Today’s post is a bit more technical than usual but nevertheless very important to understand scaling solutions to overcome the Ethereum network limitations.
Ethereum has been a driving force behind all the major blockchain and crypto trends such as initial coin offering, DeFi and the NFT boom. The chart below shows the dominance of Ethereum when it comes to the total value locked compared to other blockchain protocols.
However, the success of Ethereum also brought scalability problems to the surface that any blockchain needs to address and solve. Solving scalability leads to the blockchain trilemma. It basically states that solving or optimizing for decentralization, scalability and security at the same time is a very hard problem to tackle. Blockchain developers end up usually sacrificing one of the dimensions for the other two. For example, the Binance Smart Chain is sacrificing decentralization for scalability and security.
What layer 2 solutions try to solve is improving scalability whilst preserving decentralization. There are many different attempts and methods to go about that. Some examples are state channels, sidechains, plasma and rollups. Some of the leading projects in each of the layer 2 solutions can be found in the chart below. The chart is not up to date, as Arbitrum would be also a leading rollup layer 2 solution that should be listed below.
As you can see, rollups are one of the most promising categories of Layer 2 solutions. These solutions move transaction computation off-chain but store transaction data to the Ethereum chain, which basically means that the rollups are secured by the base layer protocol.
What does rollup even mean?
Rollups in simple terms is the process by which transaction data is bundled, or “rolled-up”, and moved off-chain for processing. The processors or in other words validators submit batches of highly compressed transaction data back to the main chain. These batches have the minimum data to verify if the transactions are valid.
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Rollups come in two distinct flavors i.e. the optimistic rollup and the zero-knowledge (ZK) rollup and specifically refers to the method of verification. ZK rollup generate a cryptographic proof to demonstrate that the transaction is valid. Each batch of transaction has its own proof which is submitted to the main chain. On the other hand, optimistic rollup assumes that all transactions are valid by default. That allows for significant improvement in scalability. In order to avoid fraudulent activities optimistic rollups include a so-called challenge-period where anyone can dispute the legitimacy of the transactions. In cases where a fraudulent transaction is detected, the rollup executes a fraud proof and runs the correct transaction computation using the data available on Layer 1. To incentivize the validators to only process legitimate transactions they need to stake ETH. If the work is done with honesty they receive staking rewards otherwise the sequencer can haver their stake slashed.
Because optimistic rollup approaches do not by default perform a proof computation, optimistic rollups can improve scalability from 10–100x. The downside on the other hand is that the withdrawal periods are significantly longer than ZK rollups as there needs to be a challenge period where potential fraudulent activities can be detected. In the optimistic rollup category there are two big players which are Optimism and Arbitrum.
ZK rollups unlike optimistic rollups ensures the validity of each transaction bundle with a cryptographic proof on Layer 2. The validity proofs are then submitted to Layer 1 to serve as a proxy for the corresponding bundles. This approach results in a significant data size reduction and hence reduces gas cost for validating a block. Own downside of ZK rollups is that generating this validity proof for every bundle is complex and a time consuming process but on the other hand do not require a challenge period and hence withdrawal time is very quick. Players within the ZK rollup space are Loopring, StarkEX and Hermez.
It is still to be seen which Layer 2 scaling solution(s) will take the lead when it comes to improved scalability on the Ethereum blockchain.
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