Today, a week after Ethereum co-founder Vitalik Buterin doubled down on his belief in rollups, I hoped it might be useful to provide an introduction to the technology behind rollups and the different approaches used in their implementation.

So, as defined by the Ethereum Foundation, rollups are a solution for scaling Ethereum that performs transaction execution outside of the network’s layer 1, yet posts the transaction data to Ethereum and inherits its security properties. In short, rollups make Ethereum transactions cheaper without significantly sacrificing the inherent security of the base blockchain. It's important to note that not all rollups are built the same; the most popular implementations have very different security models and user experiences.

Optimistic rollups

Optimistic rollups do not do any computation by default; rather, they assume all state changes are valid (hence optimistic) and post the off-chain transactions to Ethereum’s layer 1 as calldata. In order to protect against fraudulent transactions, the rollup has dispute periods in which any third party can publish a fraud proof. The fraud proof will cross-check layer 1 and layer 2 and confirm that all transactions are valid. If not, the invalid transactions and all following affected transactions will be reverted. Arbitrum, Optimism and Metis are a few of the protocols implementing Optimistic rollup technology to create a full Ethereum Virtual Machine (EVM) environment with user experience being a cheaper and faster version of mainnet.

Optimistic rollups do not largely change the trust assumptions of Ethereum, as any user is capable of running a sequencer (Arbitrum full node) that processes transactions and allows users to withdraw funds to mainnet. Sequencers are required to put up a “fidelity bond” on mainnet, thereby creating a financial incentive to be truthful. If another user disputes the sequencer’s transactions, and they are found to be dishonest, the fidelity bond is paid out to the disputer. Financial incentives and multiple sequencers will allow the layer 2s to have strong uptime performance and lean on Ethereum’s security without the concern of interference.

By socializing gas cost across bundled users and only posting calldata to mainnet, Optimistic rollups are able to achieve transaction fees 10-100x cheaper than the corresponding transaction on Ethereum layer 1. These fees will continue to get cheaper as data storage is optimized on mainnet for rollups and sharding, splitting the network in multiple chains to relieve congestion, is eventually implemented.

Zero knowledge rollups

Zero knowledge (zk) rollups bunch together hundreds of off-chain transactions using extensive computation and post them bundled to mainnet in what is known as a “validity proof.” The validity proof is the already computed state of the layer 2 that is sent to mainnet for storage, which contains much less data than the calldata used in Optimistic rollups. Starkware, Polygon Hermez and zkSync are a few of the first implementations of Ethereum based zk rollups creating low cost, application specific layer 2s.

Since zk rollups are so computationally intensive, it is nearly impossible to recreate the full EVM environment that layer 1 and Optimistic rollups are able to run. Therefore, this scaling solution is confined to single types of transactions and cannot host a wide variety of projects on a single network. However, since zk rollups compute and verify transactions on their own, the technology is able to offer fast finality and transaction costs that are significantly lower than Optimistic rollups and magnitudes lower than mainnet.

Which rollup will win?

The transition to rollups is still at an extremely early stage, with the most activity still seen on Ethereum mainnet and a handful of alternative layer 1s. Until large liquidity providers and developers decide to move capital and protocols over to rollups, it will be difficult to say which solution is favorable. Obviously it may not be a binary answer, with some applications favoring an application-specific chain and others favoring full EVM compatibility and the surrounding composability.

As of today, protocols have appeared to favor Arbitrum, which falls under the Optimistic category. Arbitrum has gained $2.3 billion in total value locked (TVL) according to DeFiLlama, making it the 10th largest individual chain. DyDx however, utilized zk rollup technology to enable leveraged derivatives products that gained massive traction earlier in 2021. The application has nearly $1 billion in TVL alone and noted that they chose Starkware’s ZK technology for its further commitment to decentralization and user experience.

ETHDenver

To get a better understanding of where Ethereum is moving next, I will be attending ETHDenver later this week! If the panels and speakers are any hint, layer 2 development and the transition to proof-of-stake will be on the agenda. I’ll be sure to outline the significant takeaways in articles this weekend and in next week’s edition of the newsletter!

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