(Almost) Everything about Rollup

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0. Essence and Principle of Rollup

a) Essence of Rollup

  • On-chain smart contract, which means that its trust model is a smart contract on Ethereum, that borrows the security of Ethereum, rather than requiring a new trust consensus like other Alt L1. We can trust Arbitrum’s protocol in the same way that we trust Uniswap’s protocol (which is a smart contract at its core).
  • Off-chain aggregator, which means it will execute and aggregate transactions off-chain, compressing large volumes of transactions and eventually putting them on the Ethereum mainnet for the purpose of making transactions faster and cheaper.

b) Mechanism of Optimistic Rollup

  • Optimistic Rollup has a dispute validation cycle, which means that the data will not be finalized until, say, a week after it is uploaded, during which time anyone can challenge it and prove that the batch is incorrect.

c) Mechanism of zk Rollup

  • Prover (or sequencer in most cases) generates unforgeable proofs of the execution of transactions, proving that these new states and executions are correct. Sequencer compresses the proofs and other data and submits them to the smart contracts in the Ethereum mainnet for verification.
  • Rollup can be compressed in terms of the number of bytes per transaction, including nonce and signature, etc. For zk Rollup, it can further compress the data that is not relevant to the state update, because zk proofs can already prove the correctness of the state update, while Optimistic Rollup cannot ignore this data because it needs to be able to be challenged.
  • Because in order to prevent sequencer escapes, we can rebuild the entire Layer 2 from data on Ethereum. This relates to the concept of data availability.

d) Differences of Two Types of Rollups

1. Rollup, the Good

  • Ecosystem: Arbitrum had the NFT and Metaverse ecosystems; Optimism has issued the token, and had the governance and community; StarkNet has a variety of GameFi innovations in the works; zkSync has a number of new DeFi projects. Each Rollup stands on its own.
  • Scaling: Their TPS is indeed excellent, though not as high as the theoretical peak, but the fast confirmation of L2 provides a fast and almost feeless Web3 experience.
  • Experience: Switching to Rollup is a simple task for developers and users, and the experience is almost identical to that of Ethereum. Various cross-chain bridges, wallets, Uniswap and other infrastructures also serve for a smooth user experience. This is also supported by a good ecosystem.
  • Innovation: Rollup is already an excellent ground for innovation in EVM applications, and is also more imaginative than Polygon’s “test network” style network.
  • Arbitrum: TVL is around $2.4 billion. The Nitro upgrade is now live on the test network, and will replace Arbitrum’s existing VMs with WASM-Geth, optimizing performance and adaptability. (We can talk more about the potential of WASM in a later article)
  • Optimism: launched token, on which many “groundbreaking and incredibly optimistic experiments” have been made (with all sorts of missteps, concealed facts and indifference, and recently often questioned by frustrated users as “the abolitionist prince of the Ethereum Foundation”). The Bedrock upgrade will make the VM MIPS-Geth, doing the same thing as EVM. Optimism developers have also been talking about the zkMIPS concept, so I wonder if they’ll work in that direction later?
  • StarkNet: The cross-chain bridge is not fully open yet. Cairo and StarkNet have built a good development ecosystem, and the game ecosystem is worth watching. StarkEx’s Validium model has also made applications such as dYdX, ImmutableX. StarkNet can also serve as a settlement layer and build L3 on top of L2.
  • zkSync: The first to make a more complete zkEVM. 2.0 version of Volition mode gives users the flexibility to choose between zkPorter or Ethereum data availability options.
  • Aztec: Privacy zk Rollup for the UTXO model, soon to support the privacy DeFi ecosystem (but additional optimizations are needed due to the large transaction data size). Although it does not support universal computation, it is one of the few zk Rollups that is truly zk.
  • Fuel: V1 is an Optimistic Rollup, and very decentralized. Instead of adapting EVM, V2 is a high performance VM with a UTXO model to support parallel tx processing, aiming to build the fastest execution layer.
  • everPay: A Layer 2 on Arweave based on SCP Paradigm.
  • Milkomeda: EVM Rollup on Algorand.
  • Orbis: Validium Rollup on Cardano.

2. Rollup, the Bad

a) Centralization😱

  1. zk proofs in zk Rollup cannot be falsified mathematically.
  2. Users can reconstruct all states by DA on L1.
  3. The trust model itself is always a smart contract that can be centralized.
  • Centralized sequencer: Most of the sequencer for Optimistic Rollup and zk Rollup are centralized. This means that the execution of tx, sequencing, and production of blocks are all supported by a centralized server. Previously Arbitrum was down because of sequencer hardware problems…
  • Centralized upgrades: Most Rollup networks are upgraded centrally, meaning that the cost of actually hacking an entire Rollup is negligible compared to the billions of TVLs on the network. For example, zkSync is a security council that manages upgrades. Thinking back to the Ronin hack, it is definitely not safe to have billions of dollars depending on the multi-signature of a few people.
  • Closed-source components: Some of Rollup’s key components are closed-source. For example, almost all key components of StarkNet are not open source, and are still developed centrally, without an open source license. This is not so Web3.

