Optimistic Rollup

What is Optimistic Rollup?

Optimistic rollups are blockchain scaling solutions designed to help layer one (L1) blockchains scale. They are also referred to as layer two (L2) networks, as they are built on top of a base blockchain.

Key Takeaways

Optimistic rollups help layer one blockchains scale by increasing network throughput and reduce gas fees.
Optimistic rollups are called “optimistic” because they assume that all transactions conducted on the L2 are valid by default.
Arbitrum, Base and Blast were the three most popular Optimistic rollups by TVL, as of July 2024.
Optimistic rollups are best suited to host applications that prioritize transaction speed and can tolerate finality delay.
According to Ethereum, optimistic rollups can improve scalability up to 100x.

How Optimistic Rollup Works

Optimistic rollups are built on top of the base L1 blockchains such as Ethereum therefore they are also known as off-chain scaling solutions.

The transactions executed on the optimistic rollups are batched together and posted to the L1 chain to ensure that transaction history is always available to users who want to verify the correctness of the rollup state.

These rollups are called “optimistic” because they assume that all transactions conducted on the L2 are valid by default. The main reason behind this assumption is to improve transaction execution and lower gas fees.

Instead, optimistic rollups rely on a fraud-proving system to detect invalid transactions. Therefore, when a transaction batch is submitted to the L1, a challenge period allows anyone to challenge the validity of a transaction.

If a user successfully proves the transaction invalidity, the optimistic rollup re-executes the transaction and updates the state of the rollup. Additionally, the sequencer responsible for executing the incorrect transaction is penalized.

It is because of this fraud-proof system that optimistic rollup users are only able to transfer their tokens out of the L2 when the challenge period is over. Typically, challenge periods last for roughly seven days.

Optimistic Rollup Architecture

In order to understand the definition of optimistic rollup better, let’s study its architecture.

An optimistic rollup is made up of the following parts:

Sequencer

A sequencer is a node that executes transactions on the rollups, batches them together, and submits the batches to the L1 chain.

Smart contracts

An optimistic rollup is controlled by smart contracts deployed on the L1 chain. These smart contracts receive proofs to verify batches, monitor rollup states, and track user accounts.

Offchain virtual machine

While smart contracts help connect optimistic rollups to the base L1, it is the virtual machine that allows applications to be built on the rollup. Think decentralized exchanges (DEX), blockchain games, social apps and more where users directly interact with the underlying blockchain and transactions are initiated.

Optimistic Rollup vs. ZK Rollup

Optimistic rollups and zero knowledge (ZK) rollups are the two main types of rollups. These two rollups have always been compared with each other and the crypto community is often in heated debates on which rollup type is best suited to help L1s scale.

For those who may not know, ZK rollups are blockchain scaling solutions. Unlike optimistic rollups, ZK rollups do not assume the correctness of the transactions.

Let’s study the optimistic vs ZK rollup table below to understand the differences between them.

Category	Optimistic rollup	ZK rollup
Costs	Optimistic rollup assumptions help reduce computational costs	ZK rollups produce validity proof, which comes with higher computational costs.
Security	Anyone can challenge the correctness of a transaction within a challenge period	ZK rollups do not depend on assumptions and produce validity proofs for transactions submitted to L1
Transaction speed	Transaction execution on Optimistic rollups is faster due to assumptions	Transaction execution on ZK rollups is slower due to the heavy computation involved
Finality	Optimistic rollup transactions are considered final only after the challenge period is over	ZK rollup transactions are considered final as soon as they are submitted to L1
Privacy	Low privacy	ZK rollup uses privacy-preserving technology
Use Cases	Better fit for applications that require quick transactions and can tolerate finality delay	Suited for applications that prioritize security and privacy
Examples	Base, Optimism Mainnet, Arbitrum	ZKSync Era, Polygon zkEVM

Optimistic Rollup Examples

Here are the three most popular optimistic rollups based on their total value locked (TVL) as of July 22, 2024.

Arbitrum – Arbitrum is an Ethereum-based optimistic rollup. It is the biggest rollup in the world in terms of TVL. At the time of writing, Arbitrum boasted TVL of over $3.2 billion, data on DeFiLlama showed. Arbitrum also offers developers rollup-as-a-service to launch L2 chains.
Base – Base is an Ethereum-based optimistic rollup developed by Coinbase. It is built using the OP Stack. At the time of writing, Base boasted TVL of over $1.7 billion, data on DeFiLlama showed
Blast – Blast is an Ethereum-based optimistic rollup developed by the creators of the decentralized NFT marketplace Blur. Blur differentiates itself from other rollups by offering user native yield on their ETH tokens. At the time of writing, Blast boasted TVL of over $1.3 billion, data on DeFiLlama showed

Optimistic Rollup Use Cases

Here are the use cases of optimistic rollups:

Optimistic rollups are used to help L1 blockchains like the Ethereum scale.
They are best suited to host applications that prioritize transaction speed and can tolerate finality delay.
They are used to host layer three (L3) blockchains.
They can be used to create application-specific chains for decentralized exchanges, NFT trading, blockchain gaming, and more.

Pros and Cons of Optimistic Rollup

Pros

Optimistic rollups are easy to develop
Transactions on optimistic rollups are fast
Gas fees on optimistic rollups are cheap
Anyone can verify the validity of transactions
Fraud-proof computation does not require specialized hardware

Cons

Users can only transfer tokens out of optimistic rollups after the challenge period is over
Centralization of sequencers is a big risk to optimistic rollups. Sequencers can steal tokens from users
Trust assumptions can fail if there are no honest nodes in the network

The Bottom Line

Optimistic rollups are the most popular form of L2 scaling solutions today. Despite the risks related to trust assumptions and centralized sequencers, optimistic rollups such as Arbitrum, Base, and Blast have become popular and have amassed more TVL and users at an impressively fast rate.

Learning about the definition of optimistic rollup is key to understand Ethereum’s rollup-centric scaling roadmap.