Preface

Ethereum operates on the principle that every node stores and executes every transaction submitted by users. To scale the entire network, Ethereum has adopted the Rollup solution. Simply put, it moves most transaction processing off-chain (L2), thereby reducing the load on the Ethereum mainnet (L1) and lowering transaction fees. Rollup = a set of smart contracts on L1 + a network of nodes on L2, which includes both on-chain smart contracts and off-chain aggregators. It relies on Ethereum for settlement, consensus, and data availability, while only being responsible for executing transactions. The L2 network nodes are composed of several parts, the most critical of which is the sequencer. However, currently, the sequencers of Rollups face centralization issues.

Rollup and Sequencer

Rollup is a scaling solution for Ethereum (L1) that executes transactions off-chain and packages them into blocks. For each block, Rollup publishes the data needed to reconstruct the chain state (as a source of data availability) to the data availability layer and publishes proofs of the correctness of off-chain execution to the settlement layer. Rollups come in two types: in the case of ZK-rollup, a zero-knowledge proof is published with each block, whereas, in the case of Optimistic rollup, a fraud proof is only published when a dispute arises. After EIP-4844, when data publishing switches to blobs, this layer might be referred to as the “data publishing layer.” Rollup smart contracts on L1 verify the proofs published. Each Rollup has one or more bridges to enable data transfer between chains as well as deposits and withdrawals.

In the implementation logic of Rollup, the sequencer is a key component responsible for receiving transaction requests on L2, determining their execution order, and packaging the transactions into batches that are eventually sent to the Rollup smart contract on L1. This plays a crucial role in improving transaction processing efficiency and reducing costs.

The functionality and working principles of the sequencer can be summarized into four parts:

1. Receiving Transactions: The sequencer receives transaction requests from users or applications. These transactions are processed on L2 first, rather than directly on the Ethereum mainnet.

2 Ordering Transactions: The sequencer is responsible for ordering the received transactions, determining their execution sequence. This process is similar to what Ethereum miners do before packaging transactions into blocks.

3 Packaging Transactions: The sequencer packages the ordered transactions into batches that contain summarized information of multiple transactions.

4 Submitting to L1: Finally, the sequencer submits the packaged transaction batches to the Ethereum mainnet (L1) for settlement and data storage. This allows L1 to verify and store the state updates from L2.

Although Rollup technology provides an effective scaling solution, there are still some issues in the design and implementation of sequencers, foremost among them being the centralization problem. Most Rollup projects currently rely on centralized sequencers, usually controlled by a single entity or a few entities, which poses the obvious risks of lack of transparency and single points of failure.

Setting aside the rigid explanations above, discussions on decentralized sequencer solutions for L2, as mentioned in YBB Capital’s previous articles, whether it is Metis’s L2 solution, which directly opens up the staking of sequencer pool nodes to the market, or the independent project Espresso, their essence is the distribution of the “profit pie” of sequencing and the future market hype expectations. Therefore, interest and orthodoxy correctness are the unavoidable key points.

Historical Background and Design of Based Rollup

Image source: @drakefjustin

The concept of Rollup was first proposed by Ethereum founder Vitalik Buterin, who initially envisioned achieving a completely unconstrained “Total Anarchy” state to allow unlimited transaction expansion. Given the current issues with sequencers, in 2023, Ethereum Researcher Justin Drake proposed a solution called Based Rollups, where sequencers are managed by Ethereum L1 itself. The details are as follows (source: see extension link 1):

Definition:

“When the sequencing of Rollup is driven by the base layer (L1), we refer to it as L1-based or L1-driven Rollup sequencing. Specifically, an L1-based Rollup means that the next L1 proposer can work permissionlessly with L1 searchers and builders to include the next Rollup block in the next L1 block.”

Advantages:

● Liveness: Based Rollup enjoys the same liveness guarantees as L1. Note that non-Based Rollups with escape hatches have reduced liveness (escape hatches are a security mechanism in Rollups that allow users to safely withdraw assets from L2 back to the L1 main chain in case of Rollup system issues. It is similar to an emergency exit).

Weaker Settlement Guarantees: Transactions through escape hatches must wait for a timeout period before settlement is guaranteed.

MEV from Censorship: Rollups with escape hatches are vulnerable to adverse MEV effects from short-term sequencer censorship during the timeout period.

Network Effects at Risk: Mass exits triggered by sequencer liveness failures (e.g., a 51% attack on decentralized PoS sequencing mechanisms) will disrupt Rollup’s network effects. Note that, unlike L1, Rollup cannot elegantly recover from sequencer liveness failures using social consensus. In all known non-Based Rollup designs, mass exits are the Damocles sword.

