If you are familiar and have been moving for a while in the environment of decentralized technologies, blockchain, crypto, and especially if you are involved in the Ethereum ecosystem and have heard about the recent Merge that the Blockchain did, it is very likely that you have heard about the concept of rollups. But almost certainly also, we said “Oh no, yet another term I have to learn…”. Well, here we are to help you understand it fast, easy and on time so you look like a genius at the meeting with your friends. Here we go:
A rollup is a type of scaling solution that works by executing transactions outside of Layer 1 but posting transaction data on Layer 1.
First things first. We must understand that blockchains, like Ethereum, can be slow and expensive because the higher the demand, the higher the fee to pay. Having to spend several extra dollars in gas fee, for a single transaction. This in DeFi is a major drawback.
This is where the need for layer 2’s like rollups is born. So, we could say that, rollups process the transactions from layer 1, in another faster blockchain, layer 2. Well, in this system, after processing the information, the transaction data is carried back to layer 1 (mainnet), but at a fraction of the price. In short, this means that we save the waiting time and processing cost of the mainnet. Therefore, and very importantly, users can benefit from the speed and low cost of the rollup, but without giving up the security of the layer 1 blockchain.
Rollups and the Ethereum scalability solution
Rollups are one of several scaling systems, which are nothing more than methods to make a slow blockchain faster and cheaper. Other scaling systems are sidechains and stateful channels.
Most scaling products are specifically related to Ethereum, as it is the largest blockchain with smart contracts developed on it. In the recent Merge (successfully completed in September of this year), Ethereum’s main developers sought to improve the speed and costs of the blockchain with a series of updates. These updates will not necessarily diminish the importance of scaling solutions. On the contrary, scaling solutions are likely to complement Ethereum’s updates, so they are not going away.
Read also: Ethereum: The Merge is coming
What types of rollups are there?
We could say that there are mainly two types of rollups, Optimistic and Zero Knowledge (ZK). Both, as we said, decrease transaction costs and waiting time. This works in such a way that, instead of waiting for the processing of each particular transaction in Ethereum (for example), several tens of transactions are recorded in layer 2, and then “rolled up” into a single transaction, which then returns as a packet to layer 1 or main blockchain. As you might guess, by returning like this, the cost of that transaction is divided among many users who have their transaction in that “rolled up” packet.
It is called Optimistic because it is optimistically assumed that all transactions contained in the rollup are valid. Therefore, in these types of rollups, users are given a certain number of days to challenge fraudulent transactions.
Because they are all assumed to be correct, processing is faster because the network does not have to waste time confirming things. The disadvantage is that it takes about a week (the time given to dispute the transaction), to officially withdraw your funds from an Optimistic Rollups, as in the well-known Arbirtrum or Optimism.
ZK-rollups or Zero-Knowledge Rollups use Zero Knowledge Proof to cryptographically determine if a transaction is valid, using only a minimum of information about that transaction.
This is an off-chain protocol that operates on top of the Ethereum blockchain and is managed by on-chain Ethereum smart contracts.
As we have seen in other articles, Zero Knowledge Proof, or ZKP, is a privacy-preserving, fast and inexpensive method.
Compared to an optimistic rollup, which requires the funds to remain in the network until the dispute resolution or challenge period closes, ZK-rollups allow users to withdraw their funds without so much delay.
We can say then, that ZK rollups have an advantage in terms of speed and security over Optimistic rollups. But not everything is so easy, ZK-rollups are more complex in their application and type of technology.
For now, ZK-rollups are used for specific functions or applications. One of the major use cases of these rollups, and the most seen, is the exchange of non-fungible tokens or the transfer of cryptography between addresses.
But there are many advances we see in this area, and many teams are looking to develop tools linked to ZK-rollups. For example Polygon, Scroll and Matter Labs are working on their zkEVMs, which is a ZK-rollup that works identically to Ethereum’s mainnet. The idea then, is that these rollups can support any kind of applications that users want to develop on that layer 2.
What are the dangers of rollups?
We have to take into account some security considerations. And is that, while they take many of the security features of Ethereum, not everything is equal.
First of all, we have to take into account that being tools that are in their initial stage, the networks in which they operate are usually still somewhat centralized as there is a development team that maintains partial control, being able to have certain decisions such as turning on and off the network as they deem necessary.
Smart contracts in a rollup is not as finicky as that of a program developed in Ethereum. It may contain bugs because although there are audits and reviews to improve these bugs, if we rely on an external program to manage the transactions that go through the rollup, we can expect certain risks.
Another thing to keep in mind, is that some rollups also still use centralized “sequencers” to successfully coordinate transactions on the layer 2 chain. While a sequencer cannot forge or alter transactions, it technically has the ability to censor or reorder them for profit. This does not mean that it will happen, but we should know that it is possible in some cases.
How to use rollups in Ethereum:
We could say that Optimistic rollups and ZK-rollups work in an almost identical way in their use.
What should happen, is that they can bridge your funds to layer 2, and complete the transactions you need to perform in the rollup (buy and sell cryptocurrencies/NFTs, interact with protocols, move funds between wallets, or any DeFi transaction).
Note that to get started, you must fund your crypto wallet (Metamask, Coinbase, Binance, etc.), with any Ethereum compatible token (ether (ETH) or ERC-20 tokens).
Next, you need to change your wallet to operate on layer 2, so you can bridge your tokens to move them from one network to another. Of course, there is an Ethereum transaction fee to pay to move your funds to a rollup.
Once you have completed the transactions, you can then transfer your funds back to Ethereum. This requires you to convert the rollup funds into ERC-20 tokens that are native to the Ethereum mainnet.
Rollups in general are going, if they didn’t make it yet towards decentralization, in some way or another. It is believed that the rollup market will continue to grow due to its economic, time and security benefits for users.