Could sidechains and L2s become a problem for BTC?

[alani123]

I'm looking at Ethereum that implemented some sweeping changes to potentially stabilise the supply by making a percentage of all fees paid go to burning coins and also locking validator holdings.

The issue is that after the emergence of L2s nobody wants to pay L1 fees while they can get the same equivalent service on L2s so Ethereum has returned to inflation in spite of the sweeping changes.

The issue here is different with bitcoin because there's no smart contract functionality, mining won't be gone etc. But the principle still applies. What if L2s and sidechains make on-chain transactions impractical and therefore affects the fee market adversely? Wouldn't that have a bad effect on bitcoin's longevity especially as block rewards diminish?

Couldn't bitcoin face a crisis over who's going to protect the network due to the lack of incentives down the line?

[MagnificentX]

I'm looking at Ethereum that implemented some sweeping changes to potentially stabilise the supply by making a percentage of all fees paid go to burning coins and also locking validator holdings.

The issue is that after the emergence of L2s nobody wants to pay L1 fees while they can get the same equivalent service on L2s so Ethereum has returned to inflation in spite of the sweeping changes.

The issue here is different with bitcoin because there's no smart contract functionality, mining won't be gone etc. But the principle still applies. What if L2s and sidechains make on-chain transactions impractical and therefore affects the fee market adversely? Wouldn't that have a bad effect on bitcoin's longevity especially as block rewards diminish?

Couldn't bitcoin face a crisis over who's going to protect the network due to the lack of incentives down the line?

You have made a critical observation on the tragedy heading towards us and I strongly agree that you are right. It is just like building a massive highway, massive and expensive one and then everyone starts to make us of a few back way or some short cut they found. It is very certain that the maintenance of the highway will be a problem gradually because there are no much people who pays maybe a highway toll or maintenance fee as a result of the number of persons that now uses the free back way.

Bitcoin needs to even pay miners and others in order to keep it's system running and even security stable and it is done with new Bitcoin but with the current development of L1 fees which are lesser and has attracted many Bitcoin users, those are running out. We just pray we don't face a situation like you (OP) have said.

It's just like a building so high having up to 50 floors with L1 (Bitcoin) being the foundation of the building or structure and L2 (side chains/Lightening) are the upper floors. Now L2 may appear magnificent, fine, attractive and beautiful and got people fascinated over how many people can live on the top floor but we are forgetting that it is the solid work done by L1 that holds the building strong. And in order for that building to continue standing strong, it requires the foundation (L1) to be strong.

[Catenaccio]

I'm looking at Ethereum that implemented some sweeping changes to potentially stabilise the supply by making a percentage of all fees paid go to burning coins and also locking validator holdings.

The issue is that after the emergence of L2s nobody wants to pay L1 fees while they can get the same equivalent service on L2s so Ethereum has returned to inflation in spite of the sweeping changes.

The issue here is different with bitcoin because there's no smart contract functionality, mining won't be gone etc. But the principle still applies. What if L2s and sidechains make on-chain transactions impractical and therefore affects the fee market adversely? Wouldn't that have a bad effect on bitcoin's longevity especially as block rewards diminish?

Couldn't bitcoin face a crisis over who's going to protect the network due to the lack of incentives down the line?

Why will they become problems of Bitcoin?
Bitcoin chain can seriously affect Bitcoin sidechain projects and the opposite is not true. Bitcoin sidechains can not bring any big troubles to Bitcoin chain as without Bitcoin chain, sidechains don't exist.

You can continue the discussion in a mega thread for Bitcoin sidechains.
Sidechain Observer - Bitcoin L2 Projects & current state of development.

For example, Ethereum and Vitalik can affect Ethereum layer-2 projects a lot. One tweet from Vitalik can trigger a pump or panic sell on Ethereum layer-2 tokens. While these layer-2 tokens can not pump Ethereum on the market, because they simply are dependent on Ethereum while Ethereum is not dependent on layer-2 tokens.

[BlackHatCoiner]

L2 and sidechains can make the on-chain payment undesirable only if the network is congested. If the network is not congested, and transactions confirm with just 0.1 sat/vb, then it makes sense to use on-chain again.

Perhaps the reason people rather use Layer 2 in Ethereum is because the on-chain fees there are often arbitrarily high. In bitcoin right now, you can send a median size on-chain transaction by paying less than $0.05.

[nelson4lov]

I fail to see the reasoning that L2s on bitcoin will have the same effect it had on Ethereum. Bitcoin Layer-2s have existed for over 2 years now and even no such effect. Bitcoin's situation is structurally different in that there is no fee burning on Bitcoin. Imo, the only concern here is that as more bitcoin halving come and bitcoin L2s absorb most of the tx volume.

