Rollup Gold Rush: Sequencer Profit Sharing and a Glimpse into Decentralized Solutions
Author: YBB Capital Researcher Ac-Core
Foreword
Sequencer is an important component in Rollup, an Ethernet scaling program, which is used to sort transactions and create blocks, receive transactions, sort transactions, execute transactions and submit transaction data and other related operations. With the increase in the number of Layer2 in the Ethernet network and the prosperity of its ecosystem, the profitability of Layer2 itself and the centralization problem have gradually attracted people’s attention, for example, whether the sequencer component, which is more important in Rollup, can be decentralized and whether the distribution of sequencer profits can be achieved. This article is only for analysis and reference, not for project promotion.
Brief description of Rollup Economics
Rollup’s role:
According to an explanatory note from @barnabemonnot, a research scientist at the Ethernet Foundation, there are three main roles that can be separated in the Rollup system: the user, the Rollup operator, and the base layer, and the main process that they roughly operate in is as follows: when a user transacts on L2, the Rollup operator acts as an interface between the user and the base layer, and ultimately publishes the data to the base layer as shown below:
- Users: send their transactions on the Layer2 network and deploy their assets on Layer2 to Rollup for contractual interactions and payment flows to the Rollup Operator;
- Rollup Operator: represents all the infrastructure needed to process transactions on the Layer2 network, which also includes a number of other roles, such as Sequencers for posting batches of transactions, Executors for posting declarations, Challengers for reporting proofs of fraud, and Verifiers for calculating proofs of validity, the most important being the Sequencers. The most important is the Sequencers;
- Base Layer: also understood as the full node, its purpose is to protect the protocols of the data published by the Rollup, which is used to process and validate all transactions, to ensure that the Rollup state is correct and to ensure the validity of each transaction, and to delete erroneous transactions if found.
Rollup costs:
Layer2 Operator Costs: Costs incurred for maintaining a transaction pool, sequencing batch processing, calculating state roots/state differences/validity proofs, and other issues related to batch transaction processing such as sequencing, transaction verification, block generation, etc. And since Rollup is now centralized, the costs incurred are borne by the protocol itself or by the partner. And because the Rollup operator is now centralized, the costs incurred are borne by the protocol itself or a partner, while the process of “transaction compression” needs to be settled in the base layer.
Layer1 Data Availability Costs: DA is Rollup’s equivalent of Ethernet security. In order for Rollup to publish data on Ethernet, when the operator aggregates a large number of transaction sets, the operator needs to release the transaction sets to the base layer in the form of “CallData”, in which the DA cost contributed to the Ethernet L1 accounts for the majority of Rollup’s total cost, and the market price of the data at that time is governed by EIP-1559.
Layer2’s Congestion Verification Cost: This is a controversial impact cost that must be allocated to scarce resources when the supply of Rollup’s total block space is unable to meet existing market demand, and it also intuitively reflects the dynamic balance between Gas prices and network traffic.
Rollup’s revenue:
The topic comes to revenue, which comes from two main sources:Transaction Value and Issuance.
Transaction Value
The essence of Rollup is to expand the capacity of Ether, speed up and reduce the pressure of Layer1. The answer to the question of whether or not MEV-related gains will be obtained in Rollup is in fact negative. Because Rollup itself is relying on the sequencer relying on the Gas expenditure high and low for transaction sequencing, because it does not have the concept of block so there is no Mempool itself, but nowadays the private Mempool like OP Mainnet has brought about the MEV problem, so Rollup itself in the absence of a “privatized Mempool Therefore, Rollup itself will not get MEV profit without “private Mempool”, in essence, Rollup’s biggest profit comes from the price difference between traded gas.
Distribution
The second source of revenue is issuance. Revenue is generated at the base layer in the form of newly minted tokens from block producers of the network’s native crypto assets. Somewhat offsetting the infrastructure costs of the block producers, more block producers will join once this time a profit is generated. We are assuming that Rollup may be able to pay for operating expenses by issuing new tokens in the event that Rollup is able to mint its own Token (but in reality the model here will be more ambiguous and there are a variety of ways to apply the revenue stream to Rollup costs).
Regarding the cost and revenue balance related issues do not expand the narrative, the above is only a brief description, Cancun upgrade to a certain extent will also affect the Rollup profit and loss issues, its core EIP-4844 (also known as Proto-DankSharding), as summarized in a paragraph, is to alleviate the problem of the high DA cost of Ethernet Layer1, the emergence of a “blob” of temporary external storage, the Layer2 transaction data content can be moved to a new temporary “blob” storage. A temporary external storage “blob” that moves the data content of Layer2 transactions to a new temporary “blob”. However, it does not really store the Layer2 transaction data into Layer1. The benefit is that Layer2 will have lower storage cost and faster speed, but the uncertain impact of the current Layer2 data black box is still worth exploring.
