‘Only a Small Number Can Survive’ – Galaxy Digital Issues Warning to Bitcoin Layer-2s Amid Scarce Blockspace

Crypto investment firm Galaxy Digital is issuing a warning, saying that Bitcoin (BTC) layer-2s are in danger of potentially losing their funds.

In a new research post, the crypto firm says Bitcoin’s blocks – or files where information is stored and encrypted – are crowded due to excessive demand.

According to Galaxy Digital, BTC layer-2 projects will likely have to pay more for inclusion, driving up the cost of BTC transfers.

“Given Bitcoin’s consistently full blocks since January 2023, competition for block inclusion will intensify with the introduction of new blockspace buyers like Rollups, potentially pushing Bitcoin transaction fees to new heights that could make it economically infeasible for certain users – Rollups specifically – to afford transaction fees.”

According to Galaxy Digital’s model, Bitcoin layer-2 projects, also known as rollups, will likely have to shell out millions of dollars per year just to compete for blockspace.

“For our model, we assume a Rollup’s ZK-Proof and state difference is 400KB every 730 posted blocks (approximately one month). Said another way, we expected that Rollups will choose to ‘settle’ to Bitcoin every hour or so (every 6-8 blocks), or 730 blocks per month…

If the average fee rate rises to 50 sats/vByte, monthly expenses would soar to $2.3 million, amounting to an annual cost of approximately $27.6 million.”

Currently, transactions over the BTC network cost about 2 sats/vByte, according to on-chain BTC data tracker Mesmerdata.

According to Galaxy Digital, rollup projects that don’t find a way to minimize costs will likely burn through their treasury en route to bankruptcy.

“While the high costs may not force all Rollups away from Bitcoin, they will likely create an environment where only a small number can survive… Absent sufficient Rollup activity to justify the cost to post to BTC, projects risk burning their funds simply to post data.”

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