With all the hype around Ethereum (ETH) with the London hard fork being in place and the fee burn happening, I figured it was a good time to take a closer look at one of the Layer 2 Scaling solutions, rollups. These are a pretty good way to boost up the transaction throughput, and I would expect these to be an ever growing piece of the DeFi space.
Please note I am on vacation the week of August 8-13 and no articles will be coming out that week.
For the usual disclosure, I am not a financial advisor, I don’t even work in finance at all. My day job is as a telecommunications software engineer. Treat everything you read here as some educational resources and not financial advice.
Rollups are a Layer 2 Scaling solution that allows for the bulk of transaction to occur off the main chain, with only the final states essentially needing to be handled on the main blockchain. This means that a smaller amount of data will need to be handled by the nodes of the main chain, thus lowering the transaction costs associated as more transactions will be able to fit in every block. This can be further amplified by something like sharding in Ethereum 2.0.
They are kind of like a lightweight side chain. Most of the steps of a smart contract can be executed on the rollup chain, such as most of the computational work. Only the final state change operations need to be pushed out onto the main chain to be handled there, and these final changes can be bundled together and rolled up into a nice small package to be handled on the main chain.
Rollups also rely on the security and consensus mechanism of the primary blockchain directly, where something like a side chain may have it’s own implementations to worry about. This also means that any smart contract deployed on the main chain can also be deployed onto the rollup, with little to no code changes necessary to support it.
Rollups basically work off a series of smart contracts that are responsible to handle withdraws, deposits, and verifying the cryptographic proofs that are produced by the rollups. This final step, the verifying proofs, is also where the main distinction between the two main types of rollups occur. Optimistic rollups use fraud proofs, while ZK rollups use validity proofs.
Optimistic rollups will simply fire off it’s output to the main chain, as assume that everything is A-OK with it, which is why they are called optimistic. As long as everything truly is good with it, that’s as far as this process needs to go, and everyone will be happy. If things are not good however, the system will recover the valid state, and actually slash the stake of the node who submitted the invalid transaction.
This is handled through the dispute resolution process by any network user submitting a fraud proof against the transaction. If the dispute process is kicked in, the transaction is run again, this time on the main blockchain which will show if the final state ends up being the same or not, showing if the rollup transaction was truly valid or not. To prevent misuse of this system, if a transaction that was flagged by a user is deemed to be valid, they can have their stake slashed as a penalty.
Because the system needs to give people time to spot bad transaction, and submit their fraud proofs, a lot of optimistic rollup systems have significantly long withdraw lockups. This can be quite an issue, as it can be upwards of a week to get your funds out, so make sure you are checking on this aspect of it if you are thinking of doing any transactions using rollups. There are some projects working to design a speedier exit from them, using something called Liquidity Exits, but these are newer and not well battle tested solutions at this time.
With Zero Knowledge, or ZK rollups, there is no dispute resolution process. In these types of rollups, every batched transaction that is sent back to the main chain, includes a Zero Knowledge cryptographic proof (hence the name). This proof is used by the management smart contract to instantly determine the batched transactions are valid, and be able to just straight up reject them when they are not, so no need for outside parties to need to find and open disputes against them.
Because of this automatic and instant validations of the transactions, there is no withdraw lockup period needed when using ZK rollups, and the withdrawn funds are available as soon the transaction has the required block confirmations, the same as any other transaction.
ZK rollups are quite a bit more complicated, and as such, they tend to be more application specific, and have a much harder time being a more general purpose rollup. This is why a lot of focus has been on optimistic rollups recently, and why a lot of the bigger projects are targeting using it, its just friendly to the developers. They are also much heavier on the CPU side of things, so systems running ZK rollup nodes, have to be pretty high end.
One project is working to help out with the problem of contract compatibility, zkSync, so we may actually see more general purpose EVM-compatible ZK rollups in the future, making it able to run almost any smart contract like its optimistic counterpart.
As we can see, rollups can play a significant role in helping to increase the scaling of a network, by taking a lot of the processing off chain, you leave transaction space and processing power for other things, and lowering the cost for yourself and others by being able to fit more transactions into a given block.
Combine this with some layer 1 solution such as sharding, and we can suddenly take a network like Ethereum, which can do about 15-50 transactions per second, and suddenly have the network be able to handle hundreds of thousands of transactions per second, and we can see why this should drop the transaction cost significantly.
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