Key Takeaways

• Rollup networks come with various risks, and lately, risks associated with sequencers are being highlighted.

• 'Based Rollups' refers to the sequencing of the rollup network taking place in the L1 upon which the rollup is based.

• Using Based Rollups offers the advantage of inheriting the decentralization of Ethereum. However, it has downsides in terms of MEV profitability and latency.

• Taiko is a representative rollup network that utilizes the Based Rollups approach.

1. Introduction

Undoubtedly, the period from 2022 to 2023 marked the ascendancy of Ethereum's Layer 2, during which various rollup networks proliferated. Within the Optimistic rollup sector, Arbitrum and Optimism have firmly secured spots among the top 10 by total value locked (TVL). Meanwhile, in the area of zk rollups, the second wave of Layer 2 is coming, especially with the introduction of Polygon's zkEVM and the launch of zkSync Era's mainnet.

1.1 The various risks of rollups

(Data as of Apr 15, 2023 | Source: l2beat)

However, due to the rapid growth of various Ethereum layer 2 networks, not all of them have met the criteria for a proper rollup. The table above analyzes the risks of existing rollup networks, as provided by the l2beat. Each item describes the approach taken by the rollup network, with yellow indicating a slight risk and red indicating a major risk.

1. State Validation: Since the Rollup Network performs computations off-chain, it must prove the validity of its computational results to Ethereum. This category is categorized by how this validation is achieved. For zk-rollups, this can be done via zero-knowledge proofs (zk-SNARKs, zk-STARKs). In the case of optimistic rollups, at least one honest entity should be in charge of fraud proof, but many networks do not yet have fraud-proof systems in place, and even if they do, there is still a long way to go as only whitelisted entities can submit fraud proofs.

2. Data Availability: A classification based on where the transaction data used in the computation is stored. On-chain storage on Ethereum is the most secure. In the case of External (DAC), the transaction data is managed off-chain by a group of entities called the Data Availability Committee, and in the case of Optimistic (MEMO), the transaction data is managed on a decentralized storage network, which is the approach used by Metis Andromeda.

3. Upgradability: Rollup networks have a smart contract on the Ethereum network, which is categorized as to whether or not it is upgradeable. Non-upgradable means that the code is immutable, which is the most secure, and often comes with a delay of a few days after the decision to upgrade, or in the worst case, a centralized entity can upgrade the rollup contract without any approval. In the last case, the centralized entity could steal all of your funds if they wanted to (although this is highly unlikely).

4. Sequencer Failure: Sequencers are responsible for determining the order of users' transactions on the rollup network, and this category categorizes what to do if all sequencers are offline or censoring. Transact using L1 means that the user can submit a transaction via Ethereum to add it to the rollup network, while Force exit to L1 means that the user can force the sequencer to insert a withdrawal transaction. The worst case is No mechanism, where the user has no recourse if the sequencer is offline or censored.

5. Validator Failure: Validators are the entities responsible for submitting the state of the rollup network and, in the case of zkRollup, the ZKP to the Ethereum network, and this section categorizes what to do if a validator goes offline. Propose blocks allow anyone to become a validator after a period of time, and Escape hatch (MP) allows users to safely withdraw their assets by submitting a Merkle Proof, both of which are very secure methods. Escape hatch (ZK) requires the user to submit a ZKP, which is quite a difficult task for an individual to execute, and Propose blocks (ZK) requires the node to execute the ZKP in addition to generating the ZKP. Again, the worst case scenario is no mechanism, which means that if the validator goes down, all users' assets are frozen.

1.2 The Importance of Sequencers

So far, we've covered a variety of risks, but one that's become a hot topic as many rollups have gotten larger is the failure of sequencers and validators. Optimism Network has grown to be the 6th largest network on TVL, but users' funds can be frozen if a whitelisted validator goes offline, and in the case of the recently released zkSync Era, there is no way to deal with a sequencer and validator going offline.