Briefly explain how Rollup works:
- Aggregation: Rollup nodes collect multiple transactions and create a compressed summary i.e. a rollup block, which contains the basic information required for transaction validation and status updates;
- Validation: the Rollup block is submitted to the main blockchain where a validator node verifies the validity of the transactions within the block and ensures that they conform to the predefined rules.
In general once a block is verified, the status of the Rollup is updated on the chain and reflects the outcome of the transaction. In this way the computational load and data storage requirements on Layer1 are reduced by Rollup, thus significantly improving scalability. One effective approach is to move both computation and state storage off-chain, but keep some of the data on-chain.
What is a sequencer
The sequencer is a core component of the Rollup design choices, as it is literally responsible for sorting the accepted pairs of transactions by the price of the gas they pay, bundling the transactions into blocks, and extracting the fees in order to improve the ordering of the transactions and the efficiency of the whole system. The reality is that all Rollups on Ether are currently run in isolation from each other and in a centralized manner, and are managed by their respective Rollup teams. The intuitive effect of this is that Rollup providers maintain their own centralized sequencers to make the network cheaper and faster, but this also eats into the profits of the Rollup alone.
As in Rollup’s cost and revenue section above, its main profit comes from sorting the revenue from the user’s Gas spreads, while the expenses mainly lie in the data availability cost of Layer2 to Layer1, and the operating expenses of the centralized operator, so the sequencer mainly collects the transaction fee from the user side and pays the DA fee to the Ether Simple to understand:
Sequencer Revenue = User Transaction Gas Spread Revenue — L2 to L1 Data Expense — Sequencer Opex
Different Sorting Schemes for Op Rollups and Zk Rollups
Op Rollups are bundles of large numbers of off-chain transactions into larger batches before posting them to the base tier. This process facilitates the allocation of fixed fees to the many transactions in each batch, thereby reducing fees for users. Along with processing transactions in batches, a variety of compression techniques, as described above, are used to minimize the amount of data posted to the base tier. The difference between the two is that Zk Rollups utilizes cryptography to prove the validity of off-chain transactions, and Op Rollups relies on a mechanism to detect fraudulent activity to identify inaccuracies in transaction calculations.
After submitting a batch Rollup a challenge time period occurs during which anyone can challenge the result of the convolution transaction by generating a fraud proof. Upon a successful fraud proof the Rollup protocol re-executes the transaction and adjusts the state of the convolution accordingly. In addition, a successful fraud proof causes the sequencer’s bet to be cut, as the sequencer includes the incorrectly executed transaction in a block. In this process, a successful fraud proof results in a loss of the sequencer’s stake if the sequencer includes the incorrectly executed transaction in a block. At the end of the challenge period, if the rolling batch remains unverified (i.e., all transactions are executed correctly), it is recognized as valid and included in the base layer. The OP on the sequencer problem in the implementation is to use a multi-chain but single shared sequencer.
ZK Rollups reduces the amount of data that needs to be uploaded to the blockchain by aggregating transactions into batches that are processed off-chain. Its sequencers combine the changes needed to represent the entire batch of transactions into a single one, rather than transmitting each transaction individually, a process that generates proofs of validity in order to verify that the state changes are correct. So Zk Rollups are relying on zero-knowledge proofs of validity rather than fraud proofs, and the sequencer collects transaction data from L2 and is responsible for submitting (and, depending on the specific architecture, may also be responsible for publishing) zero-knowledge proofs to L1. If the sequencer behaves maliciously, their stakes are cut, which motivates them to publish valid blocks (or batches of proofs). The provers (or sequencers, if combined into a single role) justify these new states and executions by virtue of generating unforgeable proofs of transaction execution.
The sequencer then submits these proofs, along with transaction data or at least state differences, to the validator contract on the main Ethernet network. Technically, the duties of the sequencer and the prover could be combined into one. However, since both proof generation and transaction sequencing require highly specialized skills to be adequately accomplished, splitting these duties prevents unnecessary centralization in convolutional designs.
In many cases, the sequencer performs zero-knowledge proofs while only submitting changes to the L2 state to L1 and provides this data in the form of a verifiable hash to the validator smart contract on the main Ethernet network. Since Zk Rollups only requires proof of validity to complete the transaction, there is no delay in transferring funds from or to Zk Rollups to the base tier. Once the Zk Rollups contract confirms the proof of validity, the exit transaction is executed.
