VOC Explained

What Are Rollups in Crypto?

Adekunle Joshua

Over the years, Ethereum has witnessed imminent growth in terms of users, value, and the overall data the network manages. The growth of Ethereum has seen a new hike with the advent of smart contracts and increased crypto usage since 2021.

The statistics of Dapps reveal that out of 4000 decentralized applications, approximately 3000 are built on the Ethereum blockchain. Moreover, out of 216 Decentralized Finance projects, 191 are powered by the ETH network. Apart from dominating the DeFi market and Dapp's sector, Ethereum, the second largest cryptocurrency, is also the most-used network for NFT transactions and projects.

However, the increased usage of Ethereum has now reached its limit of capability, and as a result, lately, users are witnessing network congestion. The delay in processing transactions due to network congestion has resulted in the development of several competitors of Ethereum.

Rollups have emerged as the key solution for scalability in Ethereum and other blockchains for the foreseeable future. These are the layer-2 scaling solutions that improve the transaction processing on the layer-1 mainnet.

The scaling of a blockchain ecosystem can be done in two ways. In the first method, you can make the blockchain itself have a higher capacity for carrying out transactions. One of the major challenges in this method is that the blockchains with bigger blocks are quite difficult to verify, and have the probability of becoming more centralized. To avoid such risks, the developers either increase the client's software's efficiency or use techniques like sharding. This technique ensures that the building and verification of the chain are split up across several nodes. The ETH2.0 effort is working on this upgradation to Ethereum.

The second method is where you can change how you use the blockchain. This means that instead of directly updating all activities on the blockchain network, you would perform the bulk of your activity off-chain in a 'layer-2' protocol. There is a system of on-chain smart contracts, which performs just two tasks. It processes deposits and withdrawals and verifies that everything taking place off-chain is within the ambit of the set rules. There are several ways by which these validations can be done. However, one property they all have in common is that verification of proof on-chain is much cheaper than carrying out the original computation off-chain.

In simple terms, rollups are a type of emerging Ethereum-scaling solution that works by executing the transactions off-chain, outside Layer-1, but posting the data of transactions on Layer-1. With this process of scaling Ethereum, users can ensure that the Ethereum consensus does not sacrifice the network's security.

Moving these transaction executions off-chain can allow the processing of more transactions. This is because only a part of the data of the rollup transactions has to fit into these Ethereum blocks. An entirely separate chain is used to execute these transactions to achieve this. This chain can run a rollup-based version of the EVM.

The entire process includes:

  • Execution of transactions
  • Taking the data from these transactions
  • Compression of data
  • Rolling this compressed data to the main chain in a single batch (thus the name: Rollup).

Understanding Rollups in Crypto

We know how the regular blocks on the blockchain networks like Ethereum can store only a limited amount of data. But with the hike in the number of Ethereum users and applications across the globe, there is an increased network usage, resulting in high traffic or congestion.

Given that every Ethereum block has only a limited space, it takes more time for the network to process transactions. Since a selected highest bidding transactions are on the priority list of the mainnet, all other transactions have to wait to be processed.

We can store two types of information on the Ethereum mainnet, namely, data and transactions. The storing of transaction information and the on-chain processing can pressure the mainnet. However, if we store the data resulting from these transactions, it would be less heavy for the mainnet and remain the same irrespective of the number of transactions.

Thus, instead of storing the entire transaction on the network and processing it on-chain, we can process the transactions off-chain and submit just the resulting data that would include a bunch of transactions. Adding the data information to the mainnet would assist the network in processing more transactions. Not only will the off-chain processing reduce the burden on the mainnet, but with the uploading of a single data, one is uploading a bunch of transactions.

Basically, the blockchain rollups compress and compile several transactions and convert them into a single data. They then submit this data back to the Ethereum mainnet. Due to this process of taking transactions out of the mainnet, processing them off-chain, converting them into a single data, and then submitting them back to the main network, the rollups are often referred to as 'off-chain scaling solutions.

By processing several transactions and submitting them back in the form of a single data, the rollups efficiently improve the scalability of Ethereum or other blockchains.

Distinguishing Between Rollup Types

Rollups can broadly be classified into two types: Optimistic rollups, and Zero-knowledge (ZK) rollups. Both these types work on considerable reduction in the cost of transactions. They work on the basic idea that instead of paying and waiting for every transaction to be processed one by one on the Ethereum network, several transactions can be recorded on the layer-2 scalability chain. After processing them and rolling them into a single transaction or data, they will be added back to the more expensive, slower blockchain. With this process, several users can split the cost of that single transaction amongst themselves.

  • Optimistic rollups

The first type of Blockchain rollups is referred to as Optimistic rollups. This type of rollup assumes beforehand that positively all transactions contained within a rollup are valid. In the case of Optimistic rollups, everyone on the network receives a certain amount of time, say one week, to contest the fraudulent transactions. Due to the assumption that things are correct and valid, the network doesn't have to waste time confirming things. This makes the process of optimistic rollups quite fast. However, the downside of these rollups is that it often takes approximately one week to officially withdraw your funds from popular networks like Optimism or Arbirtrum.

  • ZK rollups

The second category of rollups, ZK rollups, are also known as the Zero-Knowledge rollups. This category of rollups uses a complex set of cryptography, the Zero-knowledge proof, via which it uses only the minimal information required to determine whether the transaction is valid. With this process, privacy is maintained. The entire process is sleek, quick, and cost-efficient. Unlike the optimistic rollups that require funds to stay on the network till the closure of the one-week dispute resolution period, with the ZK rollups, users can withdraw their funds with considerably less delay.

When it comes to the ZK rollups, they are far more advantageous as compared to the optimistic rollups in terms of speed, security, and costs. However, these are more complex than the optimistic rollups.

Up until now, all the ZK-rollups have had specific applications. This means that only a particular service or use case can be supported (for instance, swapping, NFTs, or transferring cryptos between addresses).

With the advancements in the cryptography field, Scroll, Matter Labs, and Polygon teams have claimed that they are quite close to the launch of the first zkEVMs. These are the ZK-rollups that would be able to work just the same as the functioning of Ethereum's mainnet. They will be capable of virtually supporting any application the developers wish to build on the Ethereum network. This would make things way quicker and cheaper for the end users.

Crucial Web3 Infrastructure

We can safely say that rollups greatly benefit the world of DeFi, NFTs, and even blockchain-based games of the day. However, this is not the only plus aspect of the rollups. With the advent of Web3.0, rollups prove to be a sturdy solution for scalability issues. While building a decentralized internet network is a huge step forward from scaling one blockchain, the developing entities and giants see great merit in adopting this technology for enhancing the scaling, utility, and viability of Web 3.0.

With the list of Layer-2 solutions growing daily, it is evident that the core blockchains are in dire need of efficacy enrichments. Any project related to the cross-chain or the multichain approach is bound to lay eyes on the ongoing developments and advancements in this sector. One good example is GTON capital indulging in creating an ecosystem of Web3 infrastructure and products. Its native Ethereum rollup protocol would comprise a decentralized stablecoin that would serve as the gas currency.

The GTON network uses optimistic rollup technology, and its approach is compatible with EVM. It is a layer 2 net on top of Ethereum but can be scaled periodically to Layer 3/ Layer 4 networks. GTON network supports any business to run a native 'permissioned' Layer-3.