The reason for this concern is that most rollup networks in existence operate a centralized sequencer. Let's take a look at how the major rollup networks operate their sequencers:

• Optimism: Both the sequencer and validator are centralized and run by the Foundation (sequencer address: 0x68...2985, validator address: 0x47...3A33). Even if the centralized sequencer is offline or censored, users can still force transactions to the L2 network via L1, as the above-mentioned "Transact using L1" is possible. However, if a validator goes offline, users will not be able to withdraw from L2 to L1. Optimism has plans to decentralize the sequencer in the future, which it says will be solved by introducing economic game theory and governance mechanisms.

• Arbitrum: The sequencer is centralized and operated by the Foundation (sequencer address: 0xC1...47cc), and the validators are 13 whitelisted entities. Even if the centralized sequencer is offline or censored, users can still force transactions on the L2 network through L1, as the above-mentioned "Transact using L1" is possible. Unlike Optimism, there is also a fraud proof system in place, but it is only accessible to whitelisted validators, and if all validators go offline and the situation lasts longer than 7 days, anyone can become a validator and make withdrawals. Arbitrum has plans to decentralize the Sequencer in the future.

• zkSync Era: There is a centralized operator that acts as a sequencer and validator (operator address: 0x11...2211). The project is still in its infancy, so there is no way to fix any problems with the operator. zkSync Era plans to decentralize the operators in the future by creating a family of roles called Validators and Guardians.

• Polygon zkEVM: The Sequencer is operated in a centralized manner by the Foundation (Sequencer address: 0x14...2800), and the Validator (Aggregator in Polygon zkEVM) that submits ZKP is also centralized (Aggregator address: 0xdA...86eA). If the sequencer fails, the user's funds are frozen, but if the aggregator fails, anyone can still submit a ZKP to withdraw from L2 to L1. Polygon zkEVM will later decentralize the sequencer and aggregator with a consensus algorithm called PoE.

As a result of the centralization of sequencers and validators, there have been a number of recent projects that have attempted to decentralize the sequencing of rollup networks. Examples include Astria, Espresso, Radius, OP Stack, and Suave. They provide their own sequencer network to the rollup network so that the nodes in the rollup network only need to compute, but they decide the order of the transactions and hand them off to the rollup network. Contrarily, a different approach has been proposed by Ethereum Foundation researcher Justin Drake called Based rollups.

2. Based Rollups

"Base can achieve tokenless decentralization by becoming based." - Justin Drake

That's the last sentence of Ethereum Foundation researcher Justin Drake's introduction to Based Rollups. What does this mean that the rollup network launched by Coinbase could utilize a form of Based Rollups to achieve tokenless decentralization? (Note that Based Rollups and Coinbase's Base are not related, except for the similarity in name).

2.1 Overview

Based Rollups (or L1-sequenced Rollups) mean that the sequencing of the rollup network takes place on the L1 that the rollup is based on (in most cases, the Ethereum network). More specifically, in the case of Ethereum, this means that searchers, builders, and proposers on the network all participate in the sequencing of the rollup network.

2.2 Block Generation Participants

(MEV-Boost | Source: Flashbots)

Currently, the majority of Ethereum network blocks are created through a middleware called MEV-Boost, and in the future, this process will be built into the Ethereum protocol itself in a Proposer-Builder Separation (PBS). In this approach, searchers initially listen to the mempool, identify MEV opportunities, bundle them, and submit them to the builders. Builders take the transactions in the mempool and the bundles they receive from searchers and use their own algorithms to create full blocks that maximize MEV revenue, which are then delivered to proposers and added to the Ethereum network.

In this process, searchers and builders bid nearly as much MEV revenue as they can generate to get their bundles and transactions selected, with the effect that MEV revenue flows from searchers - builders - proposers.

