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UNDERSTANDING THE DEBATE AROUND BASED ROLLUPS

Taiko is the largest based rollup today, with a multi-proof system in place

by Donovan Choy /
December 13, 2024 01:00 pm

hxdbzxy/Shutterstock modified by Blockworks

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Ethereum loves rollups. As of late, “based” rollups are in vogue.

What makes based rollups special? Its sequencer.

Layer-2s today use a trusted centralized sequencer to order users’ transactions
before they are posted down to the layer-1 for settlement, but based rollups
defer those execution duties to Ethereum layer-1 validators. This is otherwise
known as “based sequencing.”

There are two primary reasons this is preferable: censorship resistance and
interoperability. 

Using the layer-1 as a sequencer ensures the same liveness guarantees as
Ethereum layer-1 blocks, and avoids the major complaints of potential censorship
surrounding trusted centralized sequencers.

Read more: MagicBlock open sources a16z-backed ‘ephemeral rollup’ tech

The second advantage of based rollups is better interoperability. Based rollup
proponents such as Justin Drake have in recent months touted this benefit as
“synchronous composability,” where transactions in Ethereum are sequenced (or
bridged) across different layer-2s at the same time. 

Simply put, smart contracts on based rollups will be able to call any other
contract on the layer-1 in near-instant finality within the same block — as if
they were all on the same chain. 

This composability and “money legos” is not exactly new; it was always one of
the core properties sold with the original vision of Ethereum. 

Read more: Rethinking Ethereum consensus with Beam Chain

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But the fragmented state of rollups today means an Arbitrum transaction is
asynchronous with an Optimism transaction, which creates problems of fee
uncertainty. Fee uncertainty arises because gas fees are calculated in different
slot times, as opposed to within the same 12-second slot time of one Ethereum
block.

In addition to making Ethereum seamlessly interoperable again, there are also
different kinds of significant cost savings, Ahmad Mazen Bitar, technical
product lead at Nethermind and Ethereum ACD developer, explains.

“A user may want to swap his token on the [layer-1] but wants to take advantage
of a deep liquidity pool on a [layer-2]. With synchronous composability, they
would be able to push a singular transaction from the [layer-1] to the
[layer-2], execute it, then bring it back to the [layer-1].”

The first and largest existing based rollup in live production today is Taiko,
which recently saw a burst in TVL and daily transactions this month.

Source: DefiLlama

Other early based rollups are also in early production, such as Surge by the
Nethermind team, and UniFi by the Puffer Finance team. Both are forks of Taiko.

Based rollups don’t come without its own drawbacks, however. Since execution
(i.e. sequencing duties) is now being relegated back to layer-1 block
validators, that means based rollups are constrained by the layer-1’s 12-second
block time.

Hence, the purported benefits of based rollups, like synchronous composability,
may be easier said than done. Based rollups would require real-time proving
within the latency of one 12-second slot, without which based rollups cannot
execute composable transactions speedily.



To have that kind of fast proof generation in turn brings another technological
dependency into the mix, but Brecht Devos, co-founder and chief technology
officer of Taiko, remains confident the tech is catching up.

It’s why Taiko recently enabled two zk proofs on its rollup by Risc Zero and
Succinct Labs, on top of Intel’s SGX trusted execution environment (TEE). This
made it the first multi-proof based rollup in production without reliance on one
trusted party.

“Provers are improving quickly with more TEEs, faster and cheaper zkVMs and AVSs
that can be used. We think the zk development is going very well and the
sub-slot latency for proving is not far off,” Devos told Blockworks.

One other believed disadvantage of based rollups is a loss of MEV as a key
“revenue” stream, due to the lack of a centralized sequencer. Yet there are
nifty workarounds available, Devos said.

On Taiko, “MEV can also be captured by auctioning “execution tickets” to layer-1
block proposers,” Devos told Blockworks.

As such, while based rollups by default give up sequencing rights to layer-1
validators, it doesn’t necessarily have to be the case.

Matthew Edelen, co-founder of Spire Labs, a based rollup infrastructure
provider, shares a similar view. As he explained on a recent Bell Curve podcast:
“Auctions don’t have to be the only way to distribute sequencing rights. You
could distribute 99% of sequencing rights through an auction and give the last
1% to friends or solo stakers to look good on L2Beat.”

Finally, MEV may not even be such a big deal in the long run. This idea centres
on a simple cost benefit analysis: Today, the bulk of blockchain revenues are
coming from congestion fees, dwarfing a far smaller share of MEV revenues that
is diminishing over time due to better MEV solutions.

As such, the smarter rollup revenue model for rollups is one that banks on the
greater network effects of congestion fees coming from synchronous
composability, rather than MEV fees.

As Justin Drake explained on the The Rollup podcast:

“Congestion fees against contention fees is roughly at an 80:20 ratio today. 80%
of the income on the [layer-1] comes from congestion fees — about 3200 eth per
day since EIP-1559. MEV is about 800 ETH daily since the Merge. My thesis is
that this ratio is becoming more extreme, going from 80:20 to something like
99:1.”

In conclusion, the benefits of based rollups bring the user experience of
Ethereum back full circle. 

There’s a sense of irony here, considering that these benefits were what
blockchains already had from day one. Synchronous composability and layer-1
sequencing transactions have been the norm for all blockchains since the Bitcoin
network’s genesis. 

This deviation of execution layer duties only happened due to the rollup-centric
roadmap (or the multichain path in Polkadot, Cosmos and Avalanche) as of the
last few years. Based rollups are ready to run it back.

--------------------------------------------------------------------------------

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