Written by Yohan Yun
Compiled by: Luffy, Foresight News
Ethereum's Rollup-centric Layer 2 roadmap has successfully alleviated transaction congestion on the base layer (Ethereum mainnet) and effectively reduced gas fees, but at the cost of creating a liquidity-fragmented ecosystem.
The starting point of Layer 2 is to expand the scale of the Ethereum network, but the reality now is that each Layer 2 network has become an isolated island, each with its own systems, rules and obstacles.
Layer 2 liquidity is siloed, users are stuck in cross-chain bridges between Layer 2s, and developers are forced to choose whether to build on Base, Arbitrum, or Starknet.
Fortunately, this dilemma of the Ethereum ecosystem has ushered in a turnaround. Over the past year, the community has begun to talk more and more about the Layer 2 solution of Based Rollups, and regards it as a potential answer to the problem of liquidity fragmentation. The community believes that Based Rollups will restore the interoperability and composability of Layer 2 and revive the "currency Lego" concept of DeFi Summer on Layer 2 (this means that DeFi protocols can interact seamlessly). In short, if Based Rollups fulfill all their promises, they will make the Ethereum ecosystem "more like Ethereum."
The fundamental problem that Based Rollups attempts to solve is the use of a separate transaction sorter on Layer 2. (Note: The sorter is the engine that sorts transactions on the blockchain. The current Rollup Layer 2 usually uses a centralized sorter that it controls, while Based Rollups sorts transactions through the Ethereum mainnet.)
“When I first learned about the Layer 2 scaling roadmap from Vitalik Buterin’s blog post, it was a little hard to swallow because of the trade-offs,” blockchain developer Teddy Knox told (Magazine).
“Unlike Layer 1 (Ethereum has a very large committee of nodes that validate the network), Layer 2 in its original form is a centralized sorter that has special authority to sort transactions on the Layer 2 network.”
The Ethereum Surge roadmap aims to achieve 100,000 TPS. Source: Vitalik Buterin
Centralized sorters split Ethereum Layer 2
While centralized sorters are very efficient and make operators a lot of money, they also lead to isolation between different Layer 2s. Transactions processed by one Layer 2 sorter cannot be easily matched and interacted with other Layer 2s. This lack of interoperability is the main reason why Ethereum has been FUDed by the community this year. (Interoperability between Layer 2s can still be achieved through other methods besides shared sorters, but these methods are implemented "asynchronously", which means that transactions are not real-time).
Therefore, the Based Rollups (not to be confused with Coinbase's Layer 2 solution Base) solution proposed by Ethereum researcher Justin Drake is expected to solve this fragmentation problem.
Unlike traditional Rollups, Based Rollups returns the power of transaction sorting to the Ethereum mainnet (Layer 1). Before Layer 2 became popular, Layer 1 was responsible for transaction sorting on the Ethereum network.
Daniel Wang, co-founder of Taiko Labs, said: "The Based Rollup sorting method can not only improve the security of the Ethereum network, but also improve its revenue-generating capacity and ecosystem cohesion, ensure that Layer 2 is more aligned with the Ethereum mainnet, and promote cheaper and faster transactions while supporting the sustainability of the Ethereum network." Taiko Labs developed the first production-level Based Rollup using Based sorting.
Compared to other Rollups that use centralized sorters, Taiko can bring more benefits to Ethereum, about 5 times that of traditional Rollups.
Taiko is the first Rollup-based Ethereum scaling solution. Source: Justin Drake Twitter
Based Rollup and composability
Based Rollup sounds promising, but everything has its pros and cons, so Based Rollup also has a series of problems.
In order for users to enjoy the benefits of Based Rollup, other Layer 2s must also adopt them. In the case of Taiko, they are working with Nethermind’s Rollup Surge chain, which will be specially designed to allow users to skip the Ethereum mainnet and cross-chain directly with Taiko.
However, Daniel told Cointelegraph at Devcon that despite being based on the same technology, the two Rollups still cannot achieve synchronous composability.
“You need to have almost real-time proof of validity that both are changing at the same time,” he said. “I don’t think we’re there yet, but as a project we can’t wait until that happens.”
Advantages and Disadvantages of Centralized Sorters
When operated by a single entity or a small group, a sorter can efficiently order transactions without the delays associated with decentralized consensus or Ethereum’s 12-second block time.
The blockchain trilemma illustrates the challenge of simultaneously optimizing decentralization, scalability, and security
For many Layer 2 networks, it is worth sacrificing decentralization to provide throughput that Ethereum mainnet cannot match, although this comes with risks of its own.
“If the sorter fails… there’s going to be a performance impact, or they could easily censor your transaction without any other functionality,” Knox explained.