Gas Penalty: Transactions settled through escape hatches typically incur a gas penalty for users (e.g., due to suboptimal data compression from non-batch-packed transactions).

● Decentralization: Based Rollup inherits the decentralization of L1, naturally reusing the L1 searcher-builder-proposer infrastructure. L1 searchers and builders are incentivized to include Rollup blocks in their L1 blocks to extract Rollup’s MEV. This in turn incentivizes L1 block proposers to package Rollup blocks on L1.

● Simplicity: Based Rollup sequencing is the simplest, even simpler than centralized sequencing. Based Rollup does not require verifying sequencer signatures, escape hatches, or external PoS consensus.

Historical Note: In January 2021, Vitalik referred to L1-based sequencing as “Total Anarchy,” which had the risk of multiple Rollup blocks being submitted simultaneously, leading to gas and workload waste. The current Proposer-Builder Separation (PBS) scheme can strictly control L1 sequencing, allowing at most one Rollup block per L1 block, and without gas waste. When Rollup’s n+1 block (or for k >= 1, n+k) includes the SNARK proof of block n, the waste of ZK-rollup proofs can be avoided.

● Cost: Based Rollup’s gas overhead is zero — it does not even require verifying signatures from decentralized or centralized sequencers. Based Rollup’s simplicity reduces development costs, shortens release times, and minimizes the exposure of code vulnerabilities. Based Rollup sequencing is also token-free, avoiding the regulatory burdens associated with token-based sequencers.

● L1 Economic Alignment: MEV derived from Based Rollup naturally flows to its base L1. This flow strengthens L1 economic security and, in the case of MEV burning, increases the economic scarcity of L1 native tokens. This close economic alignment with L1 can help build the legitimacy of Based Rollup. Importantly, despite sacrificing MEV revenue, Based Rollup retains the option to earn revenue from L2 congestion fees (e.g., in the form of EIP-1559 base fees).

● Sovereignty: Despite delegating sequencing to L1, Based Rollup retains sovereignty. Based Rollup can have a governance token, charge base fees, and use the revenue from these base fees as appropriate (e.g., Optimism funds public goods).

Disadvantages:

● No MEV Revenue: Based Rollup relinquishes MEV to L1, limiting its revenue to base fees. Counterintuitively, this might increase Based Rollup’s overall revenue. The reason is that the Rollup landscape appears to be winner-takes-all, where the successful Rollup may leverage Based Rollup’s security, decentralization, simplicity, and consistency to achieve dominance and ultimately maximize revenue.

● Constrained Sequencing: Delegating sequencing to L1 reduces sequencing flexibility. This makes certain sequencing services more difficult, or even impossible:

○ Pre-Confirmation: Rapid pre-confirmation is not an issue for centralized sequencing and can be achieved through external PoS consensus. Using L1 sequencing for rapid pre-confirmation is an open question, with many promising research directions, including EigenL, Inclusion Lists, and Builder Bonds.

○ First-Come, First-Served (FCFS): It is uncertain whether Arbitrum-style FCFS sequencing can be implemented on Based Rollup. EigenL may provide an FCFS overlay for L1-sequenced Based Rollup.

Naming:

The name “Based Rollup” comes from its closeness to the base chain (Base L1). This coincidentally conflicts with Coinbase’s recent announcement of the Base chain. Interestingly, Coinbase shared two design goals in their Base announcement:

● Tokenlessness: “We have no plans to issue a new network token.”

● Decentralization: “We plan to progressively decentralize the blockchain over time.”

Base can achieve tokenless decentralization by becoming a Based Rollup.

Image source: @jchaskin22

In summary, Based Rollup allows anyone to scale Rollup blocks, publishing the sequenced transaction state changes to L1 to extract MEV from L2, with all sequencing and security provided by Ethereum L1. This approach avoids the need for external PoS consensus and specific Rollup tokens. Compared to other Rollups that require an essential “emergency escape hatch” function to safeguard assets, Based Rollup’s vision eliminates this need, ensuring smooth transaction completion on Rollup as long as Ethereum continues to run securely.

Based Rollup and Taiko Labs

Source: Taiko official website

Taiko Labs is the main team developing and promoting Based Rollup, an Ethereum Layer 2 scaling solution. Their vision is to address the scalability issues of the Ethereum mainnet through innovative technologies like Based Rollup. Taiko Labs has three main features:

1. Fully Ethereum-Equivalent (Type 1) ZK-EVM: Utilizing a Type 1 zkEVM that offers full Ethereum compatibility, developers can seamlessly migrate decentralized applications (dApps) between Ethereum and Taiko without worrying about smart contract execution failures.

