Based Rollup can restore interoperability to Ethereum's Layer 2 ecosystem.
Written by: Yohan Yun
Compiled by: Luffy, Foresight News
Ethereum's Rollup-centric Layer 2 roadmap has successfully alleviated transaction congestion at the base layer (Ethereum mainnet) and effectively reduced gas fees, but at the cost of creating a fragmented liquidity ecosystem.
The starting point for Layer 2 is to scale the Ethereum network, but now the reality is that each Layer 2 network has become an island, each with its own systems, rules, and barriers.
The liquidity of Layer 2 is isolated, users are trapped in cross-chain bridges between Layer 2s, while developers are forced to choose whether to build on Base, Arbitrum, or Starknet.
Fortunately, this predicament in the Ethereum ecosystem has seen a turning point. Over the past year, the community has begun to talk more about Based Rollups' Layer 2 solutions and view them as a potential answer to the problem of liquidity fragmentation. The community believes that Based Rollups will restore interoperability and composability of Layer 2 and revive the concept of 'money legos' from DeFi Summer (referring to the seamless interaction of DeFi protocols). In short, if Based Rollups deliver on all their promises, they will make the Ethereum ecosystem 'more like Ethereum.'
The fundamental issue that Based Rollups attempt to resolve is the use of separate transaction sorters on Layer 2. (Note: Sorters are engines that order transactions on the blockchain; current Rollup Layer 2s often use a centralized sorter they control, whereas Based Rollups order transactions through the Ethereum mainnet.)
Blockchain developer Teddy Knox told (Magazine): "When I first learned about the Layer 2 scaling roadmap from Vitalik Buterin's blog post, I found it hard to accept because it involves trade-offs."
"Unlike Layer 1 (Ethereum has a very large node committee to validate the network), the original form of Layer 2 is centralized sorters, which have special privileges to order transactions on the Layer 2 network."
The goal of Ethereum's Surge roadmap is to achieve 100,000 TPS, Source: Vitalik Buterin
Centralized sorters have fragmented Ethereum Layer 2.
While centralized sorters operate with high efficiency and allow operators to earn substantial profits, they also lead to isolation between different Layer 2s. Transactions processed by one of these Layer 2 sorters cannot easily match and interact with other Layer 2s, and this lack of interoperability has been a major reason for community FUD regarding Ethereum this year. (Interoperability between Layer 2s can still be achieved through other methods outside of shared sorters, but these methods are 'asynchronous,' meaning transactions are not real-time).
Thus, the Based Rollups proposed by Ethereum researcher Justin Drake (not to be confused with Coinbase's Layer 2 solution Base) are expected to address this fragmentation issue.
Unlike traditional Rollups, Based Rollups return the power of transaction ordering to the Ethereum mainnet (Layer 1). Before Layer 2 became popular, transaction ordering on the Ethereum network was handled by Layer 1.
Daniel Wang, co-founder of Taiko Labs, stated: "The method of sorting Based Rollup not only enhances the security of the Ethereum network but also improves its revenue potential and the cohesion of its ecosystem, ensuring that Layer 2 aligns better with the Ethereum mainnet, facilitating 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 is able to bring more revenue to Ethereum, approximately 5 times that of traditional Rollups.
Taiko is the first Based Rollup Ethereum scaling solution. Source: Justin Drake Twitter
Based Rollup and composability
Based Rollup sounds promising, but like anything, it has its pros and cons, so Based Rollup also has a range of issues.
For users to enjoy the benefits of Based Rollup, other Layer 2s must also adopt them. For Taiko, they are collaborating with Nethermind's Rollup Surge chain, which will be specifically designed to allow users to skip the Ethereum mainnet and interact directly with Taiko in cross-chain transactions.
However, Daniel told Cointelegraph at Devcon that despite being based on the same technology, these two Rollups still cannot achieve synchronous composability.
"You need to have almost real-time validity proofs to prove that both are changing simultaneously," he said, "I don't think we have achieved that yet, but as a project, we can't wait until that's implemented to launch."
Pros and cons of centralized sorters
When operated by a single entity or small group, sorters can effectively order transactions without the delays associated with decentralized consensus or Ethereum's 12-second block times.
The blockchain trilemma illustrates the challenge of simultaneously optimizing decentralization, scalability, and security.
For many Layer 2 networks, sacrificing decentralization to provide throughput unmatched by the Ethereum mainnet is worth it, although this also brings risks.