That concern is valid even without L2s too.

[CTO114]

I'm looking at Ethereum that implemented some sweeping changes to potentially stabilise the supply by making a percentage of all fees paid go to burning coins and also locking validator holdings.

The issue is that after the emergence of L2s nobody wants to pay L1 fees while they can get the same equivalent service on L2s so Ethereum has returned to inflation in spite of the sweeping changes.

The issue here is different with bitcoin because there's no smart contract functionality, mining won't be gone etc. But the principle still applies. What if L2s and sidechains make on-chain transactions impractical and therefore affects the fee market adversely? Wouldn't that have a bad effect on bitcoin's longevity especially as block rewards diminish?

Couldn't bitcoin face a crisis over who's going to protect the network due to the lack of incentives down the line?

Sidechains and L2s don't automatically pose a direct threat to Bitcoin, what we notice is, there are elements that shouldn't be ruled off quickly though

The base layer of Bitcoin would always prioritize security over speed

Sidechains and L2s doesn't exist to increase the main chain.

Although it poses security and centralization threats, when people opt for sidechains off course it reduces a component of Bitcoin which is centralization, and if sidechains security is breached it could pose a lot of problem for the BTC owner.

[alani123]

L2 and sidechains can make the on-chain payment undesirable only if the network is congested. If the network is not congested, and transactions confirm with just 0.1 sat/vb, then it makes sense to use on-chain again.

Perhaps the reason people rather use Layer 2 in Ethereum is because the on-chain fees there are often arbitrarily high. In bitcoin right now, you can send a median size on-chain transaction by paying less than $0.05.

I'll raise you that even right now with 1 sat/vByte economically it makes no sense to transact on chain over LN.
If we take a single use case such as depositing to an exchange most people will say they do it on-chain because no other option is available.

Out of 10 exchanges I know maybe 2 or 3 use LN. And if even exchanges don't care to figure it out adoption isn't that great. Surely not in a level where it could affect the fee market. But the real issue would be when block rewards diminish anyway so we're talking a few years down the line at least.

[stwenhao]

The issue is that after the emergence of L2s nobody wants to pay L1 fees while they can get the same equivalent service on L2s

It depends on the implementation of L2s. Because there are many possible options. For example, if by mining some sidechain, you can get real BTCs directly, then your actions would eventually lead to some on-chain transaction anyway.

Because if L1 is expensive, and L2 is cheap, then it is not a problem, if all L2 transactions are batched, and pushed into L1. Because then, thousands of users paying small fees, could be batched into a single on-chain high-fee transaction, covering everything, what they did on the second layer.

because there's no smart contract functionality

It is possible to use smart contracts on second layers, even if they are not implemented on-chain. The only thing that matters, is the translation of all of that into a proper on-chain transaction later. And the simplest way to do that, is to just require a given amount of Proof of Work. Then, the on-chain version can only check, if there is enough Proof of Work, and everything else can be done by the second layer.

mining won't be gone

Yes, since we now have Proof of Work inside scripts, it can be deployed everywhere. Even in regtest, where mining is extremely easy, it is possible to create coins, which would require a lot of Proof of Work to be moved.

What if L2s and sidechains make on-chain transactions impractical and therefore affects the fee market adversely?

Then, users will stay on second layers, and a single on-chain transaction would be used to handle a lot of users. Because then, if you have on-chain fee of 1000 sat/vB, then you can have thousands of users, paying 1 sat/vB each. And if from the on-chain perspective, the only checked thing would be "this transaction has X amount of Proof of Work", then it would be quite small, no matter how many users will be attached to the second layer.

Code:

+----------------------------------------------------------+
| sidechainX_stateA 1.00 BTC -> sidechainX_stateB 0.99 BTC |
+----------------------------------------------------------+

Something like that could take around a kilobyte on-chain. Which means 1000 sat/vB. And then, it doesn't matter, if you have thousands, or millions of users in the sidechain, because it is all about replacing one 256-bit number with another 256-bit number, from the on-chain perspective. And a single 256-bit hash can commit to the whole UTXO database from some sidechain, or another second layer.

Wouldn't that have a bad effect on bitcoin's longevity especially as block rewards diminish?

I think on-chain fees could be too high, instead of being too low. Because there are many non-monetary use cases, where users use 99% fees in practice. And then, if fees around halvings can spike, and you can have 40 BTCs in the coinbase transaction, then I wouldn't worry about the amount. I would worry more about distributing it roughly equally over time, because when you have one block paying around 40 BTC, and another block paying around 8 BTC, then there may be some incentive, to reorg a previous block, instead of mining a new one on top of it.

