Bankless - Bitcoin's 2024 Revolution: L2s & Beyond | Eric Wall

Episode Date: May 8, 2024

✨ DEBRIEF | Ryan & David unpacking the episode: https://www.bankless.com/debrief-the-eric-wall-interview  ------ What’s the Endgame for Bitcoin Scaling? That’s what we asked bitcoin builder and researcher Eric Wall. We start by exploring the evolution of Bitcoin and the genesis of scaling solutions on top of it. We then get into the intricacies of the BitVM, what exactly is a Bitcoin L2 and what’s coming next. Eric is the perfect guest to explore this frontier of Bitcoin Rollups, he tells it like it is and he understands both Ethereum and Bitcoin. ------ 📣 SPOTIFY PREMIUM RSS FEED | USE CODE: SPOTIFY24  https://bankless.cc/spotify-premium  ------ BANKLESS SPONSOR TOOLS: 🐙KRAKEN | MOST-TRUSTED CRYPTO EXCHANGE https://k.xyz/bankless-pod-q2  🔗CELO | CEL2 COMING SOON https://bankless.cc/Celo      ⚖️ARBITRUM | SCALING ETHEREUM ⁠https://bankless.cc/Arbitrum  🛞MANTLE | MODULAR LAYER 2 NETWORK https://bankless.cc/Mantle  🏠 CASA | SECURE YOUR GENERATIONAL WEALTH https://bankless.cc/Casa  🗣️TOKU | CRYPTO EMPLOYMENT SOLUTION https://bankless.cc/toku    🌐 CARTESI | APPLY FOR A GRANT https://bankless.cc/CartesiGovernance  ------ TIMESTAMPS 0:00 Intro 5:47 Eric Wall 9:48 The Evolution of Bitcoin 21:31 The Genesis of Bitcoin L2s 36:40 Runes 46:22 BitVM 1:04:45 Why Bitcoin L2s are Inevitable 1:09:07 Stacks 1:11:37 Bitcoin L2 Endgame 1:17:39 Scams 1:23:13 Bitcoin’s Direction 1:27:25 Closing & Disclaimers ------ RESOURCES Eric Wall https://twitter.com/ercwl   Taproot Wizards https://taprootwizards.com/   ------ Not financial or tax advice. See our investment disclosures here: https://www.bankless.com/disclosures ⁠    

I mean, what we ultimately need for Bitcoin is we don't, I actually, I'm not that convinced that we need to take everything that Ethereum has done and put it on to Bitcoin. Like, we don't need all of the Ethereum stuff to exist on Bitcoin. I don't think so. But what I do know that we do need, we just need a way for me to be able to send Bitcoin to you in a scalable and private fashion, just so that Bitcoin as a currency works. Welcome to bankless where today we explore the frontier of Bitcoin layer 2s. This is Ryan Sean Adams. I'm here with David Hoffman and we're here to help you become more bankless. The big question, can Bitcoin scale through layer twos the way Ethereum has? I think it's the most important question that Bitcoin builders are facing today. And it's hard. There's a lot of noise out there. We've got to find out what's real, what's narrative, what's a scam, what the future actually looks like for Bitcoin. That's why we're having this episode today with Eric Wall. He's on today. And he's got the most thorough take that David and I have heard on this subject. He's the perfect guess for this because not only

does Eric tell it like it is, he also understands both Ethereum and Bitcoin. So a few topics we get into in the episode. Number one, the Ordinals and Rune's Awakening, why that is upon us and what effect it's had. Number two, why lightning failed. Number three, the state of Bitcoin layer twos. Where are they today? Number four, we talk about BitVM and the fatal flaw it might have. Number five, we talk about the answer, the solution, the cat op code. You'll have to hear Eric talk about that and evangelize for it. Number six, Eric's message to us, be extremely cautious when you hear the words Bitcoin layer two. And why he says that.

And number seven, why Eric is optimistic about Bitcoin's future and the building that is going on today. The progress of what you can do on Bitcoin, the evolution of Bitcoin, I think it actually runs in parallel to the story of Eric Wall himself. early bitcoiner who like self-described as becoming an outcast out of Bitcoin because the laser-eyed monetary maximalists decided that you don't put any sort of ZK magic on Bitcoin. That's not what it's for. And then entered the Bitcoin Dark Ages where Eric Wall was forced to look elsewhere for scaling solutions. And that's where he found the layer two space outside of Bitcoin, but still had like his first love. These are all his words that I think he used to describe his own

arc when we did our first episode with him. Eric Wall comes back and kind of gives us an arc of the Bitcoin Renaissance, how it started where it's gone, and what the current frontier is, the current limitations, too, of the Bitcoin Layer 2 space, and what might be next steps for the actual technical evolution of the Bitcoin protocol. So just really a masterclass in Bitcoin, I would say, along with just like the current issues, current events at the time. So let's go ahead and get right into that conversation with Eric Wall. But first, a moment to talk about some of these fantastic sponsors that make the show possible,

especially Cracken, our preferred place to buy crypto in 2024. If you do not have an account with Cracken, consider clicking the links in the show notes getting started with Cracken today. If you want a crypto trading experience backed by world-class security and award-winning support teams, then head over to Cracken, one of the longest standing and most secure crypto platforms in the world. Cracken is on a journey to build a more accessible, inclusive and fair financial system, making it simple and secure for everyone, everywhere, to trade crypto. Cracken's intuitive trading tools are designed to grow with you, empowering you to make your first or your hundredth trade in just a few clicks. And there's

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Sello is seeing a meteoric rise with over 300 million transactions and 1.5 million monthly active addresses. And now Sello is looking to come home to Ethereum as a layer two. Optimism, Polygon, Matter Labs, and Arbitrum have all thrown their hats in the ring for the Sello Layer 2 to build upon their stacks. Why the competition? The cello layer two will bring huge advantages like a decentralized sequencer, off-chain data availability, secured by Ethereum validators, and one-block finality. What does that all mean for you? With cello layer two, gas fees will stay low, and you can even pay for gas natively using ERC20 tokens, sending crypto to phone numbers across wallets using Social Connect. But Sello is a community governed protocol.

This means that Sello needs you to weigh in and make your voice heard. Join the conversation in the cello forums. Follow Sello on Twitter and visit cello.org to shape the future of Ethereum. Arbitrum is the leading Ethereum scaling solution that is home to hundreds of decentralized applications. Arbitrum's technology allows you to interact with Ethereum at scale with low fees and faster transactions. Arbitrum has the leading defy ecosystem, strong infrastructure options, flourishing NFTs, and is quickly becoming the web-free gaming hub. Explore the ecosystem at portal.arbitrum.com. Are you looking to permissionlessly launch your own Arbitrum orbit chain?

Arbitrum orbit allows anyone to utilize Arbitrum's secure scaling technology to build your own. orbit chain, giving you access to interoperable, customizable permissions with dedicated throughput. Whether you are a developer, an enterprise, or a user, Arbitrum orbit lets you take your project to new heights. All of these technologies leverage the security and decentralization of Ethereum. Experience Web3 development the way it was always meant to be. Secure, fast, cheap, and friction-free. Visit arbitram.com.com.com.com. Bankless nation, Eric Wall is a crypto-OG, first enamored by Bitcoin and the many irreplaceable properties that Bitcoin has, and then later also by many of the technical research breakthroughs

in the Ethereum ecosystem. Eric now finds himself straddling many different universes, but all with strong cryptography and trust assurances underpending what Eric finds interesting and pays attention to. Eric also recently shaved his head because the ETH-BTC ratio broke below a certain level that he said that it wouldn't, even though no one really asked him to do that.

Eric, welcome back to Bankless. We're happy he did, though. Well, there are some people. that insist that Eric doesn't just lose a bet like that. So they think that the reason that I shaved my head was because I was camouflaging a hair transplant. So that I lost the bet in order to get a hair transplant without anyone noticing. And I'm fine with either of those theories. I'm happy either way. Wait, but either or maybe both. What was the real reason? So wait, did you, did you shave it

in solidarity with Ethereum or in solidarity with Bitcoin? Or like, what was the, I'm not familiar with the whole whole story. Just David showed up one week to me and he was like, yo, Eric shaved his head. There's multiple reasons. You could say I shaved it in solidarity with the fragmentation issues of Ethereum. Thank you. Or you could say that it was there was this guy who kept haggling me over a prediction that I made that we were all, we had already reached the low for the year for the EFBTC ratio. And so I kind of bundled all close together and just shade my head. And I think I was kind of done with the man bun anyway. I think the man bun had lived its life. So I think this is for the better.

