Bitcoin faces 7 challenges to be used as a data storage network

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By TP

The Bitcoin network was created as a peer-to-peer electronic cash system, although over the years, has increased its use as a data storage platform.

This interest increased thanks to the emergence of RUNES and Ordinals token standards, which facilitate the registration of data such as texts, images or even video games in the ecosystem created by Satoshi Nakamoto. These protocols also optimized the registration of information in the network. In this way, Bitcoin could position itself in the future as a major competitor for other networks such as Ethereum and Solana, which specialize in data storage and execution of smart contracts, among other functions. Despite this interest in the network, Galaxy, the cryptocurrency investment firm, warned that Bitcoin faces a number of limitations that could hinder its use as a data storage ecosystem on a large scale.

Block size

The size of each Bitcoin block is limited to 4 MB (megabytes), which implies a restriction on the amount of data that can be included in a unit. For Galaxy, this scarcity “presents a significant challenge for rollups seeking to leverage Bitcoin as a data availability layer” and states that “the emerging landscape of Bitcoin-based rollups, predominantly zk-based, aims to publish zk-proof results (proofs of knowledge) and state differences every 6-8 blocks.” As explained in Criptopedia (the educational section of BitcoinDynamic), rollups are a tool used to process multiple transactions quickly and securely outside the main chain. Through smart contracts, they summarize large batches of transactions into a single one, which are then recorded in the main network accounting. This practice allows reducing the value of commissions for users. For its part, zk proofs are a cryptographic technique that allows verifying that these summaries are correct and have not been manipulated. The drawback, in this case, This is because each data publication on the main chain consumes up to 400 KB (0.4 MB) of block space.taking up 10% of a full block. On this point, it is important to clarify that a new block is generated every 10 minutes. This demand for space limits the network's ability to process transactions, which can lead to congestion and increased fees. This also means that rollups that need to publish large amounts of data face another problem: the cost to operate on the Bitcoin network.

Cost of publishing data in Bitcoin

Another challenge facing the network is that the cost of transactions in Bitcoin is related to the weight of the data. Considering that the size of each unit is limited to 4 MB, Any data-intensive transaction can be expensive to execute.

Galaxy also warns that Bitcoin’s block space “is the most expensive per byte of any blockchain.”

Limited scalability

Due to the design of its blocks, Bitcoin is not optimized for —on its main network— process large amounts of data or run complex applications. In this regard, Galaxy points out that “when comparing the megabytes processed per second in Bitcoin with Ethereum and Celestia, it is clear that Bitcoin was never designed to be a data layer (DA).” To argue this point, Galaxy shares a graph where the difference in megabytes processed per second in Bitcoin, Ethereum Blobs and Celestia can be clearly seen.

Data processing performance on Bitcoin. Source: Galaxy.

Generating revenue from rollups

To cover the costs of publishing data, rollups need to generate sufficient revenue from transaction fees. In the event that they are unable to generate revenue, they may be forced to increase their fees, which could discourage the use of the Bitcoin network as data storage. Galaxy estimates that zk-rollups “need to generate approximately $2M-$9M in monthly L2 transaction fee revenue to operate in a 10-50 Sat/vByte fee environment.” Additionally, it should be noted that these network fees are increasingly volatile following the emergence of the Ordinals, BRC-20, and RUNES token standards.

Competition on the net

The emergence of Ordinals, RUNE, and BRC-20 saturated the block space of the Bitcoin network for a long period of time. As seen in the chart below, by early 2023, these units have been at 98% of its capacity due to the large number of transactions related to these new developments.

Daily average of each Bitcoin block from January 2023 to July 2024. Source: Galaxy. This growing demand for block space generates greater competition on the network and increases transaction fees, especially those that require rapid validation, such as financial transactions. In this regard, Galaxy highlights:

The average daily block weight has increased significantly due to the large influx of inscription-related transactions, which include arbitrary data (text, image, etc.) in the segregated witness field of a transaction. As of February 2023, the average fullness of a Bitcoin block stands at 98%. Galaxy

Attractive options to retain users

In a highly competitive space, rollups must develop compelling applications to attract and retain users, encouraging them to continue transacting on layer 2 rather than migrating to other solutions. This largely depends on the success of this development and their ability to offer a solid proposition.

Exploring L3 environments

Exploring some Bitcoin L2s in L3 environments involves a challenge to improve the scalability and privacy of transactions on the network.

However, this solution poses complex challenges related to security, interoperability, governance, and implementation. Despite these hurdles, L3s could revolutionize industries such as gaming and DeFi by enabling increased transaction processing and more customized functionalities.

Benefits offered by Bitcoin

Earlier in the text it was mentioned how expensive it is to use Bitcoin as a storage network. However, at this point it is important to emphasize that the benefits that this environment provides such as security, decentralization and transparency.

This is where rollup developers are faced with a question: should they look for a cheaper solution or a more expensive and secure one? Unlike other altcoins, the network is highly resistant to attacks and censorship, and its proof of consensus is based on the participation of millions of nodes distributed around the world. This prevents this ecosystem from being manipulated by some actors. As for transparency, it is worth remembering that the history is public and cannot be modified. Its security is backed by an electrical energy consumption that exceeds that of many countries, which gives it a backup based on the laws of physics, ties it to the real world and makes it one of the most resistant networks to any attack. This is important to highlight because striking a balance between these two factors suggests that it is a future challenge for both the network and its users. Rollup developers face a significant risk when investing in this technology. Considering the nature of the network and the competition between other developments, the future is uncertain. Projects that manage to scale efficiently, reduce transaction costs, and ensure security will have a greater chance of becoming dominant layer 2 players in the Bitcoin ecosystem.