Rollup Money Tree: An Overview of Sorter Cake Distribution and Decentralized Solutions

Author: YBB Capital Researcher Ac_Core

Introduction

Sequencers are an important component of the current Ethereum scaling solution Rollup. They are responsible for sorting transactions and performing related operations such as block creation, transaction acceptance, transaction sorting, transaction execution, and transaction data submission. With the increasing number of Layer 2 networks on the Ethereum network and the flourishing of its ecosystem, the profitability of Layer 2 itself and issues of centralization have gradually attracted attention, such as whether the important sequencer component in Rollup can achieve decentralization and how sequencer profits are distributed. This article serves only as an analytical reference and is not for project promotion.

Overview of Rollup Economics

Roles in Rollup:

According to the explanation by Ethereum Foundation research scientist @barnabemonnot, we can identify three main roles in the Rollup system: users, Rollup operators, and the base layer. The main process they operate is roughly as follows: when users conduct transactions on L2, Rollup operators act as an interface between users and the base layer, ultimately publishing data to the base layer, as shown below:

1. Users: Send their transactions on the Layer 2 network, deploy their assets on Rollup for contract interactions, and direct fee payments to Rollup operators;
2. Rollup Operators: Represent all the infrastructure needed to process transactions on the L2 network, which also includes many other roles, such as sequencers that publish transaction batches, executors that publish statements, challengers that report fraud proofs, and validators that compute validity proofs, with sequencers being the most important;
3. Base Layer: Can also be understood as full nodes, whose purpose is to protect the data protocol of Rollup, handle and verify all transactions, ensure the correctness of Rollup state, and validate each transaction, such as identifying erroneous transactions and removing them.

Image source: @barnabemonnot

Costs of Rollup:

Layer 2 Operator Costs: Costs incurred to maintain a transaction pool, sequence batch processing, compute state roots/state differences/validity proofs, and other issues related to batch transaction processing, sorting, transaction verification, and block generation. Since Rollup operators are currently centralized, the costs incurred are borne by the protocol itself or partners, and the "transaction compression" process needs to be settled on the base layer.

Layer 1 Data Availability Costs: DA is the guarantee of Rollup's equivalence to Ethereum's security. To publish data on Ethereum, when operators aggregate a large number of transaction sets, they need to release the transaction set to the base layer in the form of "CallData," where the DA costs contributed to Ethereum L1 account for the vast majority of Rollup's total costs, and the market price of data at that time is managed by EIP-1559.

Layer 2 Congestion Verification Costs: This is a highly controversial impact cost. When the total block space supply of Rollup cannot meet existing market demand, scarce resources must be allocated, which also intuitively reflects the dynamic balance between gas prices and network traffic.

Revenue of Rollup:

When it comes to Rollup's revenue, it mainly has two sources: Transaction Value and Issuance.

Transaction Value

The essence of Rollup is to scale Ethereum, speed up transactions, and reduce pressure on Layer 1. The question of whether Rollup will gain MEV-related revenue is actually negative. This is because Rollup relies on sequencers and sorts transactions based on gas expenditure levels; since it does not have the concept of blocks, there is no Mempool. However, the private Mempool of OP Mainnet has brought MEV issues. Therefore, Rollup itself will not gain MEV profits without a "privatized Mempool." Essentially, Rollup's largest profit source comes from the price difference between transaction gas.

Issuance

The second source of revenue is issuance. At the base layer, revenue is obtained in the form of newly minted tokens from the block producers of the network's native cryptocurrency. This somewhat offsets the infrastructure costs of block producers, and once profits are generated, it will attract more block producers. Assuming Rollup can mint its own tokens, it may pay operational costs through the issuance of new tokens (but the actual model here is somewhat vague, and there are various ways to use revenue sources for Rollup costs).

We will not elaborate on the issues related to the balance of costs and revenues; the above is just a brief overview. The Cancun upgrade will also affect Rollup's revenue situation to some extent. Its core EIP-4844 (also known as Proto-DankSharding) can be summarized in one sentence as alleviating the high DA cost issues of Ethereum Layer 1, introducing temporary external storage of "blobs," which can move Layer 2 transaction data content into a new temporary "blob" for storage. However, it does not truly store Layer 2 transaction data on Layer 1. The benefit is that Layer 2 will have lower storage costs and faster speeds, but the uncertain impacts brought by the current black box of Layer 2 data are still worth exploring.