Are you ready to make another prediction on the show today about the EF Bitcoin ratio? Have we now can you call a low? And what will you do publicly? I want you to what will you do if you're wrong about that? Yeah. I think we've reached low for the year. I don't know which parts of my body I'm left to shave. It doesn't have to be a shave. It could be like tattoos. Yeah, we need to do a tattoo. You could fight David.

People are doing that. One at a time. One at a time. Everyone get in line. I'm happy fighting David if I get to join the ring with Nick. I think me and Nick together stands a chance. Oh, my God. Actually, the first time I ever met Eric Wall in real life,

I think I was immediately put into a pretty aggressive headlock. That's true. That's one of the reasons that I fear for Nick, because you were kind of, like, I don't know how, if I could have gotten you down. Like, you're kind of, you know, resistant. Well, okay, since we're going into the story, like, this was at ECC right after COVID. So this was the first time I was meeting basically everyone I had been talking to online for the last, like, three years. And I'm in line at some party for, I think, like, the bar or something.

And I get put in a headlock. And I'm like, oh, okay, somebody who I know is putting me in a headlock in a friendly headlock. And they're going to let go. And I'm going to turn around and realize who this is. Except then, like, the being let go never really happened. It was just the headlock just got. more and more intense over time. Dude, it's a Bitcoin or headlock.

We're not dabbling with an Ethereum headlock here. I think my main gripe was that you guys in the Ethereum world have started to call Ethereum clients that just sink the Ethereum state rather than executing every single transaction. You call those full notes. Whereas in Bitcoin, we have to validate every single transaction. So I was like, there's David. I'm going to punish him for this.

deluding the term of what a full note actually means coming up with new terminology and shit. And I guess that's what we're going to talk about a little bit today. What's the definition of an L2? And there's also been like a degradation of that term, which you guys have also played a little smart part. I have too. Like we're all guilty of degrading what it means to be an L2. Yeah. I love when Eric Wall comes on an episode because I know we're going to bring back the purity of decentralization and why we're here.

And trustless. We should get into it then. Let's set the landscape a little bit. Eric, almost two years ago, November of 2022, you and I did an episode discussing the technical potential of ZK layer two's on Bitcoin. This was like, it was only 18-ish months ago, but still super early. Like, ordinals weren't a thing. Rooms weren't a thing.

Everything was completely theoretical. And now not only do we have both tokens and NFTs on Bitcoin, but now there's this emerging class of layer two's on Bitcoin. How would you like explain or characterize the arc of what Bitcoin was back then? I'll call that like 2022, 2021 Bitcoin Dark Ages. Maybe you agree or don't agree. But like characterize the arc of Bitcoin technological progress since then. Like what do you think about the current direction of Bitcoin?

If I recall correctly, I think the origin of that episode was that the Human Rights Foundation, together with a grant from Starkware and C-N. and as Holdings assigned research paper to be written about what are the potential scalability benefits of putting a ZK roll-up on Bitcoin within the block size constraints of Bitcoin. Like if you just use the full 4-Mabyte block that Bitcoin has, how far can we get with the ZK roll-up in like ideal circumstances? And John Light was the person that wrote that. I was the person at Human Rights Foundation that sort of selected the part.

person to write the paper, and I select the John Leifx, I think is, uh, what I liked about him was that he was actually sort of anti-ZK roll-ups before writing the paper, but I know that he's a neutral guy and he's going to stick to like what the research says. And the results that he came to were pretty interesting. Like, we could be looking at a 40x, 50x, a scalability improvement on Bitcoin. If we had a ZK verifier and a Covenants off code on Bitcoin. So that was like, I think back then what we were excited about was that, well, if we actually had ZK rollups on Bitcoin, not only would the scalability improve significantly, but we would also be able to tap into the full expressiveness that ZK. Rollups give. And that could also lead to privacy enhancements,

because if you have a zero knowledge proof, you can embed any type of virtual machine, private or non-private into that as well. So Ziki roll-ups suddenly came back to the scene as this is like a real, this has a real potential to improve Bitcoin on all the sort of facets that we could think of. So I think we were just trying to bring back ZK roll-ups back into the discussion of what should the next soft fork in Bitcoin be. And there were some people at that time that were thinking that, you know, a ZKP verifier op-code.

is maybe not impossible to get into Bitcoin, so maybe we should look more into that. But to sort of describe the overall arc of what has been happening since then is that, I mean, this was still, like, ZKP verifiers in Bitcoin, we're still, you know, there's a lot of people that need convincing, and it's not only the people that need convincing, it's also which type of ZKP verifier do we put into Bitcoin? Because it's not like in Ethereum where, like, you have a roll-up,

you can just upgrade the roll up to use. We usually have like admin keys that with a delayed function can upgrade the roll up to use some type of new circuit if you find a new one. But in Bitcoin, we really have like one soft fork and then we have one one serenolage proof system, one proving system. And that now maybe has to be the serialage proof way that we verify things in Bitcoin for, I don't know, five years, 10 years. Right. You got to get right the first time. Yeah, we got to get it right the first time. That led to some discussions of, like, let's maybe put something more generalized,

like a ZK. Wazem verifier, and then we can put other types of ZK circuits inside that, so that the ZK. Wasam sort of verifies the Starks and the Snarks and the growth 16s of the world. But what has happened sort of recently over the last year, as I've gone around and spoken to different researchers, the most significant one, I think, was in Palo Alto last year where we got together a bunch of, you know,

CK-interested people in Bitcoin, which aren't a lot of people, by the way. Within the research community of Bitcoin, I'd say there's a small fraction of people that are knowledgeable enough to have a real conversation about Cyr knowledge-proof and Bitcoin. But the sort of crew that we could amass, that we could gather,

We gather in Palo Alto. And going out of that meeting, I actually felt we were further away from getting CER knowledge proofs into Bitcoin than I felt before getting into that meeting. So I don't, I, I'm sort of less optimistic that we're going to get a CKP, in CKP verify op code in Bitcoin in the next, you know, say two or three years. I don't, I'm not sure that that's. Why, why pessimistic on that is it just so hard to get any kind of op code into Bitcoin, and much less a ZK proof, like op code,

that you just think that's like politically insurmountable, or I don't even know if politically is kind of the right word for that. Yeah, so choosing the right one and not being able to upgrade that is maybe the hardest challenge to tackle. But there are other, so if you wanted them to do what I described that you wanted to have like a Wazom, a ZK. Wasam that you put other verifiers into, then the problem is that if you want, for example, Starx, which I think are like the least,

they use the least exotic cryptographic primitives, if that's what you want, then you sort of lose those benefits if you verify them in a sort of a WASM environment. Because if you have, you need, if you have a different layered ZK verifiers on top of each other, you sort of lose the characteristics of one, if they sort of all have to go through a funnel of multiple ZK verifiers and the complexity increases too. And I think another thing that has shown

that it's made me more pessimistic is that we're fighting right now to just get this OPCath opcode into Bitcoin and we're making very good strides but OPCat is basically an op code but the only thing that it does it's it can concatenates two elements

on the stack. So Bitcoin is like a stack-based scripting language so you have like a bunch of elements that are on a stack, and you can multiply them, you can use addition, you can use subtraction, but you can't really do anything like super advanced. For example, you can't even concatenate, which is a pretty regular thing that you do in programming. Like you can catenate two strings. So if I have A, B, and C, D, and I concatenate them, I have A, B, C, D.

Or if I have a two and a two, and I concatenate them, I have 22. So that sounds like, so the most, like, if you had a calculus, and there was a concatenate button. That's like one of the simplest. Like it's more simple than cosine or sign or something like that. And even that is like a massively technical conversation in Bitcoin. And the conversation is really about does this destroy Bitcoin and in effect the world? Like does this destroy humankind is sort of the conversation.

