ROLLUPS – The Ultimate Ethereum Scaling Strategy? Arbitrum & Optimism Explained

so what are roll-ups all about what's the difference between optimistic and zk roll ups how is our bedroom different from optimism and why are rollups considered to be the holy grail when it comes to scaling ethereum you'll find answers to these questions in this video before we begin if you want to learn more about decentralized finance and the technology behind it make sure you subscribe to my channel hit the bell icon and enable all notifications you can also consider supporting us on patreon and joining our defy community on discord ethereum scaling has been one of the most discussed topics in crypto the scaling debate usually heats up during periods of high network activity such as the cryptokitties craze in 2017 defy summer of 2020 or the crypto bull market at the beginning of 2021.

During these periods the unparalleled demand for the ethereum network resulted in extremely high gas fees making it expensive for everyday users to pay for the transactions to tackle this problem the search for the ultimate skilling solution has been one of the top priorities for multiple teams and the ethereum community as a whole in general there are three main ways to scale ethereum or in fact most other blockchains scaling the blockchain itself layer 1 scaling building on top of layer 1 layer 2 scaling and building on the side of layer 1 side chains when it comes to layer 1 eth2 is the chosen solution for scaling the ethereum blockchain eth2 refers to a set of interconnected changes such as the migration to proof-of-stake merging the state of the proof-of-work blockchain into the new proof-of-stake chain and sharding sharding in particular can dramatically increase the throughput of the ethereum network especially when combined with roll-ups if you'd like to learn more about the eth2 you can check out this video here when it comes to scaling outside of layer 1 multiple different scaling solutions have been tried with some mixed results on one hand we have layer 2 solutions such as channels that are fully secured by ethereum but work well only for a specific set of applications side chains on the other hand are usually evm compatible and can scale general purpose applications the main drawback they are less secure than layer 2 solutions by not relying on the security of ethereum and instead having their own consensus models most roll-ups aim at achieving the best of these two worlds by creating a general-purpose scaling solution while still fully relying on the security of ethereum this is the holy grail of scaling as it allows for deploying all of the existing smart contracts present on ethereum to a rollup with little or no changes while not sacrificing security no wonder roll ups are probably the most anticipated scaling solutions of them all but what are roll-ups in the first place a rollup is a type of scaling solution that works by executing transactions outside of layer 1 but posting transaction data on layer 1.

This allows the rollup to scale the network and still derive its security from the ethereum consensus moving computation off chain allows for essentially processing more transactions in total as only some of the data of the roll-up transactions has to fit into the ethereum blocks to achieve this roll-up transactions are executed on a separate chain that can even run a rollup specific version of the evm the next step after executing transactions on a rollup is to batch them together and post them to the main ethereum chain the whole process essentially executes transactions takes the data compresses it and rolls it up to the main chain in a single batch hence the name a roll-up although this looks like a potentially good solution there is a natural question that comes next how does ethereum know that the posted data is valid and wasn't submitted by a bad actor trying to benefit themselves the exact answer depends on a specific role up implementation but in general each rollup deploys a set of smart contracts on layer 1 that are responsible for processing deposits and withdrawals and verifying proofs proofs are also where the main distinction between different types of rollups comes into play optimistic roll-ups use fraud proofs in contrast zika roll-ups use validity proofs let's explore these two types of roll-ups further optimistic roll-ups post data to layer 1 and assume it's correct hence the name optimistic if the posted data is valid we are on the happy path and nothing else has to be done the optimistic rollup benefits from not having to do any additional work in the optimistic scenario in case of an invalid transaction the system has to be able to identify it recover the correct state and penalize the party that submits such a transaction to achieve this optimistic roll-ups implement a dispute resolution system that is able to verify fraud proofs detect fraudulent transactions and disincentivize bad actors from submitting other invalid transactions or incorrect fraud proofs in most of the optimistic rollup implementations the party that is able to submit batches of transactions to layer 1 has to provide a bond usually in the form of eth any other network participant can submit a fraud proof if they spot an incorrect transaction after a fraud proof is submitted the system enters the dispute resolution mode in this mode the suspicious transaction is executed again this time on the main ethereum chain if the execution proves that the transaction was indeed fraudulent the party that submitted this transaction is punished usually by having their bonded eath slashed to prevent the bad actors from spamming the network with incorrect thought proofs the parties wishing to submit thought proofs usually also have to provide a bond that can be subject to slashing in order to be able to execute a rollup transaction on layer 1 optimistic rollups have to implement a system that is able to replay a transaction with the exact state that was present when the transaction was originally executed on the rollup this is one of the complicated parts of optimistic rollups and is usually achieved by creating a separate manager contract that replaces certain function calls with a state from the rollup it's worth noting that the system can work as expected and detect fraud even if there is only one honest party that monitors the state of the rollup and submits fraud proofs if needed it's also worth mentioning that because of the correct incentives within the rollup system entering the dispute resolution process should be an exceptional situation and not something that happens all the time when it comes to zk roll ups there is no dispute resolution at all this is possible by leveraging a clever piece of cryptography called zero knowledge proofs hence the name zk rollaps in this model every batch posted on layer 1 includes a cryptographic proof called sdk snark the proof can be quickly verified by the layer 1 contract when the transaction batch is submitted and invalid batches can be rejected straight away sounds simple right maybe on the surface in practice to make it work multiple researchers spend countless hours iterating on these clever pieces of cryptography and math there are a few other differences between optimistic and zk rollups so let's go through them one by one due to the nature of the dispute resolution process optimistic rollups have to give enough time to all the network participants to submit the fraud proofs before finalizing a transaction on layer 1.

