Scaling Blockchains with Rollups

Blockchains have proven to be an incredibly robust, versatile, and potentially disruptive technology, and have evolved in leaps and bounds since the first blockchain platform (Bitcoin) was launched in January 2009.

Now, there are dozens of popular blockchain platforms, many of which are either general-purpose (like Ethereum) or application-specific (like Bitcoin), and have exploded in popularity since their inception. Nonetheless, blockchain scalability has emerged as a major limitation in recent years, posing a major obstacle to the widespread adoption of cryptocurrencies, decentralized finance (DeFi), and decentralized applications (DApps).

Today, the most popular Proof-of-Work (PoW) blockchains like Ethereum and Bitcoin can only process somewhere in the order of a dozen transactions per second (fps.). Newer generation blockchains, like BNB Chain and Solana, currently offer around a 10–100 fold improvement but still cannot match traditional centralized payment networks like VisaNet — which can currently handle upwards of 20,000 tps.

But significant progress is being made on the development of so-called ‘layer-2’ solutions, which can extend the capabilities of sovereign blockchains to not only dramatically improve their scaling, but also improve their efficiency, accessibility, privacy, and much more.

Rollups are quickly gaining momentum as perhaps the most promising form of layer-2 construction, and are helping to tackle some of the longest-standing challenges facing blockchains today — including scalability, energy usage, and transaction costs.

Here’s what you need to know to get up to speed on rollups.

What Are Rollups?

Rollups are designed to ease the burden on layer-1 blockchains by moving a large portion of the data and computation associated with transactions off-chain to a separate layer-2 network. This sidechain network then securely processes the data and returns a highly compressed resultant transaction back to the main chain to achieve finalization.

Communication between the two chains is handled by smart contracts and an associated node network. These smart contracts bundle transactions together (i.e., rolling them up) on the main chain and interoperate with a smart contract on a sidechain. Validators on the sidechain then process the transactions and a compressed version of the result is passed back to the main chain where it is permanently recorded. This reduces the computational burden on the main chain while allowing transactions to still be processed securely since they achieve finality when they are recorded and finalized using the consensus of layer-1.

This solution can lead to dramatic improvements in scalability since the proofs posted to the layer-1 chain can represent dozens or hundreds of layer-2 transactions in a single layer-1 transaction. Since only a fraction of the data is stored on the layer-1 chain, blocks can include far more rollup transactions than regular ones, boosting the number of transactions the layer-1 chain can process per second.

Rollups are currently one of the most promising ways to scale a blockchain, and a significant amount of development firepower is being aimed at maximizing their potential and limiting their drawbacks. That said, other potential scaling solutions are also in the works — including state channels, sovereign sidechains, and Plasma — but these are outside the scope of this article.

Right now, there are two main types of rollups: Optimistic rollups and zk-rollups:

Optimistic rollups (ORs)

Optimistic rollups are currently the most popular rollup option and the two largest Ethereum layer-2 scaling solutions (Arbitrum and Optimism) both use this technology. OR platforms batch an array of transactions together on a layer-2 chain and assume that each of these transactions is valid.

The process of storing and executing transactions on layer-2 is handled by specialized nodes, known as sequencers. These sequencers are responsible for broadcasting updated chain states to the rest of the L2 network and transmitting the transaction data and state roots to the L1 chain (as a rollup). This data contains all the information necessary to confirm that the transactions are indeed valid.

Most optimistic rollup solutions include a challenge period, whereby the validity of transactions can be disputed for a time. Until this window has closed, transactions cannot be considered truly final. Tokens cannot be withdrawn from layer-2 to layer-1 until this grace period has passed.

Arbitrum and Optimism currently operate a centralized sequencer, but both intend to switch to a decentralized solution in future whereby potentially anybody will be able to participate as a sequencer — staking their ETH to earn staking rewards for honest operation but risking being slashed if they include invalid or fraudulent transactions.

zk-rollups (ZKRs)

Zero-knowledge rollups (zk-rollups) are another sidechain-based scaling solution.