2.Open Source: All of Taiko’s source code is available on GitHub, allowing anyone to view, build, or modify it. This open-source approach ensures that blockchain technology development is not limited to a small team but includes contributions from a global community of developers.

3.Fully Decentralized: In addition to ensuring high compatibility with EVM, Taiko is committed to achieving full decentralization. Taiko plans to submit blocks and generate zkPs through decentralized proposers and validators, ensuring the protocol’s decentralized nature.

Taiko aims to build a Type 1 fully Ethereum-equivalent ZK-EVM, as mentioned by Vitalik Buterin in “The different types of ZK-EVMs” (see Extension Link 2). This pursuit of full and uncompromised equivalence with Ethereum aims for complete compatibility to verify Ethereum blocks (at least the execution layer, excluding the beacon chain consensus but including all transactions, smart contracts, and account logic without replacing hash, state/transaction trees, and other consensus logic). Therefore, compared to other types, Type 1 is the most complex and challenging solution to approach the native solution.

Image Source：Vitalik Buterin：《The different types of ZK-EVMs》

Other Core Structures:

Base Competitive Rollup (BCR)

Base Competitive Rollup is an innovative blockchain scaling solution developed by Taiko Labs. BCR aims to improve Rollup efficiency and security through a competitive mechanism, allowing different participants to freely compete in submitting blocks and generating proofs, thereby enhancing the overall network’s performance and decentralization.

● Features

Open Competition: Allows any eligible participant to compete in submitting blocks and generating proofs. This open mechanism reduces centralized control and enhances network decentralization. Competitors are incentivized to provide better services to earn rewards and transaction fees.

Efficient Scaling: Effectively improves block generation and verification efficiency. Multiple competitors can work in parallel, avoiding single points of failure and enhancing transaction processing speed and network scalability.

Security: Through a multi-party competitive mechanism, the system’s attack resistance is improved. Blocks and proofs generated by multiple parties increase system transparency and security, making it difficult for a single entity to control or attack.

● Advantages

EVM Compatibility: BCR is fully compatible with the Ethereum Virtual Machine (EVM), allowing existing Ethereum smart contracts and dApps to easily migrate to BCR without significant modifications.

High Throughput: Since BCR can process transactions and generate blocks in parallel, the network’s throughput is significantly increased, capable of handling higher transaction volumes while reducing transaction costs and latency.

Decentralization: The decentralized block generation and proof mechanism ensure the network’s decentralization, reducing the risk of control by centralized entities.

● Disadvantages

Increased Complexity: The system’s complexity requires sophisticated algorithms and protocols to coordinate block generation and verification among multiple competitors. Smart contracts may need additional logic to handle competitive results.

Potential Issues: In BCR’s competitive mechanism, multiple competitors computing and submitting blocks simultaneously may lead to increased fees. Users may face higher transaction costs, especially during busy or highly competitive periods. Additionally, resource-rich large nodes may dominate the competition, leading to centralization.

BBR (Based Booster Rollup)

In BBR, a Booster is a special participant responsible for optimizing transaction batches, compressing transaction data, and processing multiple transaction batches in parallel. Its primary function is to separate execution and storage, ensuring that while L2 handles execution, L1 remains decentralized, and smart contract addresses remain consistent across L1 and all BBRs.

However, BBR faces challenges such as increased system complexity, resource consumption, and potential centralization. Future developments will require further optimization and expansion to meet the evolving demands of blockchain technology.

Image source: Taiko Labs

Conclusion

Currently, Based Rollup represents a significant shift in Ethereum Layer 2 scaling methods. It delegates Rollup sequencing directly to Layer 1 proposers, utilizing the proposer-builder separation design. This allows Layer 1 to perform all sequencing roles for Rollup. Simultaneously, it extends MEV, enabling L2 searchers to bundle transactions and send them to L2 builders, who are also L1 searchers. These complete L2 blocks then become part of L1 blocks, ultimately processed by L1 builders and the Ethereum mainnet.

While it remains to be seen whether Based Rollup can be considered the ultimate solution for Rollups, it undeniably represents a major innovation in Ethereum Layer 2 scaling, providing a more secure and decentralized solution. If we apply the same thinking to the Bitcoin ecosystem, achieving a native and decentralized VM with the extensibility of Ethereum will undoubtedly be challenging. The entire industry still has a long way to go in solving the issue of truly decentralized scaling.

Extended Links:

【1】Based rollups — superpowers from L1 sequencing

【2】The different types of ZK-EVMs

Reference article

【1】The game of credit: Rollups rigged by multi-signing and committees

【2】Taiko Research Report: Ethereum Layer 2 solution that achieves seamless scaling and full compatibility

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