Rollup technology in blockchain
Before the popularity of cryptocurrencies, which began to skyrocket in 2017, blockchain networks did not face much load. However, the massive influx of users driven by the development of the DeFi sector revealed the severe shortcomings of early blockchains due to low bandwidth and lack of scalability.
What are Rollups?
Rollups are a technology used in Layer-2 (Layer-2 or L2) blockchains. L2 networks are created on top of the main blockchain, such as Ethereum, to scale it up, i.e. distribute the load between the two networks.
Rollups are transaction packets sent by the Layer-2 blockchain to the underlying, i.e. Layer-1 network for confirmation.
There are currently 2 types of rollups:
- Optimistic Rollups,
- ZK-Rollups.
The first type, as the name implies, "optimistically", assumes that all transactions in a packet are valid. In this case, each network member can challenge transactions within a week if they appear suspicious. This approach reduces the time it takes to validate transactions, but if malicious activity is detected, funds cannot be withdrawn from the blockchain for a week. Optimistic Rollups are used in the Arbitrum and Optimism networks.
ZK-Rollups use zero-disclosure proof-of-stake, known as SNARK, to authenticate transactions. This type of rollup aims to confirm the validity of transactions with as little information about them as possible. This approach provides speed and transaction privacy while not requiring delays in withdrawals. However, their implementation in practice is much more complex than Optimistic Rollups. Blockchains such as Polygon, Starknet and Scroll use ZK-Rollups.
How do rollups work?
Rollups are an alternative to consensus mechanisms such as Proof-of-Stake, which Ethereum is based on. Layer 2 networks based on rollups do not have their validators responsible for processing transactions and adding new blocks.
When a user sends a transaction to the Arbitrum or Polygon network, it is not validated immediately on that blockchain but is bundled with other transactions. Once the packet is complete, it is sent to the first layer network, in this case, Ethereum, where validators validate it as a single transaction. This reduces the load on the underlying network: instead of hundreds of transactions, validators only need to validate the entire packet once.
This approach also ensures security, as it relies on Ethereum validators rather than participants in other networks.
Practical application of rollups
At the time of writing, the average cost of a simple transaction on the Ethereum network is around $1.30. Imagine that you need to make 10 transactions and pay about $13 for them. And that's just for simple transactions. The cost of more complex transactions such as swaps, adding assets to a liquidity pool or NFT mint can cost $5 or more.
In this case, it may be more appropriate to transfer assets once to a second-tier network such as Polygon and Arbitrum to do all the necessary transactions. The cost of each simple transaction in these networks is only a few cents and complex transactions rarely exceed $0.50.
You must make 10 ETH transfers and 10 swaps on a DEX exchange. Let's compare how much you will spend on commissions using the Ethereum blockchain and the L2 network. Estimates are approximate and can change significantly depending on the workload of one or the other network.
On the Ethereum blockchain, you will spend approximately 10 * $1.3 + 10 * $5 = $63 for all transactions.
When using a second-tier blockchain like Arbitrum, you must transfer ETH, complete all necessary transactions, and withdraw the cryptocurrency into the Ethereum network. To estimate the value, we used data from Orbiter Bridge, current at the time of writing, and the indicators of Etherscan and Arbiscan reviewers.
The result is as follows: $3.8 (transfer from Ethereum to Arbitrum) + 10 * $0.1 + 10 * $0.6 + $15 (withdrawal from Arbitrum to Ethereum) = $25.8.
Conclusion: if you had performed the duplicate transactions on the Arbitrum network instead of Ethereum, you would have saved ~$37 on transactions, i.e. about 69%. And that's not to mention how much time you would save by doing transactions on L2 networks, usually done in just a few seconds.
Conclusion
Rollups are one of today's leading technologies that provide a high level of security for users, fast speed and low-cost transactions.
This is one of the main reasons why Ethereum-based L2 solutions are so popular. According to the aggregator DeFi Llama, the leading networks regarding the number of assets blocked in the protocol (TVL) after Ethereum, Binance Smart Chain and Tron are solutions based on Arbitrum, Polygon and Optimism rollups. It is also worth considering the growth rate of TVL networks: Arbitrum's TVL has grown by more than 100% since the beginning of 2023, while Optimism's TVL has grown by more than 50%.