Couldn't bitcoin face a crisis over who's going to protect the network due to the lack of incentives down the line?

Well, people are still mining testnet3, even though there were 23 halvings, and there are only 596 satoshis in the basic block reward, and everything else comes from fees. So, I wouldn't worry too much about it.

[PrivacyG]

Mining will never really stop in my opinion.  When some Miners are leaving, others see an opportunity and will jump in.  For example.  If the Hashrate dropped significantly over a matter of months, I would definitely ramp up my support.

But how can Bitcoin run into a crisis caused by Second Layers if the at least the Second Layers I know so far are particularly working by NOT spamming the Blockchain with Transactions but running all the details on the Second Layer with a chunkier Transaction on-chain in the end?  It sounds like Second Layers will actually avoid a crisis than cause one.

[Donneski]

I’m of the view that sidechains won’t seriously undermine Bitcoin’s security model. Miners are still getting incentives through block rewards and fees and as long as Bitcoin remains the settlement layer, there will always be demand for L1 transactions. Ethereum’s situation is different because smart contracts and DeFi are native there. With Bitcoin, most people just want secure settlement and L2s don’t change that core role.

[X-ray]

What I can see is those L2 are predatory for the L1. They took on-chain transaction and fee, then only submit their bundled transactions rarely.

These L2 should dynamically change the frequency of submit to L1 according to the fee and on-chain activity in the L1 otherwise they will make the L1 unprofitable.

It will increase the security and also populate on-chain transaction on the L1. The L2 and L1 relationship should be mutualistic.

Same scenario is playing out in Ethereum like you pointed out, I believe the reason Vitalik Buterin trashing on L2 is because L1 needs to be more profitable.

[dansus021]

Could sidechains and L2s become a problem for BTC? Bitcoin relies on transaction fees to pay miners once the block reward (inflation) and eventually hits zero. if everyone moves to L2 the main L1 Fee are goin almost zero and mining will no longer be profitable in the future.

is double blade in the other hand L2 or sidechain is needed when the transaction fee is insane and we need fast transaction. But this is the part of the blockchain trilemma right

The problem is decentralization, security and scalability that we need L1 and L2 at the same time to achieve the trilemma

[FinneysTrueVision]

The issue is that after the emergence of L2s nobody wants to pay L1 fees while they can get the same equivalent service on L2s so Ethereum has returned to inflation in spite of the sweeping changes.

This isn’t entirely true. Ethereum has always had high usage despite the existence of cheaper L2s.

Even though both networks are similar in that they have different layers, Ethereum’s overall approach to scaling is very different. Ethereum is constantly increasing capacity on their mainnet, which is something that Bitcoiners are reluctant to do through block size increases.

Similar to Ethereum, I think most of the economically meaningful activity, that doesn’t require high TPS, will remain on L1 for Bitcoin. What Bitcoin needs to have a healthy amount of fees, when the coinbase subsidy becomes too low, is increasing adoption. Growing Bitcoin usage is easier said than done, but the situation isn’t as dire as it may seem.

[alani123]

The issue is that after the emergence of L2s nobody wants to pay L1 fees while they can get the same equivalent service on L2s so Ethereum has returned to inflation in spite of the sweeping changes.

This isn’t entirely true. Ethereum has always had high usage despite the existence of cheaper L2s.

Even though both networks are similar in that they have different layers, Ethereum’s overall approach to scaling is very different. Ethereum is constantly increasing capacity on their mainnet, which is something that Bitcoiners are reluctant to do through block size increases.

Similar to Ethereum, I think most of the economically meaningful activity, that doesn’t require high TPS, will remain on L1 for Bitcoin. What Bitcoin needs to have a healthy amount of fees, when the coinbase subsidy becomes too low, is increasing adoption. Growing Bitcoin usage is easier said than done, but the situation isn’t as dire as it may seem.

Right now BTC on chain transactions don't have much traffic which has resulted to a reduction in fees so you're right that Ethereum has more usage on chain. But as L2s become more prominent and usage fell even just a little then the result was that the planned deflation is no longer in effect and Ethereum has returned back to permanent inflation. So if this continues for too long something might need to be done so things on Ethereum's chain need gone balanced again.

Bitcoin could actually face a similar issue more easily given the lower usage. If an on chain transactions costs 0.15$ which is already dirt cheap, why would I pick it over a 0.00001$ LN transaction with instant finalization? Are we assuming there will be so many LN transactions that their finalization will eventually cover the gap therefore creating a fee market? Based on current projections that seems unlikely.