Bitcoin L2s and whether Bitcoin needs them

Transcript

GM good morning welcome to the milro show The Daily crypto show where we cut the crust off your crypto sandwich I'm your host Jay Hamilton and today we're joined by Daniel fog CEO of rootstock labs one of the leading l2s built on Bitcoin now you're probably thinking why does Bitcoin need l2s well that's what this conversation is all about Daniel's going to give us a history lesson of Bitcoin in order to understand why l2s or as Daniel prefers to call them side chains are necessary for Bitcoin just six years ago there was only two side chains on Bitcoin today there's over 50 all with the aim of turning Bitcoin into a smart contract platform that can rival

ethereum or salana and in this fascinating conversation Daniel is going to help you decide if Bitcoin side chains are something you should be paying attention to for your portfolio now before we jump in we are so close to 10,000 subscrib rers on YouTube and I am so pumped and I know you are too because the more subs we get the more people we can bring into crypto in a safe way so if you're not already subscribed make sure you smash that subscribe button on YouTube today and if you do you could win some super sweet prizes worth hundreds of dollars so don't wait subscribe now also you're going to want to make sure you check out our friends over at Gemini discover Gemini The us-based Exchange built for new and

advanced Traders as a special welcome gift they are offering new customers $15 in Bitcoin just for trading at Gemini security is the top priority as a licensed full Reserve exchange and custodian your assets are well protected plus they offer cuttingedge security features like pass keys to keep your account safe this exchange is setting the standard for compliance and Innovation so you can trade with confidence head over to gemini.com slm milroad and start trading today to earn your $15 in Bitcoin sign up now and get ready to join the trading fund Daniel welcome to the milk Road Show thanks for having me this is great awesome super excited to have you I think I got to start with what might seem like a rather obvious question to you but is not going

to be so obvious to our listeners and maybe to a lot of people out who aren't in the space every day which is why does Bitcoin need l2s when to most people Bitcoin is digital gold and a store of value not a smart contract platform yeah totally so bitcoin's core use case is storing value in a decentralized global permissionless way but really that is only just the beginning if you can store value you and transfer value that is essentially a storage and payment mechanism that everybody can connect into but that's not a Global Financial system it's not an economy it's just one component of it and so what l2's tried to do is take that store of value and give it utility Beyond just storage and

it does that there are many different ways you do that but essentially what we do at rootstock labs uh with rootstock and what other l2s do in in different forms and different ways is to use the computational and cryptographic power of the Bitcoin Network itself not Bitcoin the asset but the actual computational power from all of the miners to secure a second Network and that's really what an L2 is it's a it's a second Network a side chain where the it is in some way linked or anchored to the Bitcoin main chain as well Daniel let's um maybe give everybody a little bit of a history lesson to understand the Bitcoin and then the Bitcoin L2 landscape can you kind of take us back through what has happened and how we got to where we are today yeah exactly so

there's a there's a forum that was set up by Satoshi Nakamoto called Bitcoin talks and I think in 2011 there was a post by Satoshi which talked about the need for l2s on bitcoin then didn't call them l2s I think you might have called them side chains at the time but um essentially a mechanism where you can do uh more complex interactions and uh process again it he wasn't referencing smart contracts but hinting in that direction without congesting the main chain using the computational power using the the power that the Bitcoin miners are using to do the cryptographic hashing that you need to secure Bitcoin and using that and recycling it for a second Network so that was originally where the idea came from and so this was

kind of actively discussed you know is something is something else required in addition to bitcoin to scale Bitcoin Beyond just the network itself you know and there's a there's a I mean there's a history of rootstock here which is kind of uh which is important because rootstock was the first Bitcoin side chain so a lot of the early work that the rootstock team did kind of set the groundwork but there there's some kind of key players here I mean the first one really is Nick zaro who was a who's a a legend in the in the space and was one of the big inspirational factors for the rootstock founding team to to build root stock another one was Adam back uh so Adam's a legendary cryptographer featured uh you know in in popular culture most recently in the HBO