Using a centralized sorter will bring back many of the problems that decentralization and blockchain originally sought to solve, such as censorship and single points of failure, of which the exploitation of MEV (maximum extractable value) is an issue that cannot be ignored.
However, while these concerns keep Ethereum idealists awake at night, the biggest concern for ordinary users is the ability to easily switch between Layer 2s.
Duncan Townsend, a smart contract engineer at 0x Protocol, a decentralized exchange protocol, said that the current process of moving funds from one Ethereum Layer 2 to another “is not a very good experience.”
“Cross-chain user experience in DeFi is poor unless you use a chain abstraction protocol,” he explained. “If you have the Based feature, you have composability. It doesn’t matter which chain your tokens are on because you can get them on any chain you need at low cost.”
If Rollups share this Based sorting framework, tokens and assets should be able to interact directly with each other without relying on separate cross-chain mechanisms, thus achieving native interoperability between Rollups.
Challenges of Adopting Based Rollup
Based Rollups leverages Ethereum’s validator network to order transactions on multiple Layer 2s, restoring decentralized transaction ordering, creating a more unified and efficient ecosystem where developers can develop DApps that run across all participating Layer 2s (Layer 2s using Based Rollup).
As of November 20, the Ethereum mainnet has over 1 million validators. Source: Dune Analytics
However, getting existing Layer 2s to agree to give up lucrative sorter revenue is not an easy task.
Townsend said, “There is a major obstacle to switching to based sorting, which is that all the centralized Layer 2 sorters are making a lot of money.”
Sorter revenues for some of Ethereum’s top Layer 2 networks, in ETH
According to Dune Analytics, as of November 20, ZKsync, which uses ZK Rollup, has accumulated nearly 40,500 ETH ($125.5 million) in sorting revenue. In addition, Base, a competitor using Optimistic Rollup, has earned 20,904 ETH ($64.7 million), Arbitrum has earned 62,001 ETH ($192 million), and Optimism has earned 6,916 ETH ($21.5 million).
Would they really give up that income because of idealism?
Based Rollup is the cure for Ethereum
Although Taiko’s Daniel is indeed an idealist, he said that the mechanism of Based Rollup helps ensure the security of Ethereum’s base layer; because Layer 2 activity will reduce Layer 1 activity, which in turn reduces the income of validators.
Daniel said: “Based Rollup does provide Layer 1 validators with additional fees, tips, and MEV opportunities, which will encourage more validators to protect the Ethereum blockchain, which will ultimately make all Base Rollups more secure.”
According to Growthepie, Taiko is the Layer 2 that pays the most to the Ethereum mainnet. In the 30 days ending November 21, Taiko paid $1.29 million in gas fees, almost five times that of the second-ranked Arbitrum One.
Taiko is the largest Ethereum rent payer in Rollup. Source: Growthepie
Based Rollup makes it more profitable to become an Ethereum mainnet validator, thereby encouraging staking, reducing the circulating ETH supply, and potentially contributing to ETH price increases in the long run.
The future of Ethereum: Based Rollup? Or fragmentation?
Rollup-based blockchains offer a potential solution to unify liquidity in the Ethereum ecosystem, but returning to the Ethereum mainnet for sorting could also raise old problems.
Daniel said that the key trade-off of Based Rollups is that they are limited by Ethereum's current 12-second block time. Because other Rollup transactions are very short, such as Arbitrum's transaction time is less than 1 second.
“We are working with partners on pre-confirmation (of transactions), which will free Based Rollup from the limitations of the long block time of the Ethereum mainnet, providing users with a changed transaction experience. Users will see their transactions included in the block almost in real time,” said Daniel.
Without solutions like Based Rollups that enhance interoperability, the Ethereum network is destined to continue to fragment, while DeFi challengers like Solana will continue to make progress as a unified Layer 1, providing users with a more seamless trading experience.
Solana returns to the DeFi stage in 2024, TVL continues to rise
“It’s essentially, ‘How big can we make a single chain and a single Rollup in terms of transaction throughput, and how quickly can we get liquidity settled when it needs to move from A to B?’ Assets can get there quickly and users don’t have to wait,” Knox said.
Layer 2 needs to adopt a Rollup-Based approach to succeed, but not everyone agrees. Source: Charlie Noyes Twitter
Townsend said Based Rollup is "definitely" an effective solution for unifying the Ethereum ecosystem, but it is still a novel concept and there is no active ecosystem yet.
“The immediate hurdle we face is convincing these layer 2s to give up their lucrative revenue stream as collators and join and participate in this interoperability ecosystem,” Townsend said.
