Bitcoin’s Block Space Challenges for Data Availability and Rollups

Bitcoin’s block space is very scarce, with each block limited to 4MB. This scarcity poses significant challenges for rollups that want to leverage Bitcoin as a data availability layer. The emerging Bitcoin-based rollup landscape is primarily ZK-based, aiming to publish ZK-Proof outputs and state differences every 6–8 blocks. However, this approach faces a significant hurdle: each data publication consumes up to 400KB (0.4MB) of block space, effectively taking up 10% of the entire block.

As Bitcoin’s blocks continue to fill up after January 2023, competition among rollups for block inclusion could intensify, potentially pushing Bitcoin’s transaction fee market to unsustainable levels. The current limitations of Bitcoin’s base layer, combined with the proliferation of rollups in development, could create an environment where L2 struggles to support data publishing. For Bitcoin rollups to remain viable, they will need to generate significant revenue from transaction fees driven by useful applications. This report analyzes the economic viability of rollups on Bitcoin by examining data from the Ethereum ZK-Rollup and estimating the cost of rollups that use Bitcoin for data availability. This analysis examines the potential impact on Bitcoin’s block composition if such projects were to launch on mainnet, and discusses alternative strategies that rollups could employ if publishing data on Bitcoin becomes too costly.

Is Bitcoin L1 a data availability layer?

Bitcoin rollups that publish data to the base layer will face a significant challenge: the cost of publishing data. Bitcoin block space is the most expensive per byte of any chain. Additionally, Bitcoin’s block size is strictly limited to 4MB, and fees are based on the weight of the data in the transaction, making data-intensive transactions expensive to execute. The advent of Ordinals, inscriptions attached to individual Satoshis, shows that transactions that occupy a significant portion of the block size are subject to a premium, causing transaction fees to skyrocket. For example, the first 4MB Bitcoin transaction inscribed by the Taproot Wizards team (block 774,628) cost $147,000 in fees.

According to conversations with several teams building ZK-Rollups on Bitcoin, Rollups are expected to publish ZK-Proof outputs and state differences to Bitcoin L1 every 6-8 blocks (1-1.2 hours), which is arbitrary data stored in the Segregated Witness section of a transaction. This data is all Participant Run a Bitcoin node to reconstruct the most recent state of the rollup. Based on our conversations with testnets and developers, we estimate that it will take ~400KB (0.4MB) each time a proof output and state difference is published to Bitcoin’s Layer 1 blockchain.

When you compare the number of megabytes processed per second on Bitcoin to Ethereum and Celestia, it becomes clear that Bitcoin was never designed as a digital asset layer in the first place.

Proof Verification Costs – Ethereum ZK-Rollups

Taking a cue from the Rollup ecosystem on Ethereum, ZK-Rollups have emerged as a capital-intensive operation due to their use of proofs of validity. This approach requires the Prover to publish a ZK-Proof along with transaction data or state differences for each L2 state change. Unlike Optimistic Rollup scaling solutions that only pay for validation costs when fraud disputes (which are rare) occur, ZK-Rollups pay for validation costs upfront by publishing proofs of validity. The higher up-front cost of ZK-Rollups enables immediate finality (~7 days challenge period for Optimistic Rollups). Below is a chart showing the weekly data publishing costs of ZK-Rollups on Ethereum.

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

Estimating the cost of posting data to Bitcoin

At Bitcoin L1, at 400KB per data publication every 6 blocks, and at a low 10 sat/vByte level, Bitcoin’s Rollups would pay $2,640 per published block. If data publication occurs every 6 blocks, Bitcoin’s Rollups would pay $1.9m per month to publish 730 blocks ($23m per year). Using a 50 sat/vByte level, this would increase the monthly data publication cost to almost $9.6m ($115m per year). It is important to note that it is very difficult to estimate future sat/vByte levels as Bitcoin’s fee environment becomes increasingly volatile with the advent of Ordinals, BRC-20s, and Runes.