Knox explained: "If a sorter fails... it will affect performance, or they may easily censor your transaction without any other features."
Using centralized sorters reintroduces many of the issues that decentralization and blockchain initially sought to solve, such as censorship and single points of failure, among which the exploitation of MEV (maximum extractable value) is a significant concern.
However, while these concerns keep Ethereum idealists awake at night, the biggest issue for ordinary users is the convenience of switching between Layer 2s.
Duncan Townsend, a smart contract engineer at the 0x protocol (a decentralized trading protocol), stated that the current process of transferring funds from one Ethereum Layer 2 to another "is not a good experience."
"Unless you use chain abstraction protocols, the cross-chain user experience in DeFi is poor," he explained, "If you have Based features, you have composability. It doesn't matter where your tokens are because you can acquire them on any chain you need at low cost."
If Rollup shares this Based ordering framework, then 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 brought by adopting Based Rollup
Based Rollups utilize Ethereum's validator network to order transactions across multiple Layer 2s, restoring decentralized transaction ordering to create a more unified and efficient ecosystem where developers can build DApps that run across all participating Layer 2s (Layer 2s adopting Based Rollup).
As of November 20, the Ethereum mainnet had over 1 million validators. Source: Dune Analytics
However, getting existing Layer 2s to agree to give up their lucrative sorting income is not an easy task.
Townsend said, "The significant barrier to transitioning to Based sorting is that all current centralized Layer 2 sorters are making a fortune."
The income of top Layer 2 networks on Ethereum, measured 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 income. Additionally, its competitor Base, which uses Optimistic Rollup, has earned 20,904 ETH ($64.7 million), Arbitrum has earned 62,001 ETH ($192 million), while Optimism has earned 6,916 ETH ($21.5 million).
Will they really give up this income for idealism?
Based Rollup is the cure for Ethereum.
Although Taiko's Daniel is indeed an idealist, he stated that the mechanism of Based Rollup helps ensure the security of Ethereum's base layer; because Layer 2 activity reduces Layer 1 activity, thus decreasing validator income.
Daniel stated: "Based Rollup does provide additional fees, tips, and MEV opportunities for Layer 1 validators, which will encourage more validators to secure the Ethereum blockchain and ultimately make all Base Rollups more secure."
According to Growthepie, Taiko is the Layer 2 that has paid the most to the Ethereum mainnet. In the 30 days leading up to November 21, Taiko paid $1.29 million in gas fees, nearly five times that of the second-ranked Arbitrum One.
Taiko is the largest rent payer in Rollup on Ethereum, Source: Growthepie
Based Rollup makes being an Ethereum mainnet validator more profitable, thus encouraging staking, reducing the circulating supply of ETH, and potentially aiding in the long-term increase of ETH prices.
The future of Ethereum: Based Rollup? Or fragmentation?
Based Rollup's blockchain offers a potential solution for unifying liquidity in the Ethereum ecosystem, but returning to the Ethereum mainnet for sorting may also reignite old issues.
Daniel said the key trade-off of Based Rollups is that they are limited by Ethereum's current 12-second block time. Other Rollup transaction times are much shorter, for example, Arbitrum's transaction time is less than 1 second.
"We are working with partners on (transaction) pre-confirmations, which will allow Based Rollup to break free from the long block times of the Ethereum mainnet, providing users with a better transaction experience. Users will see their transactions included in blocks almost in real-time," Daniel said.
Without interoperability-enhancing solutions like Based Rollups, the Ethereum network is doomed to remain fragmented, while challengers in the DeFi space like Solana will continue to advance as a unified Layer 1, offering users a more seamless trading experience.
Solana returns to the DeFi stage in 2024, with TVL continuously on the rise.
"Essentially, it's about 'in terms of transaction throughput, how big can we make a single chain and a single Rollup, and how quickly can we settle them when liquidity needs to move from A to B?' Assets can reach there quickly, and users don't have to wait," Knox said.
Layer 2 needs to adopt a Based Rollup approach to succeed, but not everyone agrees with this. Source: Charlie Noyes Twitter
Townsend stated that Based Rollup is 'definitely' an effective solution for unifying the Ethereum ecosystem, but it is still a novel concept and there is currently no active ecosystem.
Townsend said: "The obstacle we face is convincing these Layer 2s to give up their lucrative income sources and join and participate in this interoperability ecosystem."