Brief Overview of Rollup Working Principles:

1. Aggregation: Convolution nodes collect multiple transactions and create a compressed summary, i.e., a convolution block, which contains the essential information needed for transaction verification and state updates;
2. Verification: Rollup blocks are submitted to the main blockchain, where validator nodes verify the validity of the transactions within the block and ensure they comply with predefined rules.

In summary, once a block is verified, the Rollup state will be updated on-chain to reflect the results of the transactions. This reduces the computational load and data storage requirements on Layer 1 through Rollup, significantly improving scalability. The effective approach is to move both computation and state storage off-chain while retaining some data on-chain.

What is a Sequencer

Sequencers are the core component of Rollup's design choices. As the name suggests, they are responsible for sorting accepted transactions based on their gas prices, bundling transactions into blocks, and extracting fees to enhance the orderliness of transactions and the overall processing efficiency of the system. However, the reality is that all Rollups on Ethereum currently operate in an isolated and centralized manner, managed by their respective Rollup teams. The intuitive impact of this is that Rollup providers maintain their centralized sequencers to achieve cheaper and faster network performance, but this also monopolizes Rollup profits.

Image source: Binance Research

As mentioned in the previous sections on Rollup costs and revenues, the main profit comes from sorting the income from users' gas price differences, while expenditures mainly consist of Layer 2's data availability costs to Layer 1 and the operational expenses of centralized operators. Therefore, sequencers primarily charge transaction fees from users and pay DA fees to Ethereum, simply understood as:

Sequencer Revenue = User Transaction Gas Price Difference Revenue -- L2 Data Expenditure to L1 -- Sequencer Operational Expenditure

Different Sorting Schemes of Op Rollups and Zk Rollups

Op Rollups bundle a large number of off-chain transactions together to form larger batches before publishing them to the base layer. This process helps allocate fixed costs to many transactions within each batch, thereby reducing user fees. While batching transactions, various compression techniques are also employed to minimize the data published to the base layer. The difference is that Zk Rollups use cryptography to prove the validity of off-chain transactions, while Op Rollups rely on a mechanism to detect fraudulent activities to identify inaccuracies in transaction computations.

After submitting a batch Rollup, a challenge period occurs during which anyone can question the results of convolution transactions by generating fraud proofs. Upon successful fraud proof, the Rollup protocol will re-execute the transactions and adjust the convolution state accordingly. Additionally, a successful fraud proof will lead to a reduction in the sequencer's stake, as the sequencer included incorrectly executed transactions in a block. In this process, if the sequencer includes incorrectly executed transactions in the block for fraud proof, a successful outcome will harm the sequencer's interests. After the challenge period ends, if the Rollup batch remains unverified (i.e., all transactions are correctly executed), it will be confirmed as valid and included in the base layer. Regarding the sequencer issues during the implementation process, OP adopts a multi-chain but single shared sequencer.

ZK Rollups aggregate transactions into batches and process them off-chain, thereby reducing the amount of data that needs to be uploaded to the blockchain. Their sequencers merge the changes required for the entire batch of transactions into a single one, rather than transmitting each transaction individually. To verify whether the state changes are correct, they generate validity proofs. Thus, Zk Rollups rely on zero-knowledge validity proofs rather than fraud proofs. Sequencers collect transaction data from L2 and are responsible for submitting (and possibly publishing, depending on the specific architecture) zero-knowledge proofs to L1. If the sequencer behaves maliciously, their stake will be reduced, incentivizing them to publish valid blocks (or batch proofs). Provers (or sequencers, if merged into one role) generate non-falsifiable proofs of transaction execution to demonstrate that these new states and executions are correct.

Subsequently, the sequencer submits these proofs along with transaction data or at least state differences to the validator contract on the Ethereum mainnet. Technically, the responsibilities of sequencers and provers can be combined. However, since both proof generation and transaction sorting require highly specialized skills to be fully accomplished, separating these responsibilities can prevent unnecessary centralization in convolution design.

In many cases, sequencers submit only the changes in L2 state to L1 while generating zero-knowledge proofs, providing this data to the validator smart contract on the Ethereum mainnet in the form of verifiable hashes. Since Zk Rollups only need to provide validity proofs to complete transactions, funds moving in or out of Zk Rollups to the base layer do not incur any delays. Once the Zk Rollups contract confirms the validity proof, the exit transaction will be executed.

Centralization and Decentralization of Sequencers

Currently, sequencers in L2 are centralized, but decentralized sequencers will be particularly important in the future. From an ideological perspective, a single centralized sequencer is undesirable under the premise of trust assumptions. However, sequencers are not indispensable; they are merely a design choice for Rollup. Currently, there are no entirely new solutions, and Rollups all adopt centralized sorting methods to solve transaction sorting issues. The actual progress of Rollups is shown in the official data from L2BEAT below.