The stakes are high. Like, yeah, concatenating numbers is like a really dangerous thing. Make sure you can divide by zero on that. Right. However, one interesting thing about concatenating numbers, concatenating strings is that a Merkel tree, how you get a Merkel tree actually just comes from concatenating hashes to have, let's say, have 16 hashes at the base layer of a pyramid

and you concatenate those until you have eight and then you have four and then you have two and then you have one. That is actually how a Merkel tree is constructed. And if you can then verify the hash of the root node in that Merkel tree, now you can verify Merkel roots. And blockchains in general, like how both Ethereum and Bitcoin, Merkel verification is like one of the primitives that we use the most. So like optimistic roll-ups, Merkel-free verification, syncing the Ethereum state root, Merkel-tree verification. SPV proves in Bitcoin, Merkel-free verification or Merkel-Rut verification. And it turns out that with just that small op code alone, I think we should, maybe we should

get into this a bit later in the episode, but just through concatenation, we can get Merkel verification, but we can also get a form of covenants. I don't know how familiar you guys are with covenants, but that's like, covenant is the ability to create, let's call them finite state machines. You know, Bitcoin is stateless, doesn't have a way to update variables and carry over state from one transaction to the other. Covenants is a way to do that. It's a way to sort of restrict where coins can go in specific paths in sort of like a state machine.

You can sort of program that state machine to decide like how the different paths in the state machines can look like and what you do in those different paths. So apparently concatenation alone through some weird cryptography that comes from Schnur signatures. You can actually do this with ECDA signatures too. You can actually get covenants with just this one with this one. concatenation op code alone. And you can even, there's some people at Starkware that think that they can even

actually program a stark verifier with just this one, this one simple upcode that's cat. So you could actually verify like Starkware Starks. And if you can have, if you have covenants and Starks, so what we talked about in

that previous episode that you realized, you need a ZKP verifier and you need recursive covenants in order to create ZK roll-ups on Bitcoin. So if the Starc Verifier works with Kat, which we're still unsure about, then we can actually get ZK roll-ups on Bitcoin. At my company, Taproot Wizards, since we don't know for sure yet that we're going to be able to do ZK. Starks with just Kat alone, we have an alternative approach, which does

optimistic verification of arbitrary computation. It uses something called Matt, which again uses Merkel trees to a very large extent so that you know how in optimistic ruleups that you have a state route and then you update that state route with another one. And then in order to find if there was like fraud between those state routes that didn't follow a specific state transition function, you can do bisection games and identify, okay, this is where this is the part where you lied about what the computation was. We can do that in Bitcoin if we had Merkel route verification. So that is basically the idea of Matt.

So if you bundle Matt with recursive covenants, then you can get a, and actually a real version of optimistic, it actually becomes more like plasma, but some hybrid between plasma and optimistic whirlups with just capital alone, even if we can do sharks. So that was a mouthful. And I think that does a really good job kind of illustrating some of the aspirations

that technical people have for the future of Bitcoin roll-ups and also the technical hurdles that need to be overcome in order to actually make true, valid layer two spawn from Bitcoin. But Eric, also at the same time, we're seeing many, many Bitcoin layer twos spawning to this day that are skipping over, basically everything that you just laid out. Because as maybe listeners kind of got the gist of it's really hard and complicated and not technically there yet.

You get an off code in specifically, right? Exactly. But nonetheless, there are the Bitcoin Layer 2s are like a whole thing. Like VCs are funding them. Users are starting to use them. One of them just went Mainnet this week. So how do you like square these two things? How do you feel about that dislocation, that discrepancy between, well, you don't have O.P.

Cat in, yet nonetheless, Bitcoin Layer 2 as a narrative is here. How do you feel about this? Yeah, so this is difficult. But I think what basically happened was that Casey Rottermore invented the Ordinals Protocol. And I think maybe a bigger invention that sort of the Ordinals Protocol itself was this thing, which are called envelopes, which is how you packet very large blobs of arbitrary data into Bitcoin. And basically- It's Bitcoin finding data availability. Yeah, it's like, oh, apparently we.

had access to call data in Bitcoin, a part of the block space that we don't execute. That's just a dumb data blob. Apparently, we had that, and you needed to come up with a small script, which it basically creates an if statement, and then that whole if statement is false. So you never, you never actually check what is underneath that if statement, because you just know that this part of the script is false. And then what you can do with the rest of the script is you can just put arbitrary data in there. So that is what is called an envelope in Casey Roder Moore's ordinal theory. And that ability that, I mean, we've actually had the ability to packet large amounts

of arbitrary data in Bitcoin before. It was just way more clunky. Like you could divide all the state of blobs into different transaction outputs. And it was just like, you needed to be a. somewhat savvy programmer writing an arbitrary data scheme in Bitcoin that looked in different parts of transactions and carved out this part from here, this part from here, this part from here. But basically with this sort of envelope trick, it became very easy in a block explorer to see, oh, there's all my data. Like I can see in the block explorer, there's all that data. And I don't have to like tie together with that transaction input and that transaction input. But what this means is that what this meant was that, okay, now we can put 400 kilobytes

data blobs in single transaction inputs in Bitcoin. And they will propagate in the Bitcoin network. There's usually one of the issues like when you create non-standard transactions in Bitcoin, while they're valid in the blockchain, nodes will not propagate them. And miners running that same software will not actually put them into blocks. But if another miner does, it will still be a valid block and they'll accept it as valid. But what we had since Seguid and Tapwood was that we have this 400 kilobyte arbitrary data blobs that propagated freely over the network and miners included them into the blockchain.

So now all of a sudden we have like this huge part of the block, which is like a place where, you know, it's a free for all. You can do whatever. You can you can even write an entire EVM inside of that arbitrary, like as a sovereign roll-up, you can embed. a whole blockchain into the Bitcoin blockchain that way. And that was actually what I, um, so we, we started using this for JPEGs, right? So, uh, taproot wizard. And yeah, so the first, the first, the first, I can't believe you did that, by the way. Yeah.

So the first, the first, uh, I mean, the first, uh, word, roll inscription number one is just dick butt. Of course. Dick butts. Let's go. Let's go. Yeah. And that, and that's actually, that was actually inscribed by our, uh, CTO at the attack. He joined later as the CTO of Tapperid Wizards.

And he's actually the same guy that has now implemented this way of how you use the cat-op code to create recursive covenant. So it's actually a super smart guy. But the first thing that he did when he sort of discovered the Orrinos protocol, inscription number one, just put a dick button in there. The thought that I had was that, okay, well, we have this arbitrary data space in Bitcoin. Now we can build meta protocols inside of Bitcoin that are, like, we don't have to. to work with the same confines as previous meta protocols as Bitcoin had to, you know, confine themselves to. So like writing meta meta protocols inside of Bitcoin is actually not something that is super new. You know that USDT used to exist on Bitcoin and then Ethereum sort of

took over all that USDT. That meta protocol was called the Omni layer. So that was a fungible token standard that lived inside of Bitcoin. And there's been other protocols like a counterparty was also a protocol like that. But however, they had to sort of work with restrictions on how much data they could put on there. So you couldn't have like an Ethereum style sequencer that, you know, takes all transactional data and Ziki proves and bungles them into each block of Bitcoin. That was like not really practical before.

But since we had orinoles, that now became product gold. Anyway, so what happened was after the Dikbot, Taproot Wizards, we made a 4 megabyte block that was just a JPEG of a wizard. And then people realized, okay, so the entire Bitcoin block is just up for grabs. You can put any amount of, we had to go, we had to, like, contact a miner and be like, can you, like, modify your node and, like, put it into the blockchain? And nowadays, there's a, there are specific services that are popping up. They are doing this, like, as a service.

So Marathon, the Marathon Mining Pool, has one called a slipstream. So now, like, this is not something that you have to do anything weird. You just have to connect to the Marathon API and just send them whatever data you want to pack it in there. Anyway, so, I mean, I guess as everyone knows, and you as Ethereum people will know that, you know, Ethereum NFTs has sort of been struggling a little bit price-wise. Like, I don't know, BoredApe is like 12 these days. I don't know how the others are doing Moonbirds. like a lot of these blue chip entity collections have sort of collapsed. And I guess that some people felt that, well, we need a new narrative here.

And the narrative was that, well, what if instead, like, we had links to JPEG? Like, what if instead of us putting IPFS links to pictures on the Ethereum blockchain, we inscribed the whole JPEG into the Bitcoin blockchain? blockchain, so it stays there forever. So we're working with a scarce Bitcoin block space, you know, all the nodes download, all of the blockchain is going to get replicated and a whole network of tens of thousands of nodes. Those are like real pristine, like fine art.