documentary definitely not Satoshi Nakamoto thanks for confirming no problem but even if he was like I wouldn't say if I knew and um you know his the team at blockstream um I think at that time liquid called liquid so what became the liquid Network they proposed a way that you could lock Bitcoin on the Bitcoin Network and then unlock a pegor identical version if you will of Bitcoin on a secondary Network and then there was and so that was that was referred to as a Federated Peg so there was a bunch of different kind of pieces and ideas and essentially it took the it took Sergio and Adrian Diego Gabriel and the team who were the kind of early founders of rootstock to kind of piece this all together and say you know what if we ah and another missing

piece really important one which was the creation of ethereum so you know you've got ballic in the ethereum team you've got Adam back you know with liquid and then you've got you know Nick Sabo is the kind of influence and obviously Satoshi Nakamoto is the original idea and essentially what the rootstock labs team did was piece all this together and say okay so what if we forked ethereum to create a smart contract platform we kept the proof of work mechanism from Bitcoin and we recycled the hash rate from Bitcoin to secure the second Network we created a bridge between Bitcoin and the second network using the stuff that Adam back designed and we brought all this together what did you what do you get so what you get is you get the best of both worlds you

get the store of value in the security and the permissionless decentralized trustless nature of Bitcoin along with the programmability the composability that a smart contract platform the first smart contract platform of any scale that ethereum created and rootstock really is the two combined now this that's what root stock is and root stock was the first it was called a side chain at the time shortly after liquid launched so liquid produced the white paper which inspired some of the work we did we managed to launch first that's not to take any anything away from them but the things often are a race but I think the L2 term is is helpful and unhelpful here right so who were the first side chains and l2s well the the the big four are root stock

Liquid Lightning and stacks these are the kind of four big ones but if you actually look at them they're all very different you know root stocks are evm compatible side chain using merge mining uh liquid is a I believe a permissioned private chain of forms which is reg I believe heavily used by institutions lightning is a is a state Channel payments Network and stacks uses a very different um consensus mechanism and you know while it's a open network it's been heavily used for ordinals and nfts and other kind of use cases so you've got four very different architectures four very different ways of scaling Bitcoin so this is important because an L2 in Bitcoin is a catchall term for anything

that helps scale Bitcoin and you can choose any different direction but it's it's a term that's been ported over from ethereum and in ethereum an L2 is something very specific so yeah I think I think this is kind of like a because the the term Bitcoin L2 really emerged in 2022 and um I think it's been really helpful because it's allowed people from outside of the Bitcoin world to understand what's going on with these scaling mechanisms but one thing I can say for sure is that you know if you took maybe the 10 you know the four original l2s on bitcoin and then some like five or six of the new newest ones they're all radically different they all do very different things they're all trying to scale Bitcoin but they're doing it in very different ways so um it's both a helpful term because it

explains what the scaling mechanisms are but it's also unhelpful because you're really often comparing apples to oranges I mean root stock and lightning are I mean completely different things used for completely different purposes is there a better term that we should use yeah so you know we you know the term we originally used was the Bitcoin side chain something that we've been doing more and more is talking about true Bitcoin l2s and I can maybe get into that I think this is a helpful and unhelpful debate it's helpful because it helps people understand this fast moving space and that matters because you're dealing in decentralized permissionless technology people are taking risk with their assets they kind of need to know what's going on and it requires terminology and analogy and research to

really understand that but it's so you know but it's unhelpful because really you're just categorizing away everything and like yeah that's that can sometimes become it's a little bit like with music genres like how helpful is it to subdivide every artist into a sub genre it's kind of more the sort of thing that a journalist or an offici would would find Value in but for the you know the Bitcoin holder on the street it kind of doesn't matter so much so but I think maybe uh if it's helpful I'd love to give you like a definition that we think about when when we talk about a true Bitcoin L2 so in simple terms um and what rootstock is is a is a network that has a cryptographic economic and monetary link directly back to bitcoin so what do I mean by that so firstly

cryptographic links so all of the blocks and all of the transactions on the side chain are hashed into the Bitcoin main chain itself that is uh for a Bitcoin block where root stock or another side chain has been merg mined or has somehow hashed on the network there is evidence of it you can see that the hashing power has been used to Anchor the two so you're inheriting uh the security architecture you're inheriting the proof of work consensus mechan mechanism and you're inheriting uh yeah all of the trust assumptions that come along with that so that's the first thing second thing is the economic alignment are you supporting is the side chain supporting the Bitcoin Network so in the case of root stock 79% of all of the transaction fees for rootstock are paid out to the