b) Real Performance😱

  • Fake Finality: The real finality is when the data is on a real blockchain like Ethereum, so how fast is Rollup’s real finality. In other words (of course if you really want to count TPS, the number of tx’s contained in a batch of data should also be taken into account), how often do they submit data to Ethereum? Here’s a real analysis with on-chain data.
  • Inflated TPS: I personally believe that TPS is an extremely bad metric and should be eliminated now. All kinds of Rollup or blockchains show their power by calculating a super high or at least higher TPS than their competitors by countless pre-conditions and confusing concepts. But in practice, their performance is still not that “Web3”. My ideal true Web3 experience would need to be completely senseless, and the entire network would have to be decentralized.

c) Economics😱

  • Business model: Rollup’s profit = Layer 2 fees — Layer 1 block space fees (security costs for storing and verifying data on L1, etc.) — computational costs such as node servers. Where, Layer 2 fee = gas fee + MEV + some premium charged by Layer 2. But this business model does not allow users to participate as nodes, only Rollup dev team can earn it. Here are the benefits and costs of Arbitrum and Optimism in terms of Layer 2 fees and Layer 1 block space fees.
  • Token model: Optimism’s network is good, but the token economy is still weak. OP has three fatal problems: 1. no utility, such as the inability to pay for network gas or PoS staking (which of course are not good Rollup utilities though). OP is only for governance. 2. no way to capture the value of network revenue and block space. Sequencer’s profit is not related to the holder. 3. the number of liquidity is very low, and the selling pressure is very high, which is exacerbated by market-making accidents. These problems are not only for Optimism, but other Layer2 Rollups are likely to face these as well.
  • MEV: Since Rollup is now run on centralized sequencer, all these gains can be captured by Rollup. MEV is a two-sided thing. On the bright side, the Rollup network can embrace the value of MEV to the network, making it an important part of the economic mechanism and incentive for miners after the network is decentralized; on the dark side, the Rollup network needs to eliminate any MEV, as it is often considered an additional tax on users. Arbitrum chooses to “ignore” MEV by adopting a first-come, first-served mechanism, but this places higher hardware requirements on the nodes and reduces the cost of DDoS.

3. Endgame Comparison of Optimistic Rollup and zk Rollup

  1. Development difficulty: In fact, zk Rollup is harder to be built than Optimistic Rollup in terms of EVM compatibility, node configuration requirements, and optimization. This is actually a way to justify the extra proof overhead… Not only does the extra proof overhead perpetuate an extra burden on the performance of the network, but it is also a huge impediment to the technical implementation of EVM compatibility.
  2. Easier to add features like privacy: Since we are already using zk, it is much easier to develop a truly private zk-zk Rollup than a zk-Op Rollup. Of course, there are zk-Op Rollup projects like ZKOPRU that are already live.
  3. Optimization: For Optimistic Rollup, parallelized tx processing is a straightforward and efficient optimization, while zk Rollup with the same scheme (StarkNet’s next version of sequencer can do parallelized execution) will still lose to Optimistic Rollup in the long run (again due to the extra proof overhead). Therefore, zk Rollup will adopt the alternative of Fractal L3 scaling, i.e., continue to build Rollup on top of Rollup. The recursive superpower not only allows L2 to verify that L3’s proof is correct, but also allows L1 to verify that L2’s verification of L3 is correct or not.
  4. Optimization implementation: These are derived from the roadmap and the envisioned design solutions, and are not currently in practice. Personally, I think it will take a long time to complete these upgrades. Some of these upgrades have side effects, such as introducing a new mechanism that requires additional trust assumptions.

4. Future of Rollup

a) Decentralization

  • Decentralized sequencer: The consensus mechanism of Optimistic Rollup’s sequencer will basically be a variety of PoS (leader election, MEV auction, rotation mechanism); and zk Rollup’s Hermez-like Proof of Efficiency or Proof of Validity Proof or Tendermint PoS. Of course if the network is a PoS mechanism, then there is actually an additional capital cost.
  • Decentralized contract upgrade: Contract upgrades should not be managed by multi-sig, but by decentralized governance (involving tokens) or by giving up contract upgrade control (e.g. a non-mandatory upgrade like Uniswap V2 to V3).
  • Multi-lang clients: Like Ethereum, multi-lang clients are necessary in decentralization to ensure 100% uptime of the network.

b) Composability

c) Feature

  • Let the application become a protocol, make its interfaces and services open, and achieve greater composability
  • L1 as the hour hand, L2 as the minute hand, and L3 as the second hand. Further improve the overall network performance without affecting the L1 pulse.
  • Privacy L3
  • Payment-only L3
  • NFT Marketplace L3
  • Game Engine L3
  • DEX and DeFi L3
  • Secured Rollup: Still a Rollup, puts DA on L1 like L2, but may involve more complex exit mechanisms.
  • Validium/Optimistic Chain: Have an additional DA layer like L2 or Celestia, which requires additional trust assumptions.

5. Conclusion

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