Fine art NFTs. So that became like that took its own life. And now we have marketplaces for that. So now we have communities. We have DGM communities for that. So like contrasting to what the Bitcoin layer two space. has been looking like in the past because it's not the first time that we have like layer two's let us call them sites so side chain so the liquid side chain the root stock side chain that's not

new at all we've had those for a very long time now uh that there's like large amounts of money that are floating around trading nfts on bitcoin now there's uh uh a sort of season two in in the bitcoin space where we have our own native de gens uh that are are trading NFTs with Bitcoin. And actually, the way that we trade those NFTs is actually kind of interesting as well because most of the trading for Bitcoin NFTs are actually on-chain using something called pre-sign Bitcoin transactions. And those are atomic swaps.

Like you atomically swap the Bitcoin NFT, which is actually a specific Satoshi, well, a specific UTXO, or the first Satoshi is of a specific UTXO. you swap them with Bitcoin in one transaction atomically, there's no, there's no, doesn't go through a centralized exchange. It's actually on-chain atomic swaps. That's how, and if he's on Bitcoin are traded. So it's like, you're basically like writing an open check saying, hey, whoever wants to fulfill this check, here's a check for like this amount of money for this JPEG.

If you want to take the other, if you also want to sign here, you can send me this amount of money and then you can have the JPEG. Yeah, exactly. So this is the start of the Bitcoin season two starting to drum up, right? And then, so one of the things that I was sort of trying to make popular was that, well, we can use this arbitrary block space to create sovereign roll-ups on Bitcoin. So that means, like, you take something like, let's say, for example, you take ZKSink and you look at what is it that they're putting into call data on Ethereum.

well, I should say in the blob space of Ethereum, you just take that and you put it into Bitcoin in the Bitcoin blob space. Now, you're not going to get like Ethereum nodes that are verifying those your knowledge proofs and making sure that that computation was done successfully. But you can have other nodes like external nodes that read the data out of the Bitcoin blockchain and you will get the ordering from Bitcoin and you'll get the data available data availability from Bitcoin and the persistence of data from Bitcoin. So that's what sovereign roll-ups are.

Many of those sort of Celestia's sovereign roll-ups work the same way. They become sort of their own layer ones, but they get so much of the properties of Bitcoin that this is now actually an interesting way to make. I wouldn't necessarily call it a layer two. It's a layer two if it aggregates, transaction in some like compactful way. So there are some people that are saying that if you use zero knowledge proofs with state diffs, now that's a layer too because you don't have

all of the transactional data. But in reality, like how state divs work, it's state divs only really compress the transactional data that you have to put on chain if it's sort of the same state that is getting updated multiple times in the same block. And a lot of times in, you know, blockchains, you know, you're sending money to Charlie. Charlie is sending money to Eva. Eva's interacting with a compound contract. Like, there's a bunch of things that is happening.

Not always can you just like compress all of that because like there's different states that needs to get updated. But anyway, you get some, you get some compression benefits when you have state diffs. So I guess you could call some of those sovereign roll-ups, like actual layer twos. Anyway, so started with Ornals, and then some people are starting to build sovereign roll-ups. Alpine Labs and Chainway are some of the teams that are working on Sock. Bison Labs is another one. And I'm an investor in Chainway and in Alpen Labs.

And I was sort of advising them to, well, you can't build your ZK roll-up right now on Bitcoin because we don't have these ZKP verifier op codes. But you can build a sovereign roll-up and make a vibrant ecosystem. And then by the time that we actually do have a way to verify serial knowledge proves on Bitcoin, you can transition. So that was that that's like mid-20203. And now now there's like, okay, we have ordinals and we have sovereign roll-ups. There's like a full Ethereum virtual machines running inside of Bitcoin that are serial knowledge-proven. This is what is getting like investors to get excited.

So even then, like in the middle of 2020, 23. people are getting excited about Bitcoin innovation in a new way because, and if you also think about it, like, all that, what was the reason for like, okay, so you have root stock and you have liquid on connected to Bitcoin through side chains. But what is the user base? Like, who's going to use that? There's traditionally been almost like no material usage on those chains. But if you see that super, like, if you see that very vibrant, ordinal activity, and you imagine

that, well, they're going to hit skillability limits. And also, the way that they're doing, and I don't know, so it started with NFTs on Bitcoin, but then that later gave rise to another thing, which was called BRC 20 tokens. I think you guys are familiar with those, right? Yeah. But the BRC 20 tokens suck. Like, I don't know. I don't know if you have tried actually to transact or sell a BRC 20 token.

It is the worst trading experience that existed in any protocol that has existed under the son of blockchain since the dawn of mankind. It is so awful. It is so awful because you have to sell. First of all, if I want to purchase on BRC 20 token, there's going to be listings like offers for sale. And I can buy 10,000 from that guy and 60,000 from that guy and 100,000 from that guy of these tokens. And then I have these like clumps of like piles of tokens. And then if I want to sell like five of those, then I have to make like a new transaction that slices up five from my existing pile.

And then I can sell that pile of five. But then the buyer who now wants to buy, let's see why he wants to buy three. He can't buy 3,000. He has to buy either my whole 5,000 pile or none of it. So it's like the tokens are fungible, but you have to sort of manually slice them up as pizza slices. And then they're like non-fundurable. Drew force fungibility. So that's how BRC 20 token trading works and still works this day on Bitcoin.

So everyone's sort of realizing that, okay, there's there's a lot of money here. But they're they cannot like we don't have, we don't have automated market makers either. Right. So we don't have like liquidity pools or anything. So the whole trading is like completely one-sided where there are offers, but there are no bids. So there's just one-sided liquidity marketplaces. There's no liquidity pools or anything. Really quick in the BRC 20 thing.

That was kind of like old tech, right? We had Casey, the creator of Ordinals and Roons on the podcast not too long ago. And so, like, very excited about the launch of Roons, which the TLDR from him was basically like Roons is a better version of a, you know, Bitcoin fungible tokens and upgrade from the BRC20. Are you also considering Rooms when you're talking about BRC20 or is that sort of, like is the new tech a lot better? So Rooms are better in the sense that they integrate with like traditional

Bitcoin wallets better. So a bit, so ruins are just UTXOs. BRC20s are not. BRC20s are like you have to go into the arbitrary data space of an inscription and then read a JSON and then you understand, okay, this person, owns that many of that BRC20. In Rooms, it's UTXO based. So if you own this UTXO, in the upper turn of that UTXO, it'll say how many of those

rooms that you own. So you can build like regular Bitcoin wallets that are only used to working with UTXOs. They can like own these rooms as pure UTXOs. So it becomes a lot more easier to build to integrate that with sort of traditional Bitcoin wallet software. However, the trading experience is exactly as shit as VRC20s. Oh, no. Yes, yes, yes.

I didn't realize that. So when you, so right now, Unisad is like the biggest market place for, for BRC20s and really. Actually, I think I'm like OKX. It clips it for a while. I think it might be back to Unisat marketplace at the moment. But, but as a user, as a technical person, you understand, well, Rooms have benefits. But as just like the retail user that's trying to interact with these tokens, it looks exactly the same. Like you still have to like, okay, I have to buy either like 1.5 million of this token or I have to buy 20,000 of this token.

And then I have to slice them up. So like the trading experience is the same. So it's actually, it's the exact same share that's just more, it just works better for people that want to integrate this with Bitcoin wallets. So runes are great. They're better. Like we love them. And the main reason that we love them is because BRC20s bloated the UTXO set of Bitcoin. So if you had, if you're if you're buying BRC 20 tokens, every time that you're splitting them up or sending them to someone else, the UTXSOSET just keeps growing.

And that's basically like the stakes or this, you know, yet that you have like problems with state bloat in Ethereum, like the state just keeps getting. bigger. In Bitcoin, yeah, our U-TXO set gets bigger also, but sometimes you want to take all your unspent transaction outputs and you want to send them to one person, and then it actually collapses. So the U-TXO sets tends to grow and shrink depending on people, like when people are sort of consolidating their transactions. But BRC-20 tokens had no consolidation mechanism. So it was just like, and if you look at these charts, up only with state, up only. And that means harder RAM requirements on on Bitcoin nodes. So it's actually kind of like an attack on the Bitcoin system.