To offset the high cost of data publishing in a world where each post is 400KB, a ZK-Rollup using Bitcoin for data availability would need to generate between $1.9M and $9.63M in revenue per month from L2 transaction fees. The sensitivity table below estimates the level of transaction activity and fee rates required for a Rollup on Bitcoin to break even after covering the cost of data publishing. Our model predicts the weekly cost of a Rollup publishing 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 per month (similar to the weekly volume of ZK-Sync last year), it would need to charge $0.096, $0.193, and $0.482 in transaction fees to break even at 10, 20, and 50 sats/vByte, respectively. Due to the limited data available on the testnet, this sensitivity table assumes that the 400KB data posting size is fixed at 1m to 80m transactions per month. We know that the data posting size can be larger or smaller than 400KB depending on the number of transactions included in the state gap.

Bitcoin Blockspace When Rollups Launch

Since the introduction of Ordinals and BRC-20 in early 2023, Bitcoin’s average daily block weight has consistently been just below the 4m weight unit limit (4MB of data). Block weight is a dimensionless measure of the “size” of a block introduced with the SegWit upgrade to include discounted witness data. The average daily block weight has increased significantly due to the massive influx of non-blockchain transactions that include arbitrary data (text, images, etc.) in the transaction’s separate witness field. Since February 2023, the average fullness of Bitcoin blocks has been 98%.

Once each proof output and state difference reaches 400k weight units, a single Rollup publishing data to a block will utilize 10% of the block’s weight limit, provided that the Rollup’s data size remains consistent. Given that blocks are constantly filling up, the introduction of Rollups changes the composition of transaction data within each data publishing block. The chart below shows the block composition for a 30-block sample on July 18, 2024, when two Rollups are active, publishing data every 6 blocks.

Rollup’s continued demand for block space, which publishes data to Bitcoin L1 every 6-8 blocks, will force time-limited transactions to pay a premium before or during the block in which data is published. The chart below highlights how increased competition for on-chain activity in Runes and Ordinals forces time-limited transactions (also known as financial transactions) to pay the highest fee premiums.

Why Bitcoin DA is Important

In order for rollups to be fully consistent with Bitcoin, they must leverage rollups for data availability. While expensive, this choice leverages Bitcoin’s unparalleled security, immutability, and decentralization. Rollups that opt ​​for alternative DA solutions introduce additional trust assumptions outside of the Bitcoin network, potentially compromising its integrity and classification as a “Bitcoin rollup.” Bitcoin’s strengths as a DA layer lie not only in its strong security, but also in its wide node distribution and low barriers to entry for setting up a light or full node. This accessibility allows anyone running a Bitcoin full node to reconstruct the latest L2 state of the rollup, enhancing transparency and decentralization.

Despite the significant costs and potential long-term feasibility challenges, Bitcoin’s role as a pure DA layer for rollups highlights a fundamental tradeoff: the high cost of leveraging Bitcoin’s infrastructure, and the unmatched security and decentralization it provides. This tradeoff between costs and security is likely to shape the future landscape of rollup implementations on the Bitcoin network.

A look at rollups using Bitcoin for DA

• ZK-Rollup, which uses Bitcoin for data availability, needs to generate approximately $1.9 million to $9.6 million in revenue per month from L2 transaction fees to operate in a 10-50 Sat/vByte fee rate environment.
• To maximize the profitability of rollups, a fee estimation engine is critical to Bitcoin.
• The Bitcoin block space cannot implement 4-8 rollups that publish 400KB proofs every 6-8 blocks.
• Teams looking to build sovereign rollups on Bitcoin will need to implement a go-to-market strategy with an application that allows users to continue transacting on L2.
• Some Bitcoin L2s explore the L3 environment for transaction execution and use L2 and Bitcoin L1 together for data availability.
• Bitcoin rollups increase competition for block inclusion, which in turn increases layer 1 fees for everyone, including the rollups themselves.
• Bitcoin L2, which uses Bitcoin L1 for DA, must be prepared for unexpected fee fluctuations through fee derivatives markets and out-of-band mining transactions.

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