Scaling Ethereum with Rollups

Why is Ethereum so popular?

When Bitcoin was introduced, it allowed for transactions to be posted on the blockchain. Users could create accounts and send money to each other in a permissionless manner. While this was revolutionary, the blockchain’s functionality was limited to transactions only.

Scaling solutions

Many teams have come together to solve this issue. Currently, the market for scaling solutions can be segmented binomially by the intended outcome of the project — to improve the Ethereum network or create a better network elsewhere.

Rollups

Rollups are scaling solutions that fall into the L2 category — they perform transaction execution outside of L1 but post they process multiple transactions on a separate chain, “roll them up” into a single transaction, and relay this back to the main chain, increasing the throughput of the L1 and decreasing transaction costs for users.

Zero-Knowledge Proofs

Before understanding how ZK rollups work, you should understand the technology behind them. In short, zero-knowledge proofs utilize cryptography to create a method where one party can prove to another party that a given statement is true without conveying any other information other than the statement is indeed true. Click here for a comprehensive breakdown, but that definition should suffice for this article.

Zero-Knowledge Rollups for scalability

For scaling, the rollup is providing the L1 proof that all transactions processed in it are legitimate. A batch of off-chain transactions is sent to a third party who runs the computation and submits a validity proof, called ZK-SNARK (succinct non-interactive argument of knowledge), that all the transactions have been executed and are non-fraudulent.

  • Substantially cheaper transactions
  • Near instant finality achieved with validity proof
  • Keeps liquidity on Layer 1 — preserving composability while lowering costs
  • Higher throughput
  • Mathematically complex technology: requires substantial computing power
  • Difficult to prove general purpose EVM execution, better suited for transaction verification
  • Computation outsourced to a single third party

Optimistic rollups

Unlike ZK rollups, which exert computational power to verify transactions, optimistic rollup validators post data to L1 assuming it’s correct, hence the name optimistic. By skipping the verification process, the network is able to expend less computational power.

  • Fully EVM equivalent L2 blockchains allow developers to easily deploy existing smart contracts on layer 2.
  • Access to all EVM developer tools (hardhat, scaffold-ETH, etc.)
  • Complicated EVM execution can be run on the layer 2
  • All data is visibly stored on the chain
  • DTD delay of the verification period causes a week-long delay to finality on layer 1
  • Assumptions have to be made that there is at least one honest validator/network participant
  • Less privacy
  • Cannot reach the capital efficiency of ZK without sacrificing their security

Future outlook

Currently, there is a lot of ongoing development in both the optimistic and the ZK rollup camps, alongside a heated debate on who is going to win out. In some cases such as scaling smart contracts, optimistic rollups currently seem better, and in others such as processing large quantities of transactions, ZK outperforms. Investments made by a16z in both technologies signal they believe both will have their respective share of the market.

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Glen Rose

Glen Rose

Investment analyst at Serafund. @glenr0se on Twitter.