• Centralized Sequencers

Advantages: Can greatly enhance transaction confirmation speed and reduce transaction costs, providing a user-friendly transaction experience;

Disadvantages: The main drawback comes from single point of failure risks and monopolies. The single point of failure issue does not require much elaboration; the frequent Rollup downtime events are no longer surprising, and the risks brought by monopolies are self-evident. Centralized sequencers undoubtedly gain the sorting rights of transactions, easily maximizing their own interests, which also brings relatively weak risks of censorship resistance.

• Decentralized Sequencers

Advantages: Whether to use decentralized sequencers seems to have become an important criterion for measuring whether Rollup can truly decentralize. Its advantages are self-evident, as it can significantly increase the degree of decentralization, prevent operators from malicious behavior, thus greatly ensuring the security of users' assets, and effectively prevent various downtime phenomena in Rollup;

Disadvantages: The cost of enhancing decentralization and security is a reduction in transaction speed or an increase in transaction costs, which can weaken the user interaction experience to some extent.

Image source: L2BEAT

Different Types of Layer 2

Vitalik mentioned in his recent article "Different types of layer 2s" that the trend of heterogeneity among Layer 2 projects will become increasingly evident in the future, and this trend will continue. For example, traditionally represented public chains like Arbitrum, Optimism, and Scroll, and the recent development of the EVM ecosystem represented by Kakarot and Taiko, are primarily due to the following reasons:

• Some projects that are currently independent Layer 1s are seeking to align with the Ethereum ecosystem. These projects may wish to gradually transition and potentially become Layer 2s. However, because the technology is not yet ready, they temporarily place everything on a single Rollup;
• Some centralized projects wish to provide more security guarantees for their users and are exploring blockchain-based approaches. In many cases, these projects will explore "permissioned consortium chains" from the previous era. In reality, they may only need a "midway house" level of decentralization. Additionally, these projects often have high throughput, making them unsuitable for Rollup development at least in the short term;
• Weak financial applications such as games or social applications also wish to achieve decentralization. In terms of social media, it is necessary to treat different parts of the application differently: rare and high-value activities such as username registration and account recovery should adopt Rollup, while frequent and low-value activities such as posts and voting only require lower security. The risk of posts disappearing due to chain failures is bearable, while the risk of losing accounts due to chain failures is much harder to bear.

Although applications and users in Ethereum Layer 1 currently only need to pay small Rollup fees in the short term, the point we want to emphasize in this section is whether users can smoothly and safely withdraw assets from Layer 2 back to Layer 1, i.e., the "forced withdrawal" and "lifeboat" functions of Rollup, as explained in the related extended link by Faust【1】.

Image source: Different types of layer 2s

If you have an asset located on Layer 1 but need to be deposited into Layer 2 before it can be transferred to another wallet address, to what extent can we ensure that you can withdraw this asset back to Layer 1? To clarify this, let’s use a simple chart:

Data source: Different types of layer 2s

It is worth mentioning that this is a simplified model with many intermediate options. For example:

• Between Rollup and Validium: In Validium, anyone can make on-chain payments to pay transaction fees, at which point operators will be forced to provide some data on-chain; otherwise, they will lose their deposits.
• Between Plasma and Validium: Plasma systems【2】 provide security guarantees similar to convolution and off-chain data availability but only support a limited number of applications. A system can provide a complete EVM and offer Plasma-level guarantees for users not using these more complex applications while providing Validium-level guarantees for users using these applications.

These intermediate options can be seen as a spectrum between convolution and validity. However, what drives applications to choose a specific point on the spectrum rather than a point further left or right? There are two main factors:

1. The cost of Ethereum's native data availability will gradually decrease with technological improvements. Ethereum will introduce EIP-4844 in the next hard fork, Dencun【3】, providing approximately 32 KB of on-chain data availability per second. In the coming years, with the rollout of complete "on-chain data sharding"【4】, this data availability is expected to increase in stages, ultimately reaching about 1.3 MB of data availability per second. Meanwhile, improvements in data compression technology【5】 will enable us to do more with the same amount of data;
2. The needs of the applications themselves: How much loss do users need to bear compared to the high costs of applications failing? Financial applications will suffer greater losses due to application failures; games and social media involve a large number of activities for each user, and the value of these activities is relatively low. Therefore, different security trade-offs make sense for them.