Relayers are responsible for arranging potentially hundreds of transactions into a batch, before creating zk-SNARK proofs which are posted to the Ethereum blockchain. These transactions are collected from transactors (i.e., regular users with an account on the layer-2 platform) who broadcast their transactions to the network.

This proof is a hash that represents the change in the network state and can be deconstructed to prove the validity of the transactions it represents. These proofs are significantly smaller than batches of transactions they represent, allowing more of them to fit in a block — hence scaling the underlying blockchain.

Unlike ORs, zk-rollups don’t automatically assume that transactions are valid and also don’t need a challenge period. Unless transactions are proven legitimate, they will not be recorded and finalized on the layer-1 chain. However, transaction processing time can be longer, due to the need to generate cryptographically secure validity proofs.

Early iterations of zk-rollups weren’t EVM compatible, but this has since changed — putting them on par with ORs in this regard. Nowadays, zk-rollups can be used to process both smart contract-based state changes and simple balance transfers.

There is even some evidence to suggest that zk-rollups may be quantum-secure, which if proven true, could position zk-SNARKs as not only a way to scale blockchains, but also keep them secure in a post-quantum future.

Benefits of Rollups

Rollups are widely billed as one of the most promising layer-2 scaling solutions, due to their ability to potentially dramatically improve the scalability of the layer-1 chain they work alongside. Indeed, current optimistic and zero-knowledge rollup options already improve the scalability of Ethereum by several orders of magnitude and have the potential to scale even further using techniques like sharding.

They also have the added benefit of significantly reduced gas costs. Since the layer-2 chain is capable of processing dozens to hundreds of times more transactions per second than Ethereum, gas competition is minimal. Likewise, since the final transaction committed to the underlying layer-1 chain is just a fraction of the size of the rollup transactions it represents, layer-1 fees are minimized.

Since many rollup solutions feature a Touring-complete virtual machine, just like Ethereum, there is no limit to the type and nature of computations that can be moved off-chain — ensuring the vast majority of workload can be easily scaled without requiring application-specific rollup solutions.

Rollups are most commonly designed to improve Ethereum, but can be just as easily applied to any EVM and account-based blockchain model.

Taken together, the improved throughput and gas efficiency result in a vastly improved user experience, while lowering barriers to entry to transacting on popular blockchains like Ethereum.

That said, most rollup solutions aren’t perfect. Many suffer from increased centralization and can expose users to attack vectors that are far less viable on most layer-1 chains — such as collusion and censorship attacks.

The Rollup Landscape is Expanding

Since the launch of the first rollup solution last year, the number and variety of different rollup implementations have expanded rapidly — and there are now well over a dozen to choose from. While some remain relatively obscure and are in their early stages of development, a handful is seeing rapid adoption. Some of the more popular options are outlined below:

Optimistic rollups:

  • Arbitrum: Built by Offchain labs, Arbitrum was the first optimistic rollup solution to market, and is currently by far the most successfully optimistic rollup platform — with a TVL of more than $2 billion (more than all other competitors combined). A wide variety of popular DApps now work with Arbitrum, including 1inch, Balancer, Curve, Uniswap, and more.
  • Optimism: One of the fastest developing Ethereum layer-2 solutions, Optimism uses ORs to dramatically improve Ethereum’s scalability. The platform boasts one of the simplest user experiences and is fully compatible with the EVM, allowing developers to easily deploy their DApps to Optimism without modifications. Like Arbitrum, Optimism doesn’t have its own native token, instead, all transaction fees are settled in Optimism-native ETH.
  • Boba Network: Boba Network is built on the Optimism codebase and is designed to help improve the capabilities of Ethereum — providing it with hybrid compute capabilities while dramatically improving scalability and gas costs. The platform is one of the fastest rollup solutions in operation, and leverages community-contributed liquidity pools to enable L2 exits in just minutes, rather than days.