This period is usually quite long to make sure that even in the worst case scenario fraudulent transactions can still be disputed this causes the withdrawals from optimistic roll-ups to be quite long as the users have to wait even as much as a week or two to be able to withdraw their funds back to layer 1. fortunately there are a few projects that are working on improving the situation by providing fast liquidity exits these projects offer almost instant withdrawals back to layer 1 another layer 2 or even a side chain and charge a small fee for the convenience the hop protocol and context are the products to look at zk roll ups don't have the problem of long withdrawals as the fans are available for withdrawals as soon as the rollup badge together with a validity proof is submitted to layer 1.

So far it looks like zk rollups are just a better version of optimistic roll ups but they also come with a few drawbacks due to the complexity of the technology it's much harder to create an evm compatible zika rollup which makes it more difficult to scale general purpose applications without having to rewrite the application logic saying this zk sync is making significant progress in this area and they might be able to launch an evm compatible zika rollup quite soon optimistic rollups have a little bit of an easier time with the evm compatibility they still have to run their own version of the evm with a few modifications but 99 of contracts can be ported without making any changes zika roll-ups are also way more computational heavy than optimistic roll-ups this means that nodes that compute zk proofs have to be high-spec machines making it hard for other users to run them when it comes to scanning improvements both types of roll-ups should be able to scale ethereum from around 15-45 transactions per second depending on the transaction type up to as many as 1 000 to 4 000 transactions per second it's worth noting that it's possible to process even more transactions per second by offering more space for the roll up batches on layer 1.

This is also why eth2 can create a massive synergy with rollups as it increases the possible data availability space by creating multiple shards each one of them able to store a significant amount of data the combination of eth2 and rollups could bring ethereum transaction speed to as many as 100 000 transactions per second now let's talk about all the different projects working on both optimistic and zk roll ups but before we do this if you've enjoyed this video so far hit the like button so that this kind of content can reach a wider audience back to the video optimism and arbitrarium are currently the most popular options when it comes to optimistic roll-ups optimism has been partially rolled out to the ether maintenance with a limited set of partners such as synthetics or unisub to ensure that the technology works as expected before the full launch arbitrarum already deployed its version to the mainness and started onboarding different projects into its ecosystem instead of allowing only limited partners to be able to deploy the protocols first they decided to give a window of time for all protocols that want to launch on the roll apps when this period of time is finished they will open the flat gates to all the users in one go some of the most notable projects launching on our beach room are uni swap sushi bancor auger channeling ave and many more arbitroom has also recently announced its partnership with reddit they'll be focusing on launching a separate roll-up chain that will allow reddit to scale their reward system optimism is partnering with maker dao to create the optimism die bridge and enable fast withdrawals of dai and other tokens back to layer 1.

