Original author: Yohan Yun.
Original translation: Luffy, Foresight News.
Ethereum's Rollup-centered 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 was to scale the Ethereum network, but the reality now 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 2s, and 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 the Layer 2 solutions of Based Rollups and view them as a potential answer to the liquidity fragmentation problem. The community believes that Based Rollups will restore interoperability and composability for Layer 2s, reviving the concept of 'money Legos' of DeFi Summer (referring to the seamless interaction of DeFi protocols). In short, if Based Rollups fulfill 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 sorters on Layer 2. (Note: Sorters are engines that sort transactions on the blockchain. Current Rollup Layer 2s typically use a centralized sorter that they control, while Based Rollups sort 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 hard to accept because it involves trade-offs and compromises."
"Unlike Layer 1 (where 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 sort 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 very efficiently and yield substantial profits for operators, they also lead to isolation between different Layer 2s. Transactions handled by one Layer 2 sorter cannot easily match and interact with other Layer 2s, and this lack of interoperability has been a major reason for community FUD surrounding Ethereum this year. (Interoperability between Layer 2s can still be achieved through other methods outside of shared sorters, but these methods are implemented 'asynchronously', 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) aim to resolve this fragmentation issue.
Unlike traditional Rollups, Based Rollups return the power of transaction sorting back to the Ethereum mainnet (Layer 1). Before the popularity of Layer 2, transaction sorting on the Ethereum network was entirely the responsibility of Layer 1.
Daniel Wang, co-founder of Taiko Labs, stated: "The sorting method of Based Rollup not only enhances the security of the Ethereum network but also increases its revenue potential and ecosystem cohesion, ensuring that Layer 2 aligns more closely with the Ethereum mainnet, facilitating cheaper, faster transactions, while supporting the sustainability of the Ethereum network." Taiko Labs has developed the first production-grade Based Rollup utilizing Based sorting.
Compared to other Rollups that use centralized sorters, Taiko is able to bring significantly more benefits to Ethereum, approximately 5 times that of traditional Rollups.
Taiko is the first Based Rollup scaling solution for Ethereum. Source: Justin Drake Twitter.
Based Rollup and Composability
Based Rollup sounds promising, but everything has its pros and cons, and Based Rollup also has a range of issues.
To allow users to enjoy the benefits of Based Rollup, other Layer 2s also need to adopt them. In the case of 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 conduct cross-chain interactions with Taiko.
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 show that both are changing simultaneously," he said, "I don't think we've achieved that yet, but as a project, we can't wait until that happens to launch."
Pros and cons of centralized sorters.
When operated by a single entity or a small group, sorters can effectively sort transactions without delays associated with decentralized consensus or the 12-second block time of Ethereum.
The blockchain trilemma illustrates the challenge 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, even though it carries its own risks.
Knox explained: "If the sorter fails... it can affect performance, or they are likely to easily censor your transaction without any other functionality."
Using centralized sorters brings back many of the issues that decentralization and blockchain originally sought to address, such as censorship and single points of failure, with MEV (maximum extractable value) exploitation being a significant concern.
However, while these concerns may keep Ethereum idealists up at night, the biggest issue for ordinary users is the convenience of switching between Layer 2s.
Duncan Townsend, a smart contract engineer for 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 great 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 a 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, achieving native interoperability between Rollups.
Challenges posed by adopting Based Rollup
Based Rollups leverage Ethereum's validator network to sort 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 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 forgo lucrative sorter revenues is not a straightforward task.
Townsend said, "The shift to Based sorting faces a significant obstacle, which is that all current centralized Layer 2 sorters are raking in profits."
Sorting revenue of some top Layer 2 networks on Ethereum, 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. Additionally, its Optimistic Rollup competitor Base 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 these revenues 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, thus reducing the income of validators.
Daniel stated: "Based Rollup does indeed provide additional fees, tips, and MEV opportunities for Layer 1 validators, which will encourage more validators to protect 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 the 30 days ending November 21, Taiko paid $1.29 million in gas fees, nearly 5 times that of the second-ranked Arbitrum One.
Taiko is the largest payer of Ethereum rent in Rollups, source: Growthepie.
Based Rollup makes it more profitable to be a validator on the Ethereum mainnet, encouraging staking, reducing the circulating supply of ETH, and potentially contributing to an increase in ETH prices in the long term.
The future of Ethereum: Based Rollup? Or fragmentation?
The blockchain of Based Rollup offers a potential solution to unify liquidity in the Ethereum ecosystem, but returning to the Ethereum mainnet for sorting could also trigger 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. This is because other Rollup transaction times are very short, for example, Arbitrum's transaction time is less than 1 second.
"We are working with partners on (transaction) pre-confirmation, which will allow Based Rollup to escape the limitations of longer block times on the Ethereum mainnet, providing users with an altered transaction experience. Users will see their transactions included in blocks almost in real time," Daniel said.
Without enhanced interoperability solutions like Based Rollups, the Ethereum network is destined to remain fragmented, while challengers in the DeFi space like Solana will continue to make progress as a unified Layer 1, providing users with a more seamless transaction experience.
Solana returns to the DeFi stage in 2024, with TVL on the rise.
"Essentially, it's about 'in terms of transaction throughput, how big we can make a single chain and a single Rollup, and how quickly we can settle them when liquidity needs to move from A to B? Assets can reach there quickly, 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 said that Based Rollup is "definitely" an effective solution to unify the Ethereum ecosystem, but it is still a novel concept and there is currently no active ecosystem.
Townsend said: "The current obstacle we face is convincing these Layer 2s to give up lucrative sources of revenue from sorters to join and participate in this interoperability ecosystem."
