lighting Network, supplement Liquidity for Lighting Network, and fully tap the potential of the UTXO model. We hope that through CKB, we can accumulate more experience in UTXO L1/L2 protocols and eventually contribute these experiences back to Bitcoin, helping Bitcoin protocol improvements find a stable path.