Bitcoin merge miners automatically so that means that the Bitcoin miners have a secondary Revenue stream it's supporting the Bitcoin model it is additive to the economic model of this decentralized organization of will and then the third thing is monetary alignment so in rootstock Bitcoin is King there there was no pre-mine token there's no competing money token so we haven't launched a token which intends to compete with Bitcoin for monetary monetary dominance and Bitcoin is the native gas token so like with ethereum you'd use ether to pay gas in rootstock you pay Bitcoin to pay gas this is root stock and this is we consider a true Bitcoin L2 you could look and there are other more technical definitions but you could look at light through a similar

characteristic it's supporting the Bitcoin Miners and the Bitcoin Network by generating um increased transaction volume on the network it uses Bitcoin so it's not competing with Bitcoin in any way and um it's cryptog I mean it's running on state Channel network which is cryptographically anchored into Bitcoin so it's a genuine Bitcoin L2 it's a genuine side chain so yeah that's how we tend to look at it and I think where things get a little bit more tasty is when you look at some of the newer l2s that have emerged in the last few years because some of them do not meet this definition they have uh tokens that will launch compete monetarily with with Bitcoin Bitcoin is not the native gas token maybe they don't use the Bitcoin proof of work consensus mechanism they

use proof of stake maybe they're using wrapped Bitcoin so they're reliant on a custodian there's lots of different sort of types out there this is not to say that these can't work and these can't be helpful in scaling Bitcoin but I do think that when you know if you think about the principles on which Bitcoin was created and what I think of the majority of people even those that are you know perhaps less aware of what's going on with Bitcoin when they hold it they kind of it represents something to them this is decentralized it's trustless it's you know it's basically Unstoppable it's that kind of means something as you take that Bitcoin off the Bitcoin main chain and into an L2 I think that's where these definitions of a true side chain start to matter because of course those trust

assumptions are going to change slightly but how far away from Bitcoin are you going how much risk you taking what is this architecture that you're stepping into how long has this chain been live Etc and I think those kind of questions where these categorizations matter and yeah and where there's some challenges in the in the growing L2 space well especially when as you said there is such a strong connection for everybody's demand for Bitcoin being tied to its decentralization and its security and its uh being outside of the system that we are all trying to change and it is I'm glad you explained that because I even coming into this conversation was unsure of if all these side chains or

l2s or true l2s whichever language we use are secure and decentralized in the way that Bitcoin is and so what I'm hearing is that some of them are and some of them aren't so I mean even rootstock is not I mean there is nothing that has even approached the level of security and decentralization of Bitcoin so there's always going to be a drop off but how far is that drop off and how much connection and linkage is there back to bitcoin and that's the question that really matters and that's what a lot of this debate around l2s is really about and um you know this matters because you know in the kind of uh War for retention in crypto some of these technical details get lost in kind of uh hyperbolic marketing and I think yeah

it's important to kind of ground everybody and say you know there's um you know you got to be aware of this stuff you know what do you want to do you want to trust your your your Bitcoin outside the Bitcoin Network on a you know with the side chain that's economically in cryptographic link to bitcoin has been up and running for six and a half years you know was built off some of the founding principles of what Bitcoin was for or do you want to move your Bitcoin into something that was launched six months ago is kind of you know built off the back of a you know an OP stack or a polygon uh side chain or something and you know doesn't really use Bitcoin it uses some sort of synthetic form and all this seems like a pretty obvious answer yeah and and

that's okay I mean it's like it's okay if people want to you know go to those places that's totally fine it's their choice but I think that a lot of that distinction does get lost in the marketing hey so let's talk a little bit of adoption these chains have been around root stock lightning a few of the ones you mentioned for several years six years but adoption has been very slow right why is adoption so slow yeah so it's really good question so I can talk very specifically From rootstocks perspective but I have sort of theories on what's going on elsewhere so rooto launched in 2018 uh you know my exact history when the bull and be markets landed is always a bit vague but I remember the Mania in 2017 so I can imagine that from memory the crash was 18 and 19 that was the winter so we

