Why Bitcoin Scaling Reduces Decentralization

Scaling layers like Lightning Network and sidechains rely on a small set of watchtowers and validators to secure funds and process transactions, creating single points of failure and censorship.\n- Lightning requires ~1,000 highly connected, well-capitalized nodes for efficient routing.\n- Federated sidechains (e.g., Liquid Network) are secured by a 15-member federation, a clear trust trade-off.

Proposed Bitcoin rollups (e.g., Citrea, BitVM) will inherit Ethereum's MEV problem, where centralized sequencers can front-run and censor transactions for profit.\n- Ethereum rollups already show >80% of sequencer market share controlled by a few entities.\n- This creates a financial incentive to centralize block building, undermining permissionless participation.

High-throughput chains and validity proofs require cheap, abundant data posting. Relying on centralized Data Availability Committees (DACs) or a single external chain (e.g., Celestia, Ethereum) recreates a central dependency.\n- Bitcoin's 4MB block limit forces scaling solutions to store data off-chain.\n- This shifts security from 10,000+ Bitcoin nodes to a handful of DAC members or a separate validator set.

Scaling via federated sidechains or centralized bridges (like Wrapped BTC) reintroduces trusted third parties. Users trade Bitcoin's base-layer sovereignty for speed, creating systemic counterparty risk.

• Custodial Risk: ~$10B+ in BTC is locked in centralized bridges and custodial L2s.
• Settlement Finality: Assets on L2s are only as secure as the bridge's multisig or federation.

High-throughput chains like Liquid Network or drivechain proposals create richer, more complex transaction environments. This attracts sophisticated bots, enabling MEV extraction that centralizes profit and disadvantages regular users.

• Profit Centralization: Top 5 entities capture >60% of MEV on Ethereum; Bitcoin L2s will follow.
• User Cost: MEV results in worse execution prices and front-running, negating low-fee promises.

Solutions requiring fraud proofs or ZK-SNARKs (like Stacks or Rootstock) shift trust from miners to a smaller set of attesters or provers. Running this infrastructure demands specialized hardware and expertise, leading to oligopoly.

• Node Requirements: ZK-provers require ~128GB RAM, pricing out individuals.
• Security Assumption: Validity rests with a handful of entities, not ~1M Bitcoin nodes.

Each new scaling solution (Lightning, Liquid, Sidechains) fragments Bitcoin's liquidity across isolated systems. This reduces capital efficiency, increases arbitrage costs, and creates winner-take-all markets that centralize around a single dominant L2.

• Capital Inefficiency: Locked capital can't be used across chains simultaneously.
• Network Effects: Liquidity begets liquidity, dooming smaller L2s to irrelevance.

Increasing block size is the naive scaling solution, but it directly attacks decentralization.\n- Node Resource Burden: A 10MB block requires ~100x more bandwidth and storage than a 1MB block, pricing out home operators.\n- Centralization Pressure: Validation becomes the domain of professional data centers, moving towards an AWS-for-Bitcoin model.

Solutions like Lightning Network and Stacks outsource execution, creating new trust and centralization vectors.\n- Watchtower Reliance: Users must trust third-party watchtowers to monitor for fraud, a role that naturally consolidates.\n- Validator Centralization: Sidechains (e.g., Liquid Network) use a federated multi-sig model, a clear regression from Bitcoin's permissionless consensus.

Rollups (e.g., BitVM) promise scaling but hit Bitcoin's core constraint: no native data availability layer.\n- Cost Proliferation: All transaction data must be posted to Layer 1, making fees scale with adoption and defeating the purpose.\n- Custodial Bridges: Moving assets to L2 requires trusted bridges, creating single points of failure and censorship vectors like in Ethereum's early days.

Higher throughput exacerbates existing mining centralization. Larger blocks increase orphan risk, favoring pools with superior network topology.\n- Hashrate Consolidation: The top 3 pools already control >60% of hashrate; faster blocks strengthen their advantage.\n- Geographic Centralization: Mining follows cheap electricity, leading to jurisdictional risk, as seen in China's 2021 ban.

High-throughput scaling floods the network with Unspent Transaction Outputs, degrading node performance.\n- State Bloat: Each UTXO must be tracked by every full node. Millions of micro-UTXOs from scaling solutions cripple validation speed.\n- Sync Time Death Spiral: New nodes take weeks to sync, further disincentivizing participation and increasing reliance on light clients and trusted checkpoints.

Scaling requires soft-forks (e.g., Taproot, Schnorr), but Bitcoin's extreme conservatism makes upgrades slow and contentious.\n- Innovation Lag: Competing chains (e.g., Solana, Monad) iterate faster, forcing Bitcoin scaling into off-chain ghettos.\n- De Facto Governance: A handful of developers and miners effectively veto changes, creating a centralized bottleneck for scaling improvements.