Zk-rollups

  • zkSync: One of the most popular ZK rollups, zkSync aims to solve Ethereum’s scalabilities issues while remaining completely secure and inclusive. The platform is currently capable of handling 2,000+ tps and offers 10-minute finality while boosting privacy and keeping fees low. zkSync is one of the few rollup platforms to support smart contracts but is only partially decentralized right now.
  • Hermez: Part of the Polygon ecosystem, Hermez is designed to minimize the cost of transferring tokens on Ethereum. The platform uses zero-knowledge technology to reduce transaction costs by more than 90% and can batch more than 2,000 transactions into a single validity proof committed to the Ethereum main chain.
  • Immutable-X: Primarily designed for NFT platforms, Immutable-X allows users to easily trade their NFTs on its high-speed layer-2 platform with zero gas fees. The platform is capable of achieving 9,000+ tps and also supports the minting of carbon-neutral NFTs that can be migrated to Ethereum without hassles.

Why Are Rollups Growing in Popularity?

Over the last year, the most popular rollup solutions have seen striking growth in both their respective user bases and DApp ecosystems.

Since it launched in September 2021, Arbitrum saw its TVL immediately balloon from nothing to over $2 billion. As per data from Nansen, the platform now has close to 50,000 weekly active users, which is around 4x its nearest competitor Optimism. Arbitrum now has more users than even some popular layer-1 networks — such as Celo. The vast majority of its activity is associated with SushiSwap — which is by far the most popular layer-2 based DEX, and now accounts for ~29% of Arbitrum’s TVL.

Image courtesy: Nansen

Another OR platform, known as MetisDAO, has also witnessed striking growth in 2022, and has seen near-constant growth in its TVL — which now stands at just north of $476 million. Currently, the second most popular OR platform by TVL, Metis has seen rapid growth in its share of the total TVL across all layer-2 platforms which grew from 4% to 15% YTD.

Zk-rollup solutions, on the other hand, are still lagging behind in terms of adoption with zkSync and Immutable X having a currently TVL of just $148 million and $73.7 million respectively.

Though much of this growth can be attributed to improved user uptake amid almost perpetually high fees on the Ethereum blockchain, improved awareness about the benefits and utility of layer-2 platforms was arguably driven by the rapid deployment of new and popular DApps on layer-2.

Indeed, platforms like Arbitrum and Optimism have seen explosive growth in their respective ecosystems, and heavyweight DeFi apps like Uniswap, 1inch, Perpetual Protocol, MakerDAO, Risk Harbor, and Yearn Finance, can now be used cheaper and more efficiently than ever before — providing users with clear advantages.

With rollup solutions becoming increasingly widespread and accessible, and some of their earliest hurdles and limitations being worked out, further growth looks promising.

Conclusion

By reducing trading down to just a tiny fraction of their standard size, rollups provide massive improvements in scalability and transactions costs. And it’s fair to say that right now, they’re also one of the few scaling solutions that are in popular usage among traders, DeFi users, and blockchain enthusiasts.

Nonetheless, it remains to be seen which rollup methodology (optimistic vs zero-knowledge) will dominate in the months and years ahead, and which layer-2 protocols will manage to capture market share amid increased competition from ultra-scaling layer-1 chains and alternate scaling solutions, as well as the potential redundancy if on-chain scaling upgrades prove fruitful (see: the merge).

But with rapid progress being made on improving their accessibility, both among end-users and developers, in addition to a gradual evolution in their scope and feature-sets, the first widely adopted rollup solution is likely already available.

Want to learn more about blockchain technology and keep informed of the latest Master Ventures news? Consider following us on Twitter and Medium!

About Master Ventures

Master Ventures is a blockchain-focused venture studio helping to build the next generation of blockchain-based Web 3.0 system innovations within the crypto industry. Launched in 2018 by Founder and CEO Kyle Chassé, the company’s ethos can best be summarized in the acronym #BeBOLD: Benevolent, Open, Love, Decentralized.

Master Ventures co-creates with entrepreneurs and businesses worldwide to turn the best ideas into innovative and disruptive products. They do this by investing as strategic partners through offering advisory services to the projects they believe in. To date, Master Ventures has invested in over 40 crypto projects, including the likes of Kraken, Coinbase, Bitfinex, Reef, DAO Maker, Mantra DAO, Thorchain, and Elrond.

For any questions, please feel free to reach out to us on:

MV Website | MV Telegram| MV Twitter

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