The Approach to Rollups on Ethereum

Introduction to Rollups on Ethereum

Four years after Ethereum embraced a vertical scaling strategy centered on interconnected layers called L2s or rollups on Ethereum. The dream, which remains elusive, was to create a seamless, composable ecosystem. Critics argue that the tradeoff of deprioritizing L1 execution hasn’t paid off. Still, Ethereum continues to double down on the L2 path, driven by its decentralization goals and the lack of viable alternatives. This article explores the current state of rollups on Ethereum, the expected value flow back to L1, and how the based rollup approach fits into this evolving landscape.

The Rollup-Centric Approach

The core function of a general-purpose blockchain is to process valid transactions. This process grows the blockchain state deterministically because the state reflects all computational data since the chain’s genesis. As economic activity rises and a blockchain gains traction, its state expansion places greater strain on node computation, leading to higher transaction fees, which can discourage further usage.

At this point, a chain can choose to scale horizontally by increasing the computational capacity of individual nodes. However, this approach introduces high hardware and participation costs, reducing accessibility and pushing the network toward centralization—an outcome Ethereum explicitly aims to avoid. Instead.

Ethereum adopts vertical scaling, where computational effort is offloaded to compatible external stacks that retain the security of the base layer while offering greater flexibility and throughput. This layered architecture allows the network to introduce new execution environments, notably rollups. Rollups offload the bulk of computation and state offchain while posting minimal data to Ethereum L1 to ensure verifiability. 

For context, Prestwich defines a rollup as “an opt-in, subset of another consensus, keeping a superset of state, via a custom state-transition function.”

Smart Contract Rollups on Ethereum

Smart contract rollups refer to the early, execution-focused L2s that offer optimized general-purpose environments separate from Ethereum, relying on bridges to publish data to the L1 for consensus and availability. Their diverse implementations arise from tradeoffs in data compression and proof generation, submission and verification mechanisms, sequencing models, execution strategies, and finality guarantees.

• Data Compression – To stay composable with Ethereum, rollups periodically publish a compressed summary of their state, typically a Merkle root, to a smart contract on the L1, rather than dumping their full state, which would be costly and strain both networks. At predefined intervals, batches of rollup transactions are compressed and submitted in a single transaction by an approved agent, along with the previous state root. The L1 contract verifies this root against the last one submitted to ensure continuity and integrity.
• Proof submission and verification – Proof is a cryptographic attestation that a specific activity occurred, allowing anyone to verify the action. Rollups use proofs to report state or state transitions to the parent chain, which otherwise has no visibility into the rollup’s state. This setup risks the parent chain finalizing fraudulent data, so mechanisms are needed to detect and report inconsistencies. Fault proofs, used in optimistic rollups, assume submitted states are valid unless challenged and serve to prove fraud after the fact. Validity proofs, on the other hand, are used in zero-knowledge rollups to verify that each state transition is valid before finalization.
• Sequencing – Sequencers handle the ordering and batching of rollup transactions, often compressing them and, in some cases, attaching a proof before submitting the data to the L1 contract for finalization. Depending on the implementation, the sequencer may act as a full node, ensuring both transaction order and execution guarantees, or delegate some responsibilities, such as state root publication, to other agents. In optimistic rollups, challenging a submitted state root is a permissioned role tied to the mechanics of fraud-proof verification.
• Execution – General-purpose rollups can scale beyond their parent chain’s computational limits and either maintain compatibility with its virtual machine or adopt entirely new ones. This flexibility drives innovation, with teams building improved VMs like the OVM, WASM, and various forms of zkVMs, each offering different degrees of EVM equivalence to enhance smart contract performance.
• Finality – Rollups on Ethereum can offer users soft finality before achieving true finality on the parent chain. However, the strength of this guarantee depends on system design and the risks of false confirmations. Ultimately, only Ethereum can provide true consensus and finality. But why would alternative L1s pay Ethereum for this, and why would Ethereum support them? The answer is mutual benefit: rollups gain social legitimacy from Ethereum’s trusted community and a reliable data availability layer. This allows them to focus on computation without full state storage. In return, Ethereum scales passively while earning fees from data availability services, making it a symbiotic relationship despite potential competition.

Rollups on Ethereum At Work

Despite over fifty live general-purpose rollups, none have fully delivered on their promises or early expectations. While progress has been made across the stack, persistent technical and economic challenges remain in Ethereum’s scalability model. The most significant of these are technical and economic.

Technical Limitations

Many rollups suffer from fragmentation and limited composability due to unique implementations and trust assumptions in their native bridges. These lead to stacks that barely integrate with Ethereum or each other. While intent-based bridges offer hope, rollup-native bridges remain more economically secure, and true compatibility requires prioritizing it from the start. Additionally, most rollups rely on centralized sequencing and validation, granting teams control over transaction ordering, censorship, and MEV extraction. On the flipside, this sacrifices decentralization and introduces critical single points of failure that risk major downtimes.

Economic Shortcomings

Data has always been less valuable than computation, and rollups exploit. They execute transactions offchain, compressing data, and minimizing what they post to Ethereum. While efficient, this means rollups don’t pay much, yet Ethereum increasingly prioritizes serving them over its users. As execution shifts to rollups, more apps and users follow, concentrating value in fragmented, barely compatible L2s. This approach drains economic activity from Ethereum.

Based Rollups

Rollups on Ethereum are based or L1-sequenced if the L1 drives their sequencing. Specifically, this defines situations where the next L1 proposer can, in coordination with L1 searchers and builders, permissionlessly include the next rollup block within the upcoming L1 block.

Whereas smart contract rollups operate outside the L1’s consensus, which can only read and store their reported state, not modify it, based rollups let L1 agents directly execute state transitions. They do this through a shared environment, rather than just finalizing reported rollup state.

L1-sequencing lets the L1 earn from rollup activity and take on more than data availability. It becomes a part-time sequencer, even handling some execution. This simplifies the economic model and gives based rollups key technical advantages over smart contract rollups.

• Based rollups have stronger liveness and security guarantees. This is so because they inherit the L1’s uptime and protection directly, without relying on fault proofs or dispute mechanisms.
• They match the L1’s level of decentralization, far surpassing smart contract rollups, which still rely on trust-based models.

While L1-sequenced rollups benefit the base chain, they face trade-offs. These include sacrificing revenue and design flexibility to remain compatible with L1 consensus. However, these limits can reduce if validators share extractable value or offer economically secured optimistic preconfirmations.

Conclusion

Rollups are key to scaling crypto for the next billion users. However, their adoption has come with economic and interoperability challenges. Broader standardization is necessary. Some models offer a clear path forward, integrating seamlessly with existing infrastructure. Such approaches create a “provably-aligned” rollup that delivers value to Ethereum without isolating itself from the ecosystem.

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