Based Rollups: The Backbone of the Ethereum Network Effect

Ethereum is hard to scale. 

There is trade-off between three critical aspects of blockchain networks, security, scalability, and decentralization.

Security refers to the fact that blockchain networks must have robust defenses in place in order to prevent malicious entities from taking over.

Scalability refers to how blockchains must be able to accommodate a high number of users without increasing, as well as transactions, without increasing fees or transaction times significantly.

Decentralization refers to how blockchain control should be distributed amongst all of its members instead of just being concentrated in a single entity.

So developers often end up having to sacrifice one of these aspects to improve the other two. And there's no question that Ethereum is slow. As the number of Ethereum users continues to grow at a staggering rate, a sort of bottleneck of transactions is being created.

Transaction speeds are slowing down and gas prices are increasing. This, of course, makes it difficult to scale Ethereum. 

This is where based rollups and validators come in.

A rollup is said to be based or L1 sequenced when the base L1 drives its sequencing. More concretely, a based rollup is one where the next L1 proposer may, in collaboration with L1 searchers and builders, permissionlessly include the next rollup block as part of the next L1 block.

Essentially, this means that there are no sequencers that are deciding the order of blocks.

So a rollup block can be created at any time, at any rollup time, and this ensures that the system is decentralized. So anybody can propose any rollup block at any rollup time

The benefits of based rollups

They're decentralized as layer-one validators. This means there's no sequencer, no external consensus, no escape hatch, and no single point of failure.

There's liveness. They're as live as the Ethereum beacon chain.

Credibly neutral: no doubt about decentralization, censoring power, or MEV extraction. Based rollups allow building custom sequenced apps like order books, and they're the most Ethereum-aligned. 

The economics of based rollups

So in general, when it comes to MEV, there are three types. There are congestion fees, which currently on Ethereum account for 80% of fees, and these happen on layer two. There's front running or toxic MEV, what a lot of you may know as sandwich attacks.

And then there's arbitrage, which refers to a difference in price, for example, between ETH and USDC. So essentially, you're accumulating fewer fees, but you're keeping the congestion fees. So the economic security of based rollups depends on ETH and not on the rollup token.

What’s missing in based rollups?

A market to pick "sequencers" among L1 validators

A way for sequencers to commit to integrating an L2 block before a deadline (preconfirmation)

Things that require a hard fork: Protocol-Enforced Proposer Commitments (PEPC), enshrined Proposer Builder Separation (ePBS)

Things that don't require a hard fork: restaking (replaces PEPC), PBS/MEV- boost (replaces ePBS)

The future

Taiko believes that it's the most Ethereum-aligned way forward for scaling. So what is the way forward? 

The endgame is to build something called based booster rollups. Essentially, based-booster rollups will shard the execution of transactions and the storage.

Thus, any rollup, whether it's optimistic or ZK, can be boosted. 

This adds Ethereum scaling by allowing layer one validators to propose blocks for the whole boosted network. With based rollups, you don't risk losing the network effects that you've already built.