Although both arbitrarium and optimism try to achieve the same goal building an evm compatible optimistic roll-ups solution there are a few differences in their design arbitrarium has a different dispute resolution model instead of re-running a whole transaction on layer 1 to verify if the fraud proof is valid they have come up with an interactive multi-round model which allows narrowing down the scope of the dispute and potentially executes only a few instructions on layer 1 to check if a suspicious transaction is valid this also resulted in a nice side effect where smart contracts deployed on our beach room can be larger than the maximum allowed contract size on ethereum another major difference is the approach to handling transaction ordering and mev arbitrary will be initially running a sequencer that is responsible for ordering transactions but they want to decentralize it in the long run optimism prefers another approach where the ordering of transactions enhanced the mev can be auctioned off to other parties for a certain period of time it's also worth mentioning a few other projects working on optimistic roll-ups fuel the omg team with the omgx and cartesi to name a few most of them try to also work on an evm compatible version of the overall apps although it looks like the ethereum community is mostly focusing on optimistic roll-ups at least in the short run let's not forget that the projects working on zika roll-ups are also progressing extremely quickly with zika roll-ups we have a few options available loopring uses zk roll-up technology to scale its exchange and payment protocol hermes and zktube are working on scaling payments using ck roll ups with hermes also building an evm compatible zkroll app aztec is focusing on bringing privacy features to their zika rollup technology starkware based rollups are already extensively used by projects such as diversify immutable x and dydx as we mentioned earlier zk singh is working on an evm compatible virtual machine that will be able to fully support any arbitrary smart contracts written in solidity as we can see there are a lot of things going on in both the optimistic and the zk roll up camps and the competition between different roll ups will be interesting to watch roll ups should also have a big impact on defy users who were previously not able to transact on ethereum due to high transaction fees will be able to stay in the ecosystem the next time the network activity is high they will also enable a new breed of applications that require cheaper transactions and faster confirmation time all of this while being fully secured by the ethereum consensus it looks like roll-ups may trigger another high growth period for d-phi there are however a few challenges when it comes to roll-ups composability is one of them in order to compose a transaction that uses multiple protocols all of them would have to be deployed on the same rollup another challenge is fractured liquidity for example without the new money coming into the ethereum ecosystem as a whole the existing liquidity present on layer 1 in protocols such as uni swap or other will be shared between layer 1 and multiple rollup implementations lower liquidity usually means higher slippage and worse trade execution this also means that naturally there will be winners and losers at the moment the existing ethereum ecosystem is not big enough to make use of all scaling solutions this main probably will change in the long run but in the short run we may see some of the roll ups and other skilling solutions becoming ghost towns in the future we may also see users living entirely within one roll-up ecosystem and not interacting with the main ethereum chain and other scaling solutions for long periods of time this could be particularly visible if we are going to see more centralized exchanges enabling direct deposits and withdrawals to and from roll-ups nevertheless roll-ups seem like the ultimate strategy for scaling ethereum and the challenges would be most likely mitigated in one way or another one question that comes up very often when discussing rollups is if they are a threat to side chains personally i think that signs will still have their place in the ethereum ecosystem this is because although the cost of transactions on layer 2 will be much lower than on layer 1 it will most likely still be high enough to price out certain types of applications such as games and other high volume apps this may change when ethereum introduces sharding but by then side chains may create enough network effect to survive long term it will be interesting to see how this plays out in the future also the fees on rollups are higher than on side chains because each roll up a batch still has to pay for the ethereum block space it's worth remembering that the ethereum community puts a huge focus on roll ups in the ethereum scaling strategy at least in the short to mid term and potentially even longer i recommend reading vitalik buterin's post on a rollupcentric ethereum roadmap that i will link in the description box below so what do you think about rollups what are your favorite roll up technologies comments down below and as always if you enjoyed this video smash the like button subscribe to my channel and check out cinematics on patreon to join our defy community thanks for watching

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