Decentralized sequencers can be implemented in two ways: one is done by the Rollup project itself, and the other is achieved through third parties. Implementing decentralized sequencers through third parties can also be referred to as Sequencing-as-a-Service. Projects like Espresso, SUAVE, Astria, and Radius focus on decentralized sequencer solutions, each with different implementation paths.

Decentralized Sequencer Solutions

1) Espresso: Composed of five main components: 1. A shared mechanism based on HotStuff【6】 that requires a two-thirds majority to confirm and is irreversible; 2. Its DA layer provides two different data retrieval paths. The first path is optimistic and fast, while the second path is more reliable but slower, designed to combat conditions; 3. Rollup REST API: The Rollup program uses this API to seamlessly integrate with the Espresso Sequencer; 4. Sequencer contract: The sequencer contract is a smart contract that verifies HotShot consensus, acting as a light client, managing transaction order checkpoints, and overseeing the HotShot protocol's stake table; 5. Network layer: This layer facilitates communication between nodes participating in the DA layer and HotShot consensus. Overall, as shown in the diagram below, when a user's transaction is sent to Rollup, it will use ZK or optimistic schemes for transaction verification.

Image source: The tech: Sequencers (Espresso Sequencing Overview)

2) SUAVE is an independent network layer that can share memory pools with other blockchain networks. It cannot directly interact with Ethereum or other public chain smart contracts but separates the memory pool and block generation parts from existing public chains to support more Layer 1 or Layer 2 networks, becoming a shared sequencer for Rollup chains. Therefore, it has certain advantages in cross-chain MEV and transaction sorting between different Rollups, but the risks it brings are similar to those faced by cross-chain bridges.

3) Astria aims to establish a shared sequencer network layer to avoid the disadvantages of centralized sequencers. It relies on a Tendermint-based leader rotation mechanism to address the scalability of transaction sorting and the downtime risks of centralized single points of failure. Meanwhile, Astria's sequencer architecture is designed to aggregate transactions from multiple Rollups rather than generating different state roots for a single block. The resulting transactions are arranged into cohesive blocks and then uniformly published to the Layer 1 DA layer, effectively separating transaction sorting from execution. This decoupling approach allows Astria to accommodate various Rollups with different state transition functionalities.

4) Radius differs from other solutions in that it ensures Rollup transactions are sorted in a trustless manner by enabling an encrypted Mempool and allowing multiple sequencers to operate simultaneously, thereby eliminating the risks associated with MEV. It employs a verifiable delay encryption mechanism (PVDE)【7】 to achieve Mempool encryption and uses zero-knowledge proof encryption to ensure trustless sorting of transactions and prevent risks related to centralized sequencers. However, the cost of enhancing security with zero-knowledge proofs is that, while there is MEV protection, users may experience transaction delays. The transaction flow of Radius is as follows:

1. Users send transactions to the sorting layer
2. The sorting layer sorts the transactions and generates a block
3. The composed block is then submitted to the Rollup-related program
4. Rollup executes transactions in the order provided by the sorting layer
5. Rollup submits the executed transactions to the settlement layer DA for final confirmation

Image source: The tech: Sequencers (Radius Transaction Overview)

5) Madara is the sequencer used in the Layer 2 network StarkNet. It is a flexible sorting method that can operate in both centralized and decentralized modes, allowing customization for different applications. Currently, Madara is the ready-made sequencer solution for StarkNet, and related research and development work is still ongoing.

Outlook

The development prospects of blockchain sequencers will be an exciting transformative journey. As the blockchain ecosystem evolves, sequencers will undergo significant changes, shifting from centralized designs to more decentralized, efficient, and adaptable solutions. Advances in sorting technology are crucial for improving transaction efficiency, scalability, and security within the Ethereum ecosystem.

Decentralization is the philosophical foundation of cryptocurrency. Shared sorting networks address issues of value accumulation and revenue distribution through economic mechanisms. Ultimately, the increasingly mature modular construction of sequencers and the development of ecosystem frameworks will undoubtedly become powerful catalysts for the industry in the future.

References:

【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

【6】https://docs.google.com/document/d/1AeXoQXnEuc_HEHb8UfLQM_Inu6_u3nDS3S3Y3j7aNqg/edit#heading=h.tn00saza05ia

【7】https://ethresear.ch/t/mev-resistant-zk-rollups-with-practical-vde-pvde/12677

Reference Articles:

https://pansophicchad.substack.com/p/the-tech-sequencers