Rooms avoid that because they are UTXO based. They can collapse and combine in the same way that UTXOs do. So they don't have that up on the UTXO problem. So, but they didn't solve the user experience. Yeah, they didn't solve the UX problem. Yeah, they didn't solve the UX problem. Sadly, they just solved, okay, now people are more happy. more happy with the growth rate of the UTXO set.

So we still, so the situation that we're in, that we have been in is that, well, now there's actually a need for layer two's on Bitcoin that can offload some of this UTXO bloat and Rooms trading. And you have seen the fees gone crazy on Bitcoin, right? There was a, I think there was a day that it was, of course, it was right. Right after halving, it was 78 million dollars. $80 million day, and that was a day where, like, Ethereum, just to give context, was like $5 million or something. So, like, actually, like, crushed Ethereum that day and fee revenue.

A single typical Bitcoin transfer was $170 or something for a short period of time. Yeah. So, I mean, doing this DGN token and NFT trading, right now is still small. So, like, sometimes the fees are low, but obviously this is not going to scale for the long term. So that is why VCs are saying that there's going to be a need for second layers on Bitcoin. So they're very interested in these sovereign rollups like, okay, how can they aggregate transactions with ZK? And they're even interested now in more fanciful versions of federated multisigs. So if you're not just like, so Liquid is an 11 out of 15 multi-sig on Bitcoin.

I mean, that's the predominant, you know, famous side chain on Bitcoin. But if you start doing something that's like a little bit more exotic than that, then Bitcoin VCs are now, okay, like, maybe this is interesting. And I think like the analogy that I'd bring is that, okay, so Polygon started out as a side chain to Ethereum, and they were Ethereum aligned. And then I think that they, I think Ethereum, the Polygon proof of, stake chain launched before roll-ups really even existed as a thing. It did.

Yeah. And then by the time that there were, you know, ZK and roll-up technology existed, they started to pivot to that. So I think that's maybe how the VC thinks that, okay, some of these things are sidechains. As long as they can get traction and momentum, they're going to be able to adopt any type of new technology for layer twos on Bitcoin that will emerge. Mantle, formerly known as BitDAO, is the first Dow-led web3 ecosystem, all built on top of Mantle's first core product, the Mantle network, a brand-new high-performance Ethereum Layer 2 built using the OP stack, but uses EGEN layer 2, but uses Eifforneau-Legener 2, built using the OPEs' data-a-fell layer-one, not only does this reduce Mantle network's gas fees by 80%, but it also reduces gas-fee volatility, providing a more stable foundation for Mantle's applications. The Mantle Treasury is one of the biggest Dow-owned treasuries, which is seeding an ecosystem of projects from all around the Web3 space for Mantle.

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And here's where the important part, the savior from the sky, which was this white paper called the BitVM. BitVM. We've heard so much about it. Yes. So BitVM posited that you could actually do arbitrary computation on Bitcoin. Sort of what I was talking about previously were, okay, well, you have basically a merklized state.

And if you transition to another state, you can sort of do these bisection games and identify this is the part where some computation went wrong. So like a fraud, an optimistic way of doing computation for Bitcoin emerged through this white paper. Well, it emerged as an idea through this white paper, and that is what people have been hacking on since October 2003. And what people imagined was that we could use this mechanism of BitVM to, if it has the ability to do arbitrary computation on Bitcoin and sort of optimistically verify that, then we should be able to build something like optimistic roll-ups, has been sort of what people have been talking about. With the caveat, so what people have considered is technically possible today with BitVM is, you know how Arbitrum has whitelisted, whitelisted entities that are, yeah,

whitelisted fraud-provers, like white-listed verifiers. So that is the, that is the technical states that people thought that you could get with BitVM. So it's not perfect. It's not like a permissionless, optimistic ruleup where anyone who can post a security bond can challenge an invalid state route update. So that's what arbitram promises once they remove this white list. That's what BitVM, or that's what Arbitrum and BitVM would promise is like... No, no, so Arbitrum promises that they're going to remove this white list.

But for BitVM, it's a hard constraint. It's a hard constraint. It's a hard constraint. That is not the only hard constraint of BitVM, though, unfortunately, as sort of we've discovered. Another, so BitVM, so the Bitcoin scripting language is just the same today as it was, you know, years ago. There's nothing new. Like, we don't have covenants. We cannot do finite state machines.

We could maybe inside sort of a state chain. channel resolve arbitrary computation optimistically through a complicated verifier challenger game. However, so one of the constraints is that when you do this on Ethereum, you have sort of an optimism, for example, you have sort of a chess lock, a chess clock dynamic where, okay, I'm going to assess that fraud was happened here. So this is the part of the transaction that I'm disputing. Now, the sequencer then in optimism has to prove, no, this is how I did the, so you sort of bisect down to the part where the computation was done incorrectly.

But they have sort of a chess clock mechanism where here's my proof. Now it's your turn to give your proof back to me. In Bitcoin, we don't have like chess clocks. So you have these like long time windows where. you can either within that time window post your, the second round in your multi-round fraud proof or not, which means that this dispute resolution mechanism in BitVM could, like the first versions we saw this would take six months. There's been some people that are now arguing that they can compress that down to four weeks. So where you guys are working with like seven

days, seven-day settlement windows, we're working with either six months, and maybe we can compress it down to four weeks. So we're struggling with like harder constraints on that side. The other thing that we're struggling with is that in order for this to work at all, you need to do, you need to set up sort of a stage channel between all the participants in the, between all the challengers and verifiers. Or actually, let's call them operators and verifiers. So that requires them to share pre-signed transactions that describes every single sort of state transition in the BitVM virtual machine.

And they have to share all those transactions with each other. So that's like a large amount of data that has to be shared between the participants of this game. and it makes it very difficult for other channel participants to join sort of the BitVM, the BitVM dispute resolution game. So it has clunkiness on the sort of the setup side, it has clunkiness on the challenge response side, but the primary clunkiness that was discovered to me quite recently because I was actually kind of bullish on BitVM. I've been writing, I've been writing tweets that are trying to describe,

like this is how we can do something that looks quite similar to, you know, some flavor of optimistic roll-up on Bitcoin. But there was a part of like when we actually got to the implementation stage. And when I say we, I mean, were the teams that are that, that, that have jumped up. And so the number of teams that are building on BitVM these days are Alpen Labs, there's chainway. Actually, Rootstock is doing that. Even Stax is doing this.

let's see, what are I forgetting? Well, basically your whole, the whole, the only exception is like Liquid is the only one that's not trying to do like the BitVM direction. Bison, that bit layer is another one. So if you see any fancy Bitcoin L2 these days, 80% probability is that they're building on BitVM. Or intending to.

They like explicitly say, hey, Bipm's not ready yet, but at some point we'll just move to BitVM. The one thing I want to add from, listeners too is BitVM, correct me if I'm wrong, Eric, does not require an op code change, importantly. Correct? Yeah, that's the whole.

That's the whole thing. Yeah. Yeah, that's the whole thing. Okay. You can do it natively on Bitcoin without anything. However, now we get to sort of the big problem, which I think might be an unsurmountable problem. The problem with BitVM is that,

so when you deposit funds to optimist, You send in, here's my $10,000 worth of ether. I send it in. And then when you want to withdraw, when you withdraw your funds, that's when you can do this fraud. Like that's when the, if the sequencer picks up the transaction and puts it into the state route, now there's an invalid transaction there. That's what you can do the fraud mechanism on. That's where you do the dispute resolution. It's on the withdrawal.

In BitVM, it doesn't work like that. In BitVM, how it works is that the operators, so the sequencer, can send, has to send the funds to the people that are owed these money. So if you say, I want to withdraw, give me my $10,000 worth of ether, then the sequencer will oblige and say, okay, here's your $10,000 worth of ether. And then he can reimburse himself with the ether that you previously posted. and it's the reimbursement that you can now do the fraud dispute resolution game on. What that means is that he cannot use the money that you deposited to pay you out. He has to front the money, that capital for your withdrawal, and then he can reimburse himself later. When the first time that I read that this, I thought like, okay, um,

He does a withdrawal and then he reimburses himself for the money and then he process the next withdrawal. But that's not how it works. It's a whole window of withdrawal that can be like, let's say, a week. All those withdrawals, he has to front. And then after a week's time, he can now reimburse himself. And so that got us a little bit because, I mean, at Tapperid Wizards, we also want to play around with L-2s. Like we also want to improve the current situations of the BRC 20 tokens, the ruin trading. We want to upgrade that and put it into environments where we can actually improve Bitcoin.