2.3 Advantages of Based Rollups

Based Rollups have a number of advantages over traditional rollup networks that handle sequencing on their own. First, they rely on Ethereum to sequence transactions, so they benefit from Ethereum's liveness. When we looked at the risks of different rollups above, we saw that a lot can go wrong if the sequencer or validator fails, but with Based Rollups, that risk doesn't exist unless something happens to the Ethereum network.

The second is decentralization. Based rollups can still leverage the diverse set of participants that create blocks on the Ethereum network, and anyone can join the sequencing permissionlessly when they see an MEV opportunity in Based Rollups' mempool.

Third is the economic alignment with Ethereum. If an MEV opportunity is identified in Based Rollups, searchers and builders on the Ethereum network will submit corresponding bids to sequence it, so the value from Based Rollups' MEV revenue will naturally flow into Ethereum L1.

Fourth is simplicity. A rollup network in the form of Based Rollups is also simpler than having a centralized sequencer. Based Rollups doesn't need to validate the signatures of sequencers, build escape hatch (a system that allows users to withdraw if a validator goes offline safely), or introduce new algorithms for decentralized sequencers later.

Fifth, no tokens are required. Traditional rollup networks require the presence of a token in order to decentralize the sequencer later. However, since the sequencing of Based Rollups is done on the Ethereum network, no token is required.

2.4 Disadvantages of Based Rollups

Based Rollups also have a number of disadvantages. The first is that the rollup network's own MEV revenue flows to Ethereum L1 and does not accumulate value on L2. However, in addition to MEV revenue, base fees for submitting transactions can be accumulated at the L2 end.

Second, there are sequencing limitations. Since Based Rollups relies entirely on the Ethereum network for its sequencing process to order transactions, it is very difficult to introduce their own sequencing process. Furthermore, relying on Ethereum for sequencing has the disadvantage that it follows Ethereum's finality, which can be very UX-unfriendly, but many researchers are currently researching ways to impose finality in advance through EigenLayer, inclusion lists, builder bonds, etc.

3. Example

Although it's not certain whether Based Rollups will be applied, there is a research piece posted on ethresearch by Taiko, one of the prominent Layer 2 zkEVM projects.

(Source: Taiko)

If L2 applies Based Rollups, the MEV flows like this:

• L2 Searchers bundle L2 transactions and send them to L2's Block Builders.

• L2 Block builders create L2 Blocks, which are then sent to L1 Searchers and can be used as part of L1 Bundles.

• Note that L2 blocks must be sent in a private order flow when sent to L1, otherwise the MEV can be stolen.

Taken together, if L1 Searchers are watching both L2 and L1 mempools, they can extract cross-chain MEV between Ethereum and L2 with Based Rollups, and the value of L2's MEV can be accumulated in Ethereum.

4. Final Thoughts

As the various rollup networks grow, there is a growing concern about centralized sequencers. While there are a number of sequencing layer projects out there to address this, Justin Drake's Based Rollups is a refreshing idea.

I've already mentioned the drawbacks above, but in my opinion, the biggest weaknesses of Based Rollups are profitability and slow finality. The only incentive for Ethereum network block producers to participate in the sequencing of Based Rollups is the MEV revenue which might be not lucrative. Also, since the sequencing takes place on the Ethereum network, instead of benefiting from Ethereum's liveness, they are locked into slow finality. If the sequencer part, which currently has centralization issues, is also handled by Ethereum, it can be said to be closer to a true rollup, but incentive schemes and ways to preemptively grant completeness will need to be further researched before Based Rollups can be widely used.

Coinbase, the largest cryptocurrency exchange in the United States, has launched its own rollup network, Base, with two design goals: 1) tokenless and 2) decentralized. Base published a roadmap to achieve this by leveraging Optimism's OP Stack, but both goals could have been easily achieved by adopting the similarly named Based Rollups approach. If you're an enterprise building a blockchain network, and you're looking for high scalability and decentralization, and you can't mint tokens, Based Rollups could be a good option.

Thanks to Kate for designing the graphics for this article.