Centralization and Decentralization of Sorters
Sorters have centralized and decentralized points, the current L2 sequencer are centralized, but decentralized sequencer in the future is also particularly important, from the ideological point of view, in the existence of trust assumptions, the premise of a single centralized sequencer is not desirable. However, the sequencer is not indispensable, it is only Rullup in the design of the choice, because there is no new program to replace and Rollup are using the sequencer to solve the transaction sorting, so only the current centralized sequencer to do an analysis of the current Rollup progress as shown in the official data of L2BEAT.
- Centralized Sequencer
Advantages: It can greatly improve the transaction confirmation speed and reduce transaction costs, friendly user transaction experience;
Disadvantages: the most important defects from a single point of downtime risk and monopoly, single point of downtime problems do not need to do more elaboration, nowadays Rollup downtime events are not something new, and the monopoly of the risk is also self-evident, the centralized sorting machine undoubtedly obtains the right to sort the transaction, in order to easily maximize the benefits of their own, and secondly, it will also bring about the relative weakness of the anti-review.
- Decentralized Sorters
Advantages: Whether or not to use a decentralized sorting machine seems to have become an important criterion to measure whether Rollup is truly decentralized or not, its advantages are self-evident, it can increase the degree of decentralization to a very strong degree, to prevent the operator from committing evils, which to a large extent ensures the safety of users’ assets, as well as effectively prevent Rollup from experiencing all kinds of downtime phenomena.
Disadvantages: The cost of improving decentralization and security is to reduce transaction speed or increase transaction costs, which leads to a certain degree to reduce the user’s interactive experience.
Different types of the second layer
In his recent article “Different types of layer 2s”, Vitalik mentioned that the trend of heterogeneity in layer 2 projects will become more and more obvious in the future, and that this trend will continue, such as the traditional public chains represented by Arbitrum, Optimism, and Scroll, and the recent development of EVM ecosystems represented by Kakarot and Taiko, for the following reasons:
- Some projects that are currently standalone Layer 1s are looking to move closer to the Ether ecosystem, and these projects may want to transition gradually and potentially become Layer 2s. But because the technology isn’t ready to put everything on a Rollup;
- Some centralized projects want to provide more security assurances to their users and are exploring blockchain-based avenues. In many cases, these projects would have explored “permitted consortium chains” in the last era. In reality, they may only require “halfway house” level decentralization. Moreover, the throughput of these projects tends to be high, so they are not even suitable for rolling development, at least in the short term;
- Weak financial applications such as games or social applications, they also want to be decentralized. In the case of social media, the reality is that different parts of the application need to be treated differently: rare and high-value activities such as username registration and account recovery should be rolled up, while frequent and low-value activities such as posts and polls only require lower security. The risk of posts disappearing due to chain failure is tolerable. If a chain failure causes you to lose your account, that’s a much bigger problem.
Although current applications and users in Ether Layer1 will only have to pay a small Rollup fee in the short term, in this article we would like to illustrate whether users will be able to safely withdraw assets from Layer2 to Layer1 without problems, i.e., the “mandatory withdrawals” and the “escape hatch” features, as explained by Faust at the link to the relevant extensions [1].
If you have an asset that is on Layer1 but needs to be deposited into L2 before it can be transferred to another wallet address, to what extent can we guarantee that you will be able to retrieve this asset to Layer1, as depicted in a simple diagram:
It’s worth noting that this is a simplified model with many intermediate options. For example:
- Between Rollup and Validium: In Validium, anyone can make an on-chain payment to cover the cost of a transaction, at which point the operator will be forced to provide some data to the chain or lose the deposit.
- Between Plasma and Validium: The Plasma system [2] provides convolution-like security guarantees and off-chain data availability, but it only supports a limited number of applications. A system can provide a full EVM with Plasma-level guarantees for those who do not use these more complex applications and Validium-level guarantees for those who do.
These intermediate options can be thought of as a spectrum between the convolution and the RMS. But what motivates an application to choose a point on the spectrum rather than a point further left or right? There are two main factors here:
- The cost of Ethernet’s native data availability decreases as the technology improves. The next hard fork of Ethernet, Dencun [3], introduced EIP-4844, which provides on-chain data availability of approximately 32 KB per second. Over the next few years, with the introduction of full “on-chain data slicing” [4], this data availability is expected to increase in stages, eventually reaching ~1.3 MB per second. At the same time, improvements in data compression techniques [5] will enable us to do more with the same amount of data.
- The needs of the application itself: How much will users suffer from high costs versus application errors? Financial applications will suffer more from application failures; gaming and social media involve a lot of activity per user and relatively low value activity, so different security tradeoffs make sense for them.
A decentralized sequencer is either made by Rollup project or implemented by a third party. The third-party implementation of a decentralized sequencer can also be called Sequencing-as-a-Service. projects such as Espresso, SUAVE, Astria, Radius, and so on, are all focused on decentralized sequencer solutions, and their paths to implementation are different.