And we have like longer term like the vision that we at Tapwood Wizards is not, okay, let's enable a bunch of degen trading on on on like meme coin trading on Bitcoin. That's actually not what we want to do. We want to provide like a more scalable environment for Bitcoin, the Bitcoin asset itself and potentially add some type of serenol. your knowledge type cryptography to give privacy to Bitcoin, which we desperately need. Anyway, so we studied, okay, so how large, what could the net outflows of a big roll-up look like? So we did some analysis. We actually work together with data always on this.

I don't know if you're familiar with that researcher, but she or he does great research. And found out that in 2021, Arbitrum, within one week's. span had a billion dollar net outflow. And I think that was, do you remember, like, in the early days of Arbitrum, there was like a neon cat Ponzi that you could play there. Yeah, it was like the right after the Arbitrum made net, like the nylon cat Ponzi was like the first, like reason why so many people push money into Arbitrum because this Ponzi was going on. But then it, then it ran out like the, the game ran out because the token went to zero, because

there was like the APY that you were earning just inflated the token. So the token went to zero. So people were farming and selling the token and token went to zero. And now there was no longer any money to earn there. So all that billion of capital that had bridged into arbitram, they were like, okay, what's the next game that I can play? What other food token can I play? So this is not even like a malicious attack.

This is just like, we want to go somewhere else and have fun somewhere else. Okay, so imagine now that you're the arbitram operator, I got to find a billion dollars to just to, and so what happens that if you don't, if you cannot fulfill that, if you cannot fulfill that liquidity requirement in that week, what's basically, so what you can do, like, so there are people that are now in the BitVM. After we sort of brought this up as a big problem, they said, well, you can just, the role of the operator, you can just push that role. to another operator and give him a chance to fulfill the liquidity requirements. And you can just kick the can down the road. But if this is like too big of a liquidity crunch that no one is going to be able to solve, I don't know how it actually helps. Like, okay, we can't do it.

We push it over to the next guy. What are the odds that he says? Okay, I just happen to have like a billion dollars. I can resolve this. So one of the main features of a layer two is that it allows many, many, many people to be aggregated all at once. And I think what you're saying is there's a fundamental problem here when there are many, many, many users of a layer two, but there's a single operator who's responsible for that withdrawal. And so that one single operator, if this layer two gets successful enough, they are, no matter how size their size is, they will still be overwhelmed by an eventual success scenario, which is that layer two has so much capital in it that eventually there's going to be a moment in which a lot of capital would like to outflow.

and that one single operator can't be a sufficiently large market maker to satisfy the outflows out of that layer two. Is that kind of the problem statement? It's like a liquidity crisis, right? It's liquidity crisis. And so what can happen in that situation? Like if you do what the current like BitVM implementers say, well, you just push the can down the road

and you give the rule to someone else. At the end, if no one can fulfill this liquidity crunch requirement, what happens in the best case is that you put it all, all the funds into a multi-sig, and now the multi-sig can distribute the funds to the participants without, like they actually just receive all the money from the roll-up, and now they can, if they're honest, they can now send the funds to whoever owes them.

But it actually just puts the hand in the full control of the multi-sig. And I mean, so you could argue like, okay, Ethereum has these kind of issues too, like with the security councils, But, I mean, at least in Ethereum, we can move away from that. And the security councils can have time delays before they can take the funds. So this is like the final, this is the bestest we can do. We can have an operator that has these upfront liquidity requirements.

And if you can't fulfill them, it devolves into a multisig. And you can argue here that, okay, why did we do all this complexity with all the challenge response games and all the liquidity? if it all devolves into a multisig in the worst case, and sort of we are sort of, we have to build these systems with the worst case as the assumption. Because if you're a George Soros type attacker, you can just force this to happen. You can force it to happen too.

So then multi-sig is ultimately the underlying security model. It seems like a pretty anti-climactic conclusion for a ton of technical research to make the BVM happen. It gets worse. It gets worse. It gets worse because even if there's not a liquidity crunch, even if it's happy days and, yeah, I can satisfy, you know, $50 million worth of withdrawals, like I'm capitalized.

I have VC funding and I'm using. But imagine how capital inefficient that operator is that he needs to have $50 million of capital that he's rotating. Non-productive capital. Non-productive capital that he cannot like so. He, ultimately needs to charge higher fees from his customers in order to make it work. Like, in order to pay the interest that he has on that capital that is probably borrowed,

then he has to make sure that he earns enough in his role as operator to make his business, you know, work. Or you could be like fractional reserve, I guess, and just like face a possible run on the chain, basically. And then if there's a run on the chain, then everything goes into like, I'll call it, bankruptcy court, which is like this kind of multi-sig for redemptions, I said. I am talking about the fractional reserve situation, but even that fraction that fraction that he has to keep on hand is going to be... Yeah, a lot. 10% at least, you know?

Yeah, yeah, it's going to be a lot of money. Like, how much capital is in arbitram these days? Like, we're talking about billions. 15 billion. Yeah, so are you going to want to keep $1.5 billion at hand? again non-productively yeah anyway so my when I'm and and and the liquidity crunch issue is not the only problem that I'm thinking about I'm also thinking about well you have this constraint of who can be a participant like who can be a verifier it's like it's more like a stage channel than like an

open system where anyone can sort of participate in there's been a new paper called bit VM version two which I've heard from the people that work on it it's still kind of impractical And then you have these setup phases and you have this very long, drawn-out challenge response games that take four to six weeks. And if you're running by the model where you're delegating this liquidity crunch problem over to someone else, to someone else, to someone else, let's say you have a hundred different operators that stand in line to take over this responsibility and they all have a week on them.

Now we're talking about like a hundred weeks before it even devolves to a multi-sig. So I would rather have a multi-sig that just always works with a different. minutes notice, then potentially having a system that runs into liquidity crunch, keeps my capital away from me for 100 weeks, and then devils into them. A multi-s think that always works is called a side chain, though, right? And we already have those. Yes. Yes.

So I generally think like the people that went into BitVM, they did this with the best intentions. They're just trying to be, they're honest good builders. They're just trying to make the best that they can with this actually pretty brilliant, pretty awesome new type of way of resolving arbitrary computation on Bitcoin. But as we get closer and as we start to understand these restrictions, it's starting to look like something that maybe isn't, it sucks to say, like maybe isn't that much better than, like maybe, maybe just build a really, really good multi-sagin with like loads of signers and like you can have a large validator set and then you can do

like subcommittees that sign things randomly assigned committees to sign things quickly so they functions like for example that's what I think what Botanics does that is what the guys that you mentioned that the guys are just spinning up their system I think that's what the mezzo like TBTC

people are doing with these very large multi-six sets yeah so the so the bitcoin l2 space like where are we with all of this i yeah because like it seems to be that the bitcoin layer two space is going to be built no matter what like technical constraints aside like that ball is rolling like they're already committed builders here there's already like vc interest in there so like the the bitcoin layer two landscape is going to happen it's just a matter of just like what does it look like on the end of it why why do you say that david why do you think it's going to happen. Is it sort of the case that now all of these like rollups are are being developed

in layer two are getting invested in? And it's like even if BitVM proves to be sort of a dead end, right? Like kind of the worst comes true here. Then they'll still force like political change and the op codes that Eric was talking about at the beginning of this episode to be pushed through. Why do you think it's not necessarily? I just think that like there is enough like Eric's like going through the arc of Bitcoin history with ordinals and ruins and then like the the, the constraints of the supply blocks based on the Bitcoin layer one. All of that was to, like, in my mind, was to express the need for Bitcoin layer two's, right? Like Bitcoin needs layer two. We've got, we've got ordinals, we've got runes. We've are seeing up only interest in building

on the layer one, which therefore creates the need for Bitcoin layer twos. And now also there has been just like an ecosystem of many, many, many Bitcoin layer twos across a broad spectrum of quality, like some like thinking about how to do this on the most technically advanced frontier possible, the high quality ones, and then like some on the opposite end of that spectrum, some vaporware kind of stuff, and like everything in between. So like this, but this whole ecosystem is now a category. There's like been venture investment in these teams. There's committed builders to building a product that they are calling a Bitcoin layer two to do Bitcoin things that settle on Bitcoin. And so like it's, I think the ball is just rolled at this point. And so like we're

going to get some set of products on the other side of things that look and feel like Bitcoin layer two's. And it sounds like, according to Eric Wall's constraints of the Bitcoin, the Biviam, that there will be needing to be some shortcuts being taken. And now it's a matter of just like what does the market feel as like satisfactory shortcuts? And what can they get out of that? Yeah. I hear what you're saying here. And like obviously Eric can kind of answer this. But I guess to all you're saying, David, it feels like a narrative is here and building is happening. But from what I'm hearing is there's like this technical brick wall, which is, means all of the layer twos will like hit that brick wall and they can't have like a full layer

two yes they could have a sovereign roll-up yes they could do a side chain with a super secure multi-sig but like you can't be an ethereum layer two style roll-up with with fraud-proofs etc on chain yes yeah but also at the same time we don't even have ethereum style of roll-ups in the ethereum ecosystem perfect on 105x5 yes thank you thank you for making my point for me Sorry for that sidebar, Eric. I think, David, you've gotten smarter over the years or something. I swear to God, I've always been this smart. Yeah, it was ever since your headlocked.

