Rollup

What is a Rollup?

A rollup is a layer two (L2) blockchain that processes transactions away from the main blockchain to reduce transaction costs and increase throughput on the main chain. 

Rollups are scaling solutions that minimize the computational load on the main layer one (L1) chain. Rollup technology has become so popular that the leading smart contract blockchain Ethereum has pivoted its scaling roadmap from sharding to a rollup-centric one.

How Do Rollups Work?

Rollups alleviate congestion, increase throughput, and reduce gas fees on the L1 blockchain by processing and verifying transactions off-chain.

In return, rollups rely on the L1 chain for security. They post transaction data and proofs to the L1 chain to ensure that the roll-up transactions are verifiable and censorship-resistant.

Rollup users pay gas fees denominated in the L1 native currency. For example, gas fees on Ethereum rollup called Base are paid in ether (ETH) – the native token of Ethereum L1.

Here is how rollups work:

• Off-Chain Transactions: Rollups are blockchains. Users conduct transactions on the rollup chain. These transactions are processed on the rollup chain. A single party called “sequencer” confirms transactions, constructs L2 blocks, and submits transaction data and proofs to the main L1 chain.
• Batched Transactions: A sequencer groups multiple transactions in batches to be submitted to the main L1 chain. Multiple transactions bundled together reduce gas fees for the end-users.
• On-Chain Security: Once the transactions are batched, the rollup chain posts the transaction data to a rollup smart contract on the L1 chain. Once the L1 block containing the rollup transactions is finalized, there is no way to modify or censor the transaction data. The L1 chain ensures that data is always available for verification when needed.
• Proof Generation: Some rollups post “summaries” or “proofs” to the L1 along with transaction data. These “proofs” serve as a cryptographic assurance that the rollup has processed the given batch of transactions.

Types of Rollups

There are primarily two main types of rollup solutions: optimistic rollup and zk rollup.

Optimistic Rollup

Optimistic rollups assume that all transactions are valid by default unless proven otherwise. 

Optimistic rollups batch transactions off-chain and post transaction data to the L1 as call data. These rollups do not submit any proof of the validity of the transactions. Instead, it allows users a time window called a “challenge window,” during which anyone can challenge the validity of a rollup transaction by computing fraud proof.

If the fraud proof succeeds, transactions are re-executed, and the state of the rollup is updated accordingly. The sequencer responsible for including the incorrectly executed transaction receives a penalty.

The biggest disadvantage of optimistic rollups is that users cannot withdraw their tokens from the rollup chain until the challenge period is over. The challenge period typically lasts seven days

Zero-Knowledge Rollup (ZK Rollups)

ZK rollup does not assume the validity of transactions. Instead, they verify the transactions and produce cryptographic proofs about the transaction’s validity. These proofs are submitted to the L1 chain.

These rollups interact with the L1 chain via two smart contracts. The main smart contract stores data on rollup blocks and monitors state updates (same as Optimistic rollups). The second smart contract verifies the submitted ZK proofs.

Proofs are considered sufficient to assure the validity of transactions, therefore, ZK rollups may not be required to submit transaction data to the L1 chain. However, it is considered safe practice to make historic transaction data available so that anyone can independently verify the state of the L2 chain. 

Data availability solutions are being developed where another blockchain is used to store historical transaction data.

An advantage that ZK rollups hold over-optimistic rollup is that users do not have to wait to withdraw their tokens from the rollup. 

As for its disadvantages, ZK rollups may encourage centralized control as producing validity proofs requires specialized hardware.

Rollup Examples

Here are examples of popular rollup blockchains that are currently operational:

• Arbitrum: Arbitrum is the leading Ethereum optimistic rollup with a total value locked (TVL) of over $2 billion as of November 2023. The Arbitrum ecosystem consists of the Arbitrum rollup, security solution Arbitrum AnyTrust, and blockchain infrastructure solution Arbitrium Orbit. The project released its native token called ARB in 2023.
• Optimism: Optimism is an Ethereum optimistic rollup. It had a TVL of $700m as of November 2023. Optimism is known for its standardized, shared, and open-source development stack called the OP Stack, which is used by developers to launch their blockchains. The OP token is the rollup’s native token.
• Base: Base is an Ethereum optimistic rollup created using the OP Stack by one of the world’s biggest crypto exchanges, Coinbase. The base does not have a native token.
• StarkNet: StarkNet is an Ethereum ZK-rollup that uses its zero-knowledge technology called STARK to compute and verify transactions. StarkNet’s native token is called STRK.
• zkSync: zkSync is an Ethereum L2 protocol that uses ZK-proof cryptography. The project is spearheaded by a company called Matter Labs.

The Bottom Line

Rollup technology is slowly taking center stage as the cryptocurrency industry strives toward its holy grail of mass adoption.

Ethereum’s pivot to a rollup-centric scaling roadmap has diverted the brightest minds of the industry towards innovation in the rollup space.

It will be exciting to see how new rollup solutions not only address high gas fees and low network throughput but community governance and decentralization risks as well.