launched a network in the in the in the depths of winter and I think you know if you think about lightning was also 2018 I think liquid 2019 if I'm not mistaken so they were all launching in Winter now if you zoom out and you think from a hype cycle perspective that actually is probably a good thing and makes sense is generally how this stuff tends to shake out you know you launch in the winter when no one's paying attention you build and build and build and then when the when the next wave comes you you're prepared for it so I think that's the first thing you know it was a it was a market moment that was that was not favorable for any crypto the second thing to bear in mind is that and I think this kind of really is often misunderstood which is that building and

scaling an ecosystem which is you know what the team at rootstock Labs is trying to do off the back of rootstock this decentralized network is slow hard difficult complex very enjoyable very interesting thing very challenging very rewarding work and it takes time it takes capital and it takes lots of different approaches and it takes you know the success and failure of of not just one team but tens if not hundreds of teams building on that Network so it's a very uh you know you're scaling a you're scaling a network scaling networks from the you know from the internet through the social media networks It's Tricky so I think that's kind of the other thing I'd say like these things take time and you know all the l2s that are launching at the moment

both the Bitcoin l2s and the l2s launching on ethereum yeah like um you know I wish them the best of luck but I my view on on this is really success in building a decentralized network is about longevity and survival can you stick around and keep building year in year out that is really the measure of whether this is going to succeed and yeah six and a half years going strong the other thing i' bu i' kind of more from a uh kind of philosophical or positioning perspective is what rootstock offers and other Bitcoin side chains also offer is a kind of is a kind of new hybrid right so on the you know I positioned root stalkers The Best of Both Worlds I think you know detractors in both the ethereum and Bitcoin world

would probably see it as as as as the opposite as the worst of Both Worlds right and I think that narrative we really struggled with that the bitcoiners originally were very skeptical of us because we were not maximalist enough and the the ethereum crowd you know didn't you know we were not dgen and kind of um and open and creative enough maybe like I don't know so we kind of were not um we were kind of uh nobody's friend and everyone's enemy and I think that what we saw there was two things that really broke that the first one is the kind of the defi summer so you know when the defi summer was kind of raging during covid uh in 2020 2021 we saw quite a significant increase in demand and adoption on

rootstock for people and Builders looking to do defi but Bitcoin defi we saw some of the first projects really launching being successful like Sovereign which defi platform s so um R YN and money on chain the first Bitcoin Clash relized stable coin all launched in that era so we saw the kind of the first innovators doing pure Bitcoin defi on bitcoin on a Bitcoin L2 launching and then the kind of second phase really where it kind of we saw a big growth in adoption was maybe like early 2023 when this narrative around Bitcoin L2 started up you know there was a technology trigger which is the Advent of zero knowledge rollups you know the possibility that that might be something you could try on bitcoin then you know the Advent of you know

potential around opcat so this is getting a little bit technical but the potential around opcat on bitcoin which is a mechanism where you can essentially you know anchor into Bitcoin anchor smart contracts into Bitcoin and potentially do a zero knowledge verification that's a hard Fork of Bitcoin that would be required for that and I believe it's also something I think opcat is something that um Satoshi originally built and was in Bitcoin but was then pulled out um I think 2011 2012 that provides conation but anyway long story short like a that that is a that creates a path for doing rollups on bitcoin and then um something called bit VM so which was a a computational framework designed by Robin Linus in late 2023 so so all of these things created a pathway where you might be

able to build a smart contract platform anchored into the Bitcoin Network without doing an evm fork or something like that or build a better bridge to bitcoin which is something we're trying to do and then there was a narrative shift as well and I got to give credit here to the stacks ecosystem who did quite a lot of good work work here but others as well I think there was um it was a kind of uh you know as the L2 moment was starting to happen on ethereum there was this reflection about like okay but can you scale Bitcoin in a similar way and this L2 narrative started started building and then yeah I mean to be honest like late 2023 early 2024 I mean it just took off and I mean the scale of growth we've seen on rootstock over the last 12 months has

been phenomenal we've done more we've seen more protocol Integrations more tvl increase more transaction volume increase in the last 12 months than like previous 5 years combin H so it's just taking off there's still challenges it's still early but yeah we're um there is real real genuine interest in real demand and there is this is also evidenced by the number of l2s that have launched in the last 12 months so you know teams like U like bit lay like core like Merlin there are many others there's ones like Bob which launched this year build on bitcoin and the I think something like 80 Bitcoin L2 projects which are slated to launch in the next few years so there there is a huge growth here which you know as the Builders of the first L2 we're like kind