You know, you just choked some sense into them. No, but I think David is completely right in that, you know, ordinales, demands for L2s, the ball is rolling. There are teams that are raised. there's this, there's this fantasy of BitVM coming in and like creating actually permissionless and trustless L2s on Bitcoin. Like the man is here and there's VC funding. And so like the VCs, like I don't know.

So I don't know how much these VCs care. Like they could, the VCs can say, well, I don't actually care like how much your BitVM bridge sucks and how much you patch it up with multistics that you hide. Because if we say, Yeah. If we say that this is a Bitcoin L2 that uses Sikaproof somewhere and, you know,

uses K proofs for aggregation in some part of the stack and, you know, uses a bit VM thing, something over again. Even if it also, take stacks, for example. Stacks is like a billion dollar, a billion dollar like multi, like I think it's like, market caps like four or six billion dollars.

Stacks is like, you know what happens? I don't know how much time we've left of this episode, but I can go into like a small detour into... I want to know, like, if Stacks a real layer two, an Eric Wall definition of like what we described layer two or not, and does they have a path to become one? Yeah, so it's kind of funny.

So the short answer is no, absolutely not. Okay. So what happened with Stax was that Stacks had this consensus algorithm them called proof of transfer. And how it worked was that people who owned Stax token could stack them. And then other people would send the Bitcoin to those people and win the right to create a Stax block and earn the Stax Block reward. So they were basically bidding for Stacks, for the Stax block subsidy, and also for the right

to make a Stax block. However, since this is happening inside a Bitcoin block, it's completely possible for the miner to just censor all the bids for the Stacks block reward and just send their own like one Satoshi bid and win the entire stacks block for nothing. And this was actually happening. So F2 pool were completely fucking stacks over and just picking out the Stacks blocks reward and didn't give a shit about Stacks. So Stacks has needed to fix that problem by completely revamping how sort of finality works

in the Stacks blockchain. And they're calling that Stacks Nakamoto. They're using like signers to basically checkpoint, which blocks are the valid ones. They're using both like mining and stacks. It's a little bit complicated. But basically they're trying to like fix this problem of, okay, our shit was completely vulnerable to minor manipulation. So they're rebranding stacks into something that's called Stacks Nakamoto now. and because they have had to halt fix this problem in what I would describe in kind of an ugly way,

they're calling now stacks an L2. We fix this finality problem with our blockchain, and now it's an L2. Even though, like, even if you read the white paper itself, they outline, like, these are the requirements for a real two on Bitcoin to exist. It requires the ability, and maybe I should have said this sooner, what is the definition of an L2? in my opinion is the ability for a user that has deposited funds into the L2, to have the unilateral right to pull those funds out whenever they want to. That's an L2. Agreed.

And I will say that's the Ethereum definition of an L2 as well. And sometimes that gets abused in the Ethereum world. I'm glad that you said that, Ryan, because I've seen people all over the Ethereum space that are like, oh, well, L2 L2. Yeah, but I agree. That should be the, like, how we define L2. And we can call those other things, other things. But yeah, that's my definition of an L2.

And if you read the Stax Nakamoto paper, then they do admit that they have made no strides and no progress towards like enabling the ability for you to unilaterally withdraw your funds back to the Bitcoin chain. So no, Stax is not an L2. The BitVM things, like, I don't know if they're L2s, but they have this liquidity crunch constraint that pushes them to multi-sig in worst cases. So to answer your question, we don't kind of have L2s on Bitcoin. And as you say, there's sort of a technical brick wall here.

And the thing that we need, and actually what the Bitcoin industry is working towards is we need covenants. We need covenants because covenants allow us to create finite state machines. And if the covenants that we chose within the Bitcoin community was Kat. cat is a covenants upcode, then we could do these Merkel tree verifications as a side bonus that actually allows us to build actual layer twos on Bitcoin. So no, Bitcoin doesn't really have practical or functional L2s at the moment. We need covenants, recursive covenants, and we need Merkel tree verification. Katz is one of those off codes that gives us both. And that is why,

I used to be arbitram delegate. I'm a board member of the Starknet Foundation. I'm an optimism delegate. I'm actually one of the largest arbitram delegates. I had no idea. I've been dedicating, because I came from the Bitcoin space, and I wanted to build better layer twos than what Lightning Network could provide because I think in a layer two how it should work is that you give me your address and

I'll send you funds. That's how the dynamic should work. That's not how it works in Lightning. And I think that Lightning is not going to be very successful. If you tell me that, well, you can't send me funds yet. I'll have to go and borrow funds from David so that they have enough inbound liquidity to receive those funds. You know, crypto has UX challenges enough as it is, like for people to manage private keys and all that. You can't add, the second layers cannot add more UX challenge.

and think that they're going to be more successful than the layer ones are. They have to reduce the technical challenges that people face. And Lightning, unfortunately, added a bunch of technical constraints. When I was young, when I was naive, I thought that would make it work because decentralization is so important. Now I feel like if your system is so decentralized that the UX sucks so that everyone uses custodial solutions instead, you have actually done a worse job at creating decentralization because there's so few people that actually use it. So that's sort of the adult take that we've come to.

So anyway, I roll-ups, I think, are the types of, even though I have my reservations with how the fragmentation, I know you guys had an episode with Justin Drake not long ago about how we're going to solve fragmentation issues with shared sequencers. I pray to God that that works and it doesn't take like three. three years and then we figure out that it's like charting. And, you know, my hope is out there that we're going to solve that. But just one single roll-up alone is still a much better layer two solution than what lightning is. And that's the direction that I've been wanting us to go towards.

So, like, no one, you know, I've wanted this as badly. I really want layer two solutions to work on Bitcoin. Like, I'm not here to try to, if we could do them, Like if Tapper'd Wizards could just spin up a bit VM roll up and it's going to work awesomely, we would be doing that right now. But there is no shortcuts here. We need covenants and probably we're going to need a way to do CTP verification also. If all the people that are like genuine about wanting to build proper L2s on Bitcoin,

if we like sort of band together and get this cat opcode through, then I think we're actually in the clear, then we don't have that much to worry about. So that is what we're fighting for at the moment. And I don't think that, you know, so this BitVM stuff that people are working on, there's not a finished implementation for that. Like that is, I would classify BitVAM as sort of like a school experiment or something like that. It's going to take years to really flesh that out into like a production grade system

that people can work with. The path to activating cat might be a shorter way than that. So if you were an L2 builder in the Bitcoin space, the fastest way for you to actually get a proper permissionless bridge, a proper two-way peg without any liquidity constraints, and that doesn't have these weird setup phases or weird channel-based constraints where there's a limit on who can do fraud proofs,

then getting cat activated is probably what you should be focused on. So that's sort of the message that we're trying to, if we can get all L2 builders on this goal together, then we're good. Otherwise, I'm not so sure. We might be in a situation with like Polygon POS is the side chain to Bitcoin for, I don't know how many years. There was one other thing I wanted to say also, which is I think that the people who are building on BitVM now, I would classify them as earnest, genuine, talented. Some of them are extremely smart, extremely capable, and just good, honest people that are trying to make this work.

We haven't touched at all on like the whole scam side of Bitcoin L2s. Because ever since the BitVM paper came out, there's been the Bitcoin space has been awash with complete scam projects. I'm not sure if I shouldn't name their name specifically because I'm going to have them up my ass for the next couple of months if I do. But there are one, okay, one obvious one is like the one which was called Satoshi VM. They just said like, we're a bit VM. They had some white paper that described something about BitVM. The white paper made no sense.

