Bitcoin has evolved from an obscure internet curiosity into a trillion-dollar asset class, spawning an entire industry and inspiring numerous innovations. Originally described in its whitepaper as an electronic peer-to-peer cash system, Bitcoin enables the exchange of value over vast distances with remarkable speed and lower costs compared to traditional systems.
However, Bitcoin’s transaction costs are currently high, and its network speed is slow for everyday transactions. To address these challenges, developers are actively exploring second-layer solutions and implementing various upgrades to enhance scalability.
One major advancement has been the Lightning Network, Bitcoin’s most prominent second-layer solution. This network allows near-instant transactions by creating off-chain payment channels between users.
Beyond the Lightning Network, four guests, Shinobi, Marco Argentieri, Simanta Gautam, & Alex Bosworth, at the Bitcoin Amsterdam Conference 2024 discussed the scaling possibilities of Bitcoin to accommodate a larger user base by 2050, focusing on two main approaches: reactive and stateful models.
Shinobi, who also hosted the session, stated that one of the core issues of blockchains like Bitcoin is scalability because it is not designed to handle a high volume of transactions efficiently.
To overcome this, there is a need to move most of the activity off the blockchain while keeping the security of Bitcoin intact, according to Shinobi. This means transactions could happen “offchain” while still being securely linked to the blockchain.
He described these two models. The first is the Reactive Model (like the Lightning Network). Here, when someone tries to misuse a transaction, users react by enforcing the correct action. It acts as a security check that triggers only when something goes wrong.
Secondly is the Stateful Model (like rollups). He stated that this model consistently updates the state of funds on the blockchain, making sure only correct transactions are processed. It offers an automatic check that ensures the right outcome without requiring constant reaction.
Challenges of Lightning Network
Alex from Lightning Labs explained that the Lightning Network currently operates on a reactive model. This model relies on users proving ownership if someone attempts to wrongfully claim their funds. While this can get complex, it effectively deters cheating by enforcing penalties.
However, Alex emphasized that most users prioritize ease of use, such as whether they need to be online or require a service provider to monitor transactions. He believes that the most practical solutions will strike a balance between technical complexity and usability. Alex suggests that the future may offer a range of solutions, allowing people to choose what they find simplest.
Combining Stateful Models with Advanced Cryptography
Simanta explored the possibility of using advanced cryptographic methods, including zero-knowledge proofs, alongside a stateful approach to process transactions outside the main blockchain. This approach allows for off-chain transactions that can later be re-integrated with Bitcoin for security, expanding opportunities for decentralized finance and other innovations.
Simanta pointed out that various applications may benefit from different strategies, with some finding the reactive model more advantageous, while others gain from a stateful approach.
Meanwhile, Marco from Arc Labs highlighted that Arc employs a combination of reactive and stateful strategies. He supports maximizing the current Bitcoin network rather than developing a new one, which can introduce complexities. Marco asserts that Bitcoin should serve as the principal foundational layer, with solutions like Arc facilitating transaction scalability without the need for additional layers.
Arc is a cryptocurrency tool aimed at improving connectivity and scalability across blockchain networks. It enables cross-chain communication through bridges and uses interoperable protocols to execute smart contracts, allowing transactions to occur across various networks simultaneously.
User Experience, Cost, and Security
Shinobi highlighted a crucial balance between user-friendliness, security, and cost-effectiveness when discussing system design. Lightning, for instance, demands fewer resources and enables limitless off-chain transactions but isn’t very user-friendly for novices.
On the flip side, stateful systems are user-friendly but necessitate frequent blockchain interaction, leading to increased costs. The discourse suggested that these models would continue to develop, with various solutions emerging to cater to diverse requirements rather than relying on a singular approach.
Check out: Relai’s CEO Julian Liniger explains why small and medium-sized enterprises view Bitcoin as a secure refuge.
Alex stressed the importance of maintaining security without compromising the user experience. For businesses, security is important to the user experience, as they depend on stable systems. He noted ongoing technical advancements, suggesting that while the perfect balance between scalability and security hasn’t been achieved, significant progress is being made.
Limiting Factor of Bitcoin Supply, expanding programmability with rollups, and
Alex further raised a new perspective, arguing that the true limitation for scaling Bitcoin by 2050 isn’t just the technical efficiency or block space; it’s the finite supply of Bitcoin itself. He explains that although developers can improve the blockchain’s efficiency, the hard cap of 21 million bitcoins will always constrain liquidity.
In particular, second-layer solutions like the Lightning Network rely on liquid assets to facilitate transactions. As more users join, this limited supply can become a bottleneck. He anticipates a future where different systems may compete to see who can provide the highest liquidity per user without compromising on costs.
Alex believes onboarding costs can be reduced over time, but the challenge is optimizing the amount of Bitcoin needed to support each user, as channels must hold actual Bitcoin to function.
For Simanta, there is potential for rollups to enhance scalability and enable programmability. This development could provide developers with tools to create diverse applications on Bitcoin, such as borrowing, lending, or keyless payments.
He noted that other blockchains have simplified payment experiences and envisions similar innovations on Bitcoin through layer-two solutions. Rollups could expand Bitcoin’s “design space” to support contracts and improve privacy.
Simanta also sees potential in combining rollups with the Lightning Network, balancing programmability with transaction speed. He envisions a bridge between Bitcoin and rollup systems, using techniques like atomic or submarine swaps to seamlessly move assets between them.
By making assets on rollups interoperable with the Lightning Network, Bitcoin could achieve faster, more versatile transactions across different layers.
Collective competition and collaboration
Speaking on Bitcoin’s future, Alex highlighted the significance of an iterative, user-focused development strategy. He advised developers to remain attuned to users’ immediate needs and to innovate incrementally rather than aiming for distant future goals in isolation. This approach, Alex believes, ensures that Bitcoin’s scaling solutions stay relevant and applicable to real-world usage.
Simanta added clarity by emphasizing that different scaling methods—such as the Lightning Network, rollups, and others—should not be seen as competitors. The true competition, he stated, exists between custodial and non-custodial solutions. Non-custodial solutions are crucial for preserving Bitcoin’s censorship resistance and accessibility, which are fundamental to the network’s ethos.
Simanta views the variety of scaling approaches as a strength, as they collectively aim to make Bitcoin scalable without sacrificing its core values. He remains optimistic that these methods will eventually become interoperable, providing a seamless experience for users.