of I mean it's amazing and it's kind proud parent yeah I guess so um but also yeah proud kind of uh slightly stunned kind of like oh okay we were right it was going to work we were just really early you know and I think you often see that right they say what is it you can either be um first best or cheapest I think is the kind of uh and we were definitely the first and that was is great but it comes with challenges as well partly that's many years trying to build adoption not quite getting there but now it's taking off so let's uh paint the picture of what is the the vision or the end state that you would like to see for the Bitcoin Network assuming adopt let's just assume

adoption happens who knows what the time frame is I know you can't predict that but what what would the end State look like what would be happening what would the activity in the use Cas is would it look similar to what is happening on ethereum and all of their l2s rollups Etc is that the end State yeah that's an interesting question yeah so a way to think about this is 0.2% of all the Bitcoin in circulation today is being used in defi it's like aund couple hundred million I can't remember the exact number like one or two billion perhaps very very very small amount it's a tiny amount so why does this matter it matters because that means means that

99.8% of all the Bitcoin that's in circulation is just doing what it was perhaps originally designed to do which is to store value but it's not really doing much else it's essentially like people talk about talk about digital gold it's closer to kind of digital dollars stuffed under the mattress that means you know okay so if it's um increasing in value over time and it's you know that's great but it also means it kind of doesn't really have much more utility other than that so the idea with l2s and like where we see the Bitcoin ecosystem going is is that that asset becomes interconnected with every other part of our financial system it really isn't today I mean like try try collateralizing a loan with Bitcoin try I don't know buying a house with it try buying a car with it try buying I mean

you can buy coffee with it and buy pizza with it but it's a pain right and so all of that needs to be abstracted away in some way for it to become an asset which is in widespread use and widespread adoption but in order to do that you need a whole Global Financial and economic system be built up around it and you certainly cannot do that just through the Bitcoin Network you need smart contract platforms and scaling layers to do that and different and you know infinite numbers of applications and infrastructure building up and today the only way that's being done is through centralized custodians and centralized actors uh you know people like coinbase for example and maybe like Robin HUD and that's great so you have access to the asset through those those mechanisms but it's really I mean it's

not decentralized um you're basically just trusting a custodian to and that that's kind of fine that's part of the plan but it's not um I would argue it's not really scalable and it's not really in keeping with the original Vision so um what we need this is all to say what we need to see is we need to see you know an entire ecosystem of applications being built up around Bitcoin which interact with it are connected to it and mean that it can become part of everybody's daily lives globally now that's the kind of obvious answer but what does this mean I mean if you zoom out a little bit I see Bitcoin as two things really it is a digital store of value which is secured by a network and it is also this absolutely remarkable distributed computation system the most

secure and unbreakable lock we have ever created and today it's only being used to secure Bitcoin what I think and what we think at rootstock Labs is it could be used to secure every single part of our digital lives and that goes Way Beyond just Financial assets and value it goes to you know everything from your identity to your you know your records your private files I mean everything potentially you know we're um it's we're kind of like uh I kind of sometimes think of uh life in the 20 2024 as like a frog slowly being boiled the number of scams and cyber attacks and meltdowns that are happening all the time we've just kind of got used to it it's not getting better it's going to get worse

because the stakes sorry the the the the um the benefit for hackers is getting bigger as our lives become more and more digitally integrated we're going to be making it more and more attractive for hackers to and and cyber criminals and stateb cyber hackers to um get access to our um our wealth and our lives and our identities and our private pictures and our whatever so there's this kind of arms race and it's running and running running running and and really the only I mean there are lots of kind of mechanisms to prevent this but one of them which is only really in its infancy is securing everything with the Bitcoin Network and so I think that that is where we're going to go in the coming

years there are lots of other Visions for where Bitcoin goes but that you can hear those from other mouths the one I'm most interested in is what we can do with this incredible computer to secure our future wonderful Daniel thank you so much for joining us today and for so eloquently explaining a very technical thing to our audience everybody listening in I want to know if you guys are interested in learning more about Bitcoin l2s are you just holding Bitcoin as a store of value curious to know what you guys think let us know in the comments and we'll see you guys next time have a wicked awesome day as always if you liked today's episode please hit subscribe and make sure you follow us you don't miss out on the next one there's also a link in the description

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