The token launched on Ethereum. And it actually trades now. You can search for it. It's S-A-V-M is the ticker. And it's just like a complete scam ticker has nothing to do with Bitcoin whatsoever. Another one is called Merlin Chain that actually like copied a lot of the, you know how the sort of brand of Tappert Wizards is let's make Bitcoin magical again. And it's about Wizards. So they just created Merlin Chain.

It has like a wizard symbol. And their tagline is let's make Bitcoin fun again. And if you go to their. tactical docs try to figure out like what is this. It says that it's a polygon ZK. EVM Bitcoin layer two that uses Celestia as a data availability layer. But if it's a polygon ZK.EVM that uses Celeste as the data availability layer, how is it using Bitcoin again?

And then in some like if you'd read further into the docs, it says you'll find like cropped out screenshots from Robin Linus. a BitVM paper somewhere where they're just, oh, you can use NANDGates to do arbitrary computation. This is like future research. But in terms of what actually exists on Bitcoin is just, it's just an address that you, it's just like a wallet. You just send Bitcoin to someone's wallet. And they call that like, they actually do call it like a Bitcoin ZK rollup, which doesn't

like technically exist at all. And there's a bunch of them. There's BVM, BVM. And if you go to these Twitter profiles of these accounts, you'll see that they have like 250,000 followers and 10 million transactions and 1.5 million daily users and 700,000 active wallets. And, you know, these numbers don't make sense at all for a wide category of these so-called Bitcoin L2s. So unfortunately, like the Orrinals hype and the BitVM paper just gave.

scammers they understood that okay there's demand everyone's looking for what's the new Bitcoin Day or two going to be and the whole you know the whole Bitcoin space

is unfortunately awash with these scams at the moment where people are just pretending to be like fully fledged BitVM L2s but they haven't done data like I said BitVM doesn't even exist yet

there's no there is no canonical there's a few projects that are trying to implement the stuff that Robin Linus has talked about. Robin Linus himself is trying to build a reference implementation. It is not finished yet. So no one really knows how any of this is

supposed to work. But there are a bunch of projects that have started to scam and saying that that technology is already complete. And they have tokens that are trading on Ethereum that are trading at everything from like 70 to $250 million valuation. So that's

like one of the negative sides of this excitement that has also happened. So my point was basically to say that, yeah, there are some BitVM builders that are struggling right now, but like it sort of feels unfair to like criticize them when there's a larger group of just pure scammers that are, that are, you know, grifting this space at the same time. So it is a difficult, like what I want to to say to like people that are listening to this, be extremely cautious to anyone that says that there are Bitcoin L2, try to understand what it is that they have implemented, what exists in open source code that you can look at. I know that most people don't do this research, but if there's any space that you need to

be very cautious, it is currently the Bitcoin L2 space. It is a complete mess. Gamers and fraudsters are actually a byproduct of an actual growing and real ecosystem. So there's actually like some symptom of success here. I know, Eric, you've been with Bitcoin since like the early days. back before the Bitcoin dark ages, I'll call it, back before like the monetary maximalist, like Laseride Maxis really gained control. And I think this is where our very first episode with you kind of talked about that

change in Bitcoin culture. But now we're seeing it kind of shift back to, I think, a more familiar territory. And despite some of the challenges that I think you've illustrated here on the episode today, the fact that there are challenges in Bitcoin that people are working to, to overcome is like extremely refreshing and very optimistic. So overall, just like, how would you rate the health of the Bitcoin ecosystem and your perception of its direction? Yeah.

As much as these Bitcoin L2s have problems, I am so thrilled that we have Bitcoin L2s with problems rather than just having lightning that everyone says is amazing and is going to solve everything. If I had to choose between either of those two things, I would much prefer the reality where there's tons of teams, smart people that are aggressively trying to bring better layer 2s into existence. So, I mean, what we ultimately need for Bitcoin is,

we don't, actually, I'm not that convinced that we need to take, you know, everything that Ethereum has done and put it onto Bitcoin. Like, why? You can go and do that on Ethereum. If you definitely, if you, you know, if you really, really need to do, like, decentralized lending and decentralized trading and all that, just go do that on Ethereum, get a reasonably secure pegged-in Bitcoin, pegged-in version of Bitcoin and do those activities

on. We don't need all of the Ethereum stuff to exist on Bitcoin. I don't think so. But what I do know that we do need, we just need a way for me to be able to send Bitcoin to you in a scalable and private fashion, just so that Bitcoin as a currency works. And everyone is believed that that would be lightning, that Lightning would solve those problems. And the same way, you know, same way that I was bullish on BitVM initially. I was bullish on Lightning initially too.

But, you know, Lightning developers are also coming to the conclusion that these channels that were trying to scale Bitcoin through have constraints with inbound liquidity, the user experience as much as we're trying to patch it up, some problem appears somewhere else in the system. It's like a balloon that you're trying to squeeze out the water of and it just pops up somewhere else. That's sort of how it works when you're struggling with the lightning design space. I think that lightning developers are at the stage now where they're, where they would happily say, we want our next upgrade of lightning to not use channels at all. So if that gave them like a convenient doubt of not saying, okay, lightning network didn't work.

Like, we have a new version of lightning that doesn't use channels. It uses the state route updates and either ZK proofs to make sure that those state troop updates are correct or some type of optimistic challenge response. So basically roll-ups, but let's call it lightning. So, but yeah, I think the Bitcoin ecosystem has woken up to the idea that lightning is not going to work. So that's why everyone is trying. You know, so a lot of the hardcore, the hardcore Bitcoiners.

There was a white paper that came out for something that was called ARC. And I don't know, you guys maybe didn't pay attention to this, but there was a massive interest in ARC. And if the reality of the situation was that everyone in Bitcoin was happy with lightning, why would everyone throw themselves to this new protocol called ARC, which claimed to have solved some of the inbound liquidity issues of lightning or some of the other issues of interactiveness of lightning? Obviously, there is this big pent up realization now that maybe getting lightning to work in a decentralized way is not where we're going to end up. We're going to end up. We're seeing like you just have to look at the data, like custodial wallets rule the day.

90% of lightning users use custodial wallets because it's just so much more convenient. And that is such a sad outcome. So we know that Bitcoiners as much as they don't want to read, when I admit that sometimes that lightning has been a failure. we see themselves throwing in themselves at things like arc, like anything that that is different or that is better. So yeah, the overtone window has changed to, we need better second layer solutions on Bitcoin.

And I think that with enough people with grit and will and desire, we're going to get there. Well, Eric, it's always fascinating having you on in both your commitment to technical assurances offered by cryptography and the way that they are just leveraged, across the space is always just a fascinating learning lesson and also there's a good reminder of like some of the history of this space so thank you for coming on and kind of updating us on the progress of bitcoin and as bankless listeners might have been able to tell like we've been doing more

bitcoin content lately and that's because of some of the technical unlocks that eric has been talking about here on the show today and a much more like optimistic and bullish frontier than we've seen in the bitcoin world than we've ever seen before so eric thank you for coming on the show today Thank you. And David, is it the 30th of May that you're going to be in the ring? 30th of May, that's right. Yeah, are you going to be at consensus? I'm going to be in the audience. I'm going to be, I'm not going to be rooting for you. You know, Nick is one of my best friends, but I will. You have a sigh, Eric. Wow. Wow. Okay. This is, we're talking about the 30th of May.

No, no, we are friends. And I hope you guys have a great fight and you both get to like show your muscles. And I hope you fail in a non-embarrassing way. Do you have money on the other side of my polymarket? I cannot. I'm not going to... He doesn't want to tell the markets. Oh, that's right. You do.

You do. No, no. Oh, I forgot about that. No, no, no. I love Nick and I'm rooting for him. I think you have a decent shot, though. Eric, let me ask you, though. You're a betting man.

I know you. Okay, so if David wins, will you shave your head again? No. No comment. All right. I'll take it at Twitter. All right, Bankless Station, you guys know the deal. Crypto is risky.

Defi is risky. Layer 2s are risky no matter what layer 1 they settle to. But we are headed west. This is the frontier. It's not for everyone. But we are glad you are with us on the bankless journey. Thanks a lot.