Original Title: (Make Ethereum feel like Ethereum again: Based rollups explained)
Author: 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 for Layer 2 is to scale the Ethereum network, but the reality today is that each Layer 2 network has become an island, with each island having its own systems, rules, and barriers.
Liquidity on Layer 2 is isolated, users are trapped in cross-chain bridges between Layer 2, and developers are forced to choose whether to build on Base, Arbitrum, or Starknet.
Fortunately, this dilemma in the Ethereum ecosystem has seen a turning point. Over the past year, the community has started talking increasingly about Based Rollups' Layer 2 solutions as a potential answer to the liquidity fragmentation problem. The community believes that Based Rollups will restore interoperability and composability of Layer 2 and revive the 'money Legos' concept of DeFi Summer on Layer 2 (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 problem that Based Rollups attempt to solve is the use of separate transaction sequencers on Layer 2. (Note: Sequencers are engines that order transactions on the blockchain, and current Rollup Layer 2s generally use a centralized sequencer they control, while 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 involved trade-offs and compromises.'
'Unlike Layer 1 (where Ethereum has a very large committee of nodes to validate the network), the original form of Layer 2 is centralized sequencers, 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 sequencers fragment Ethereum Layer 2.
While the operational efficiency of centralized sequencers is extremely high and allows operators to reap substantial profits, they also lead to isolation between different Layer 2s. Transactions handled by one Layer 2 sequencer cannot easily interact with other Layer 2s, and this lack of interoperability has been a major reason why Ethereum has faced community FUD this year. (Interoperability between Layer 2s can still be achieved through methods other than shared sequencers, 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 the popularity of Layer 2, transaction ordering on the Ethereum network was handled by Layer 1.
Daniel Wang, co-founder of Taiko Labs, stated, 'The method of Based Rollup sorting not only enhances the security of the Ethereum network but also improves its revenue potential and the cohesion of its ecosystem, ensuring Layer 2 aligns more closely with the Ethereum mainnet, facilitating cheaper and faster transactions while supporting the sustainability of the Ethereum network.' Taiko Labs developed the first production-grade Based Rollup using Based sorting.
Compared to other Rollups that use centralized sequencers, 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, and Based Rollup also has a series of issues.
To allow users to enjoy the benefits of Based Rollup, other Layer 2s must adopt them as well. As for Taiko, they are working with Nethermind's Rollup Surge chain, which will be specifically designed to allow users to skip the Ethereum mainnet and directly interact with Taiko cross-chain.
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 demonstrate that both are changing simultaneously,' he said, 'I think we haven't achieved that yet, but as a project, we can't wait until that is realized to launch.'
Pros and cons of centralized sequencers.
When operated by a single entity or small group, sequencers can effectively 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, sacrificing decentralization to provide throughput unmatched by the Ethereum mainnet is worth it, even though this itself also carries risks.
Knox explained, 'If the sequencer fails... it will affect performance, or they could easily censor your transactions without any other functionality.'
Using centralized sequencers brings back many of the issues that decentralization and blockchain originally sought to solve, such as censorship and single points of failure, with MEV (maximum extractable value) utilization being a significant concern.
However, while these concerns may keep Ethereum idealists awake at night, the biggest issue for everyday users is how easy it is to switch between Layer 2s.
Duncan Townsend, a smart contract engineer for 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 great experience.'
'Unless you're using 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 which chain your tokens are on, because you can obtain them on any chain you need at low cost.'
If Rollups share this Based sorting 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 leverage Ethereum's validator network to order transactions across multiple Layer 2s, restoring decentralized transaction ordering and creating a more unified and efficient ecosystem, allowing developers to build DApps that operate across all participating Layer 2s (those adopting Based Rollup).
As of November 20, the Ethereum mainnet has over 1 million validators. Source: Dune Analytics.
However, getting existing Layer 2 to agree to give up lucrative sequencer income is not a simple task.
Townsend said, 'The transition to Based sorting faces a significant obstacle, as all centralized Layer 2 sequencers are currently making a fortune.'
The income of some top Layer 2 networks on Ethereum in terms of ETH.
According to data from Dune Analytics, as of November 20, ZKsync, which adopts ZK Rollup, has accumulated nearly 40,500 ETH ($125.5 million) in sorting income. Additionally, its competitor Base, which adopts Optimistic Rollup, has earned 20,904 ETH ($64.7 million) in income, Arbitrum has earned 62,001 ETH ($192 million), and Optimism has earned 6,916 ETH ($21.5 million).
Will they really give up this income for idealism?
Based Rollup is the remedy for Ethereum.
Although Daniel from Taiko 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, thereby decreasing validator income.
Daniel stated, 'Based Rollup does indeed provide additional fees, tips, and MEV opportunities for Layer 1 validators, which will encourage more validators to secure the Ethereum blockchain, ultimately making all Base Rollups more secure.'
According to data from Growthepie, Taiko is the largest Layer 2 payer to the Ethereum mainnet. As of November 21, in the past 30 days, Taiko paid $1.29 million in Gas fees, nearly 5 times that of the second-ranked Arbitrum One.
Taiko is the largest Ethereum rent payer among Rollups, source: Growthepie.
Based Rollup makes it more profitable to be an Ethereum mainnet validator, encouraging staking, reducing the circulating supply of ETH, and potentially helping ETH prices rise in the long term.
The future of Ethereum: Based Rollup? Or fragmentation?
The blockchain of Based Rollup provides a potential solution to unify liquidity in the Ethereum ecosystem, but returning to the Ethereum mainnet for ordering may also rekindle old issues.
Daniel said that the key trade-off of Based Rollups is that they are limited by Ethereum's current 12-second block time. Other Rollups have much shorter transaction times, such as Arbitrum's transaction time of less than 1 second.
'We are working with partners to conduct (transaction) pre-confirmations, which will allow Based Rollup to break free from the longer block times of the Ethereum mainnet, thereby providing users with a changed trading 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 destined to remain fragmented, while challengers in the DeFi space like Solana will continue to advance as a unified Layer 1, providing users with a more seamless trading experience.
Solana returns to the DeFi stage in 2024, with TVL continuously rising.
'Essentially, it’s about how large we can make a single chain and single Rollup in terms of transaction throughput, and how quickly we can settle them when liquidity needs to move from A to B? Assets can get there quickly, and users won’t have to wait,' Knox said.
Layer 2 needs to adopt the 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 to unify the Ethereum ecosystem, but it remains 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 sequencer income to join and participate in this interoperability ecosystem.'
