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 on the base layer (Ethereum mainnet) and effectively reduced gas fees, but at the cost of creating a liquidity-split ecosystem.
The starting point of Layer 2 is to scale the Ethereum network, but the reality now 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, and developers are forced to choose whether to build on Base, Arbitrum, or Starknet.
Fortunately, this dilemma in the Ethereum ecosystem has reached a turning point. Over the past year, the community has increasingly talked 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 to Layer 2 and revive the concept of 'money legos' from DeFi Summer (referring to DeFi protocols that can interact seamlessly). 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 the engines that order transactions on the blockchain; current Rollup Layer 2s typically 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 a bit difficult to accept because it involves trade-offs and sacrifices."
"Unlike Layer 1 (where Ethereum has a very large node committee to validate the network), the original form of Layer 2 is centralized sequencers, which have special permissions to order transactions on Layer 2 networks."
The goal of the Ethereum Surge roadmap is to achieve 100,000 TPS, source: Vitalik Buterin
Centralized sequencers have fragmented Ethereum Layer 2.
Although the operational efficiency of centralized sequencers is extremely high and allows operators to earn substantial profits, they also lead to isolation between different Layer 2s. Transactions processed by one of these Layer 2 sequencers cannot easily match and interact with other Layer 2s, and this lack of interoperability has been a major reason for the FUD the Ethereum community has faced this year. (Interoperability between Layer 2s can still be achieved through other methods outside of shared sequencers, but these methods are 'asynchronous,' meaning transactions are not real-time.)
Thus, 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 hand back the power of transaction ordering to the Ethereum mainnet (Layer 1). Before Layer 2 became popular, transaction ordering on the Ethereum network was the responsibility of Layer 1.
Taiko Labs co-founder Daniel Wang stated: "The Based Rollup ordering approach can not only enhance the security of the Ethereum network but also improve its revenue capacity and the cohesion of its ecosystem, ensuring Layer 2 is more aligned with the Ethereum mainnet, promoting cheaper and faster transactions while supporting the sustainability of the Ethereum network." Taiko Labs developed the first production-level Based Rollup using Based ordering.
Compared to other Rollups using centralized sequencers, Taiko is able to bring in much more revenue to Ethereum, about 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 everything has its pros and cons, so Based Rollup also has a series of problems.
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 specially designed to allow users to skip the Ethereum mainnet and directly go back and forth with Taiko.
However, Daniel told Cointelegraph at Devcon that, despite being based on the same technology, these two Rollups still cannot achieve synchronized composability.
"You need to have near real-time validity proofs to demonstrate that both occur simultaneously," he said, "I don't think we've achieved that yet, but as a project, we can't wait until that's 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 challenges of optimizing decentralization, scalability, and security simultaneously.
For many Layer 2 networks, sacrificing decentralization to provide throughput unmatched by the Ethereum mainnet is worth it, although this itself brings risks.
Knox explained, "If the sequencer fails... it will impact performance, or they could easily censor your transaction without any other functionality."
Using a centralized sequencer brings back many of the issues that decentralization and blockchain initially tried to solve, such as censorship and single points of failure, where the utilization of MEV (maximum extractable value) is a significant concern.
However, despite these concerns keeping 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 moving funds from one Ethereum Layer 2 to another is "not a very 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; you can get them on any chain you need at low cost."
If Rollups share this Based ordering framework, then tokens and assets should be able to interact directly with each other without relying on separate cross-chain mechanisms, 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 where developers can build DApps that run across all participating Layer 2s (those adopting Based Rollup).
As of November 20, there are over 1 million validators on the Ethereum mainnet. Source: Dune Analytics
However, it is not a simple matter to convince existing Layer 2s to give up their lucrative sequencer revenue.
Townsend said, "The shift to Based ordering faces a significant obstacle, as all current centralized Layer 2 sequencers are raking in money."
Sequencer revenue of some top Layer 2 networks in ETH
According to Dune Analytics, as of November 20, the ZK Rollup ZKsync has accumulated nearly 40,500 ETH ($125.5 million) in ordering revenue. Additionally, the competitor Base, which uses Optimistic Rollup, has earned 20,904 ETH ($64.7 million) in revenue, Arbitrum has earned 62,001 ETH ($192 million) in revenue, while Optimism has earned 6,916 ETH ($21.5 million) in revenue.
Will they really give up this revenue for idealism?
Based Rollup is the remedy 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, 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 Growthepie data, Taiko is the Layer 2 that pays the most to Ethereum's mainnet. In the 30 days 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 a validator on the Ethereum mainnet more profitable, 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 offers a potential solution for unifying liquidity in the Ethereum ecosystem, but returning to the Ethereum mainnet for ordering could also reintroduce old problems.
Daniel said that the key trade-off of Based Rollups is that they are constrained by Ethereum's current 12-second block time. Other Rollup transaction times are much shorter, such as Arbitrum's transaction time being less than 1 second.
"We are working with partners on (transaction) pre-confirmation, which will allow Based Rollup to break free from the long block times of the Ethereum mainnet, providing users with a changed transaction experience. Users will see their transactions included in blocks almost in real-time," said Daniel.
Without solutions like Based Rollups that enhance interoperability, the Ethereum network is doomed to remain fragmented, while challengers in the DeFi space like Solana will continue to make progress as a unified Layer 1, offering users a more seamless transaction experience.
Solana returns to the DeFi stage in 2024, with TVL continuing to 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 quickly reach there, and users don't have to wait," Knox stated.
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 for unifying the Ethereum ecosystem, but it is still a novel concept and there is currently no active ecosystem.
Townsend said: "The obstacle we currently face is convincing these Layer 2s to give up their lucrative source of sequencer revenue to join and participate in this interoperability ecosystem."
