What is the best Ethereum scaling solution? Part 1: Optimistic Rollups

This is part one of a multi-part series exploring Ethereum scaling solutions.
In this piece, we will explore Optimistic Rollups.

Let’s start with the basics.

What is Layer 2?

Layer 2 (L2) is an umbrella term for solutions designed to help scale decentralized applications by handling transactions off blockchains like Ethereum Mainnet (which are considered layer 1) while deriving security of the transactions through layer 1s.

Layer 1 (L1) transaction speed drops when the blockchain is congested, making the overall user experience poor for certain types of dapps and increasing gas fees of transactions to exorbitant amounts as transaction senders need to outbid each other to process transactions.

When using layer 2, transactions are submitted to layer 2 servers (termed node, validator, operator, sequencer, block producer, for each respective layer 2) instead of being submitted directly to layer 1. Layer 2 would then would batch these transactions into groups before anchoring them to layer 1.

There are different methods for how the anchoring process is done. In this piece, we will focus on the Optimistic Rollup.

What are Optimistic Rollups?

Optimistic rollups are layer 2 (L2) protocols that reduce computation on Ethereum (L1) by bundling multiple off-chain transactions together in large batches before submitting to Ethereum. Thereby, spreading the fixed costs to the multiple transactions within each batch to reduce fees for end-users. Optimistic rollups also use techniques to compress data to reduce its size before its posted on Ethereum.

The “optimistic” of Optimistic rollups comes from the fact that the protocol assumes all the transactions on the L2 are valid. In doing so, it does not publish proofs of validity for transaction batches.

To maintain the validity of L2 transactions, optimistic rollups employ a fraud-proving scheme to detect whether transactions have been calculated incorrectly. Once a rollup batch is submitted to Ethereum, a challenge period exists for anyone to challenge the transaction by computing a fraud proof.

Should the fraud proof be correct, the rollup protocol re-executes the transaction(s) and updates the rollup’s state correctly. The server responsible for including the incorrectly executed transaction receives a penalty. If the rollup batch remains unchallenged, all of the transactions are deemed true and accepted onto layer 1.

Optimistic Rollup Networks

Optimism

Optimism was launched on October 2021 by OP Labs. Optimism is an EVM-compatible Optimistic Rollup chain. that aims to be fast, simple, and secure. As of the publishing date of this piece, a total of $1.42B is locked in Optimism.

Token:
The Optimism Token (OP) is an ERC-20 token that lets users participate in the governance of the Optimism protocol and funding of public goods.

OP tokens are not used to pay for gas on Optimism since transactions on Optimism are paid for in ETH, which you transfer onto Optimism using a bridge.

Notable Projects:
Uniswap
Curve Finance
Aave
Synthetix

Arbitrum One

Arbitrum was launched on August 2021 by Offchain Labs. Arbitrum aims to deliver a user experience that is exactly like interacting with Ethereum, but with transactions costing significantly less. Arbitrum has a suite of Ethereum scaling solutions that includes channels, sidechains, and rollups. As of the publishing date of this piece, a total of $2.51B is locked in Arbitrum.

Notable Projects:
Uniswap
Aave
Balancer
The Graph

Boba Network

Formerly known as OMGX, Boba Network was launched on September 2021 by Enya. Boba is an Optimistic Rollup forked from Optimism with user-friendly features like fast withdrawals, which allows users to withdraw funds from Boba into L1 without waiting for the 7-day fraud proof window unlike other Optimistic Rollup layer 2s. As of the publishing date of this piece, a total of $30.66M is locked in Boba Network.

Token:
The Boba token (BOBA) is a governance token for the Boba DAO that can be staked for rewards on Boba Network.

Even though ETH is the default gas token, all users have the option to change to BOBA which result in a 25% gas fee discount.

Notable Projects:
The Graph
UMA
FRAX
Dodo

In conclusion

Scalability has been one of the biggest concerns for developers and end-users of Ethereum Mainnet, and Layer 2s, specifically optimistic rollups have been proposed as a great solution to tackle this problem.

There are multiple optimistic rollup chains out there with small to large differences in their governance and technology, and as the layer 2 space matures will diverge even more. At present, it is difficult to pinpoint one optimistic rollup as the best solution, but we might be able to give a definite answer in the near future.

Stay tuned for the next piece in this series where we will discuss another form of layer 2, the zK rollup.

New to trading? Try crypto trading bots or copy trading on best crypto exchanges