Solutions for decentralized sequencers
1) Espresso: consists of five main components: 1. HotStuff-based sharing mechanism [6] whose process needs to be passed by a two-thirds majority to be determined and irreversible; 2. Its DA layer provides two different paths for data retrieval. The first path is optimistic and fast, while the second path is more reliable but has slower backups and is designed for adversarial conditions; 3. Rollup REST API: The Rollup program uses this API to seamlessly integrate with Espresso Sequencer; 4. Sorter Contract: The Sorter Contract is a smart contract that validates the HotShot consensus, and it can act as a light client that Manages trade order checkpoints and oversees the table of stakes for the HotShot protocol; 5. Network Layer: This layer is used to facilitate communication between nodes participating in the DA layer and the HotShot consensus. In general, as shown in the figure below, when a user’s transaction is sent to Rollup, it is validated using the ZK or optimistic scheme.
2) SUAVE: It is an independent network layer that can share the memory pool with other block networks, and it can’t work with the smart contracts of Ether or other public chains. Instead, it separates the memory pool and block generation part from the existing public chains, so that it can support more Layer1 or Layer2 networks, and become a shared sequencer for Rollup chains. So it has some advantages in cross-chain MEV and transaction ordering between different Rollups, but it brings the same risks as cross-chain bridges.
3) Astria is to build a shared sequencer network layer to avoid the disadvantage of centralized sequencer, it relies on Tendermint-based leader rotation mechanism to solve the scalability of transaction sequencing and the downtime risk of centralized single point of failure, at the same time, Astira sequencer architecture is designed to aggregate transactions from multiple Rollups. At the same time, Astira’s sequencer architecture is designed to aggregate transactions from multiple rollups, rather than generating different state roots for a single block, and the resulting transactions are sequenced into blocks with “cohesion” and then released to the DA layer of Layer1, effectively separating transaction sequencing from execution. It is also because of this decoupling that Astria can accommodate various Rollups with different state transition functions.
4) Radius, unlike other implementations, eliminates the risks associated with MEVs by enabling encrypted mempool and running multiple sequencers simultaneously to ensure that rollup transactions are sequenced without trust. It uses the verifiable delayed encryption mechanism (PVDE) [7] to implement the encrypted Mempool, and the use of zero-knowledge proof encryption plays a role in ensuring that transactions are sorted without trust and preventing the risks associated with centralized sorters. However the cost of enhancing security with zero-knowledge proof is the possibility of transaction delays for the user experience despite MEV protection.The transaction flow of Radius is as follows:
- The user sends a transaction to the sorting layer
- The sorting layer sorts the transaction and generates a block
- The composed block is then submitted to the Rollup related program
- Rollup executes the transactions in the order provided by the sorting layer.
- Finally, Rollup submits the executed transactions to the settlement layer DA for final confirmation.
5) Madara It is a sorting machine used in the Layer2 network StarkNet, which is a more flexible sorting method that can be run centrally or decentrally to customize it for different applications. Currently, Madara is an off-the-shelf sorting machine solution for StarkNet, and the research and development work related to it is still in progress.
Outlook
The outlook for blockchain sequencers will be an exciting and transformative journey, with sequencers undergoing significant changes as the blockchain ecosystem evolves, moving away from centralized designs to more decentralized, efficient, and adaptable solutions. Advances in sequencing technology can be critical for the ethereum ecosystem to improve transaction efficiency, scalability and security.
Decentralization is the philosophical foundation of cryptocurrencies, shared ordering networks address the accumulation of value and distribution of income through economic mechanisms, and finally the increasingly mature ecosystem of modular building blocks and development frameworks for orderers will surely be a powerful catalyst for the industry in the future.
About YBB
YBB is a web3 fund dedicating itself to identify Web3-defining projects with a vision to create a better online habitat for all internet residents. Founded by a group of blockchain believers who have been actively participated in this industry since 2013, YBB is always willing to help early-stage projects to evolve from 0 to 1.We value innovation, self-driven passion, and user-oriented products while recognizing the potential of cryptos and blockchain applications.
Explain the literature:
【1】https://mp.weixin.qq.com/s/OEL4_-uocBy8WSU4jAeVgQ
【2】https://consensys.io/blog/ethereum-dencun-upgrade-explained-part-1
【3】https://hackmd.io/@vbuterin/sharding_proposal
【4】https://twitter.com/VitalikButerin/status/1554983955182809088
【5】https://arxiv.org/abs/1911.12095
【7】https://ethresear.ch/t/mev-resistant-zk-rollups-with-practical-vde-pvde/12677
Reference Article:
