Original Author: Yohan Yun

Original Translation: Luffy, Foresight News

Ethereum's Rollup-centric Layer 2 roadmap has successfully alleviated transaction congestion on the base layer (Ethereum mainnet) and effectively reduced gas fees, but at the cost of creating a liquidity-split ecosystem.

The starting point of Layer 2 is to scale the Ethereum network, but the reality now is that each Layer 2 network has become an island, with each small island having its own systems, rules, and barriers.

The liquidity of Layer 2 is isolated, users are trapped in cross-chain bridges between Layer 2s, and developers are forced to choose whether to build on Base, Arbitrum, or Starknet.

Fortunately, this predicament in the Ethereum ecosystem has seen a turning point. Over the past year, the community has increasingly discussed Based Rollups as a potential solution to the problem of liquidity fragmentation. The community believes that Based Rollups will restore interoperability and composability to Layer 2, reviving the "money Legos" concept of DeFi Summer on Layer 2 (referring to the seamless interaction of DeFi protocols). In short, if Based Rollups deliver on all their promises, they will make the Ethereum ecosystem "more like Ethereum."

The fundamental problem that Based Rollups aim to solve is the use of separate transaction sorters on Layer 2. (Note: A sorter is an engine that orders transactions on a blockchain; current Rollup Layer 2s typically use a centralized sorter controlled by themselves, while Based Rollups sort transactions through the Ethereum mainnet.)

Blockchain developer Teddy Knox told Magazine: "When I first learned about the Layer 2 scaling roadmap from Vitalik Buterin's blog post, I found it a bit hard to accept because it involves trade-offs."

"Unlike Layer 1 (where Ethereum has a very large node committee to validate the network), the original form of Layer 2 is centralized sorters, which have special privileges to order transactions on the Layer 2 network."

The goal of Ethereum's Surge roadmap is to achieve 100,000 TPS, Source: Vitalik Buterin

Centralized Sorters Fragment Ethereum Layer 2

While centralized sorters operate with high efficiency and allow operators to earn substantial profits, they also lead to isolation between different Layer 2s. Transactions processed by one Layer 2 sorter cannot easily match and interact with other Layer 2s, and this lack of interoperability has been a major reason for community FUD regarding Ethereum this year. (Interoperability between Layer 2s can still be achieved through other methods outside of shared sorters, but these methods are "asynchronous," meaning transactions are not real-time).

Thus, the Based Rollups solution proposed by Ethereum researcher Justin Drake (not to be confused with Coinbase's Layer 2 solution Base) holds promise for addressing this fragmentation issue.

Unlike traditional Rollups, Based Rollups return the power of transaction sorting to the Ethereum mainnet (Layer 1). Before the popularity of Layer 2, transaction sorting on the Ethereum network was the responsibility of Layer 1.

Daniel Wang, co-founder of Taiko Labs, stated: "The Based Rollup sorting method not only enhances the security of the Ethereum network but also improves its revenue potential and the cohesion of the ecosystem, ensuring that Layer 2 aligns more closely with the Ethereum mainnet, facilitating cheaper and faster transactions while supporting the sustainability of the Ethereum network." Taiko Labs has developed the first production-grade Based Rollup using Based sorting.

Compared to other Rollups that use centralized sorters, Taiko is able to bring significantly more revenue to Ethereum, approximately five times that of traditional Rollups.

Taiko is the first Based Rollup Ethereum scaling solution. Source: Justin Drake Twitter

Based Rollup and Composability

Based Rollup sounds promising, but like anything, it has its pros and cons, and Based Rollup also faces a series of issues.

For users to enjoy the benefits of Based Rollup, other Layer 2s must also adopt them. For Taiko, they are collaborating with Nethermind's Rollup Surge chain, which will be specifically designed to allow users to skip the Ethereum mainnet and directly interact with Taiko across chains.

However, Daniel told Cointelegraph at Devcon that despite being based on the same technology, the two Rollups still cannot achieve synchronous composability.

"You need to have almost real-time validity proofs to demonstrate that both are changing simultaneously," he said, "I don't think we've achieved that yet, but as a project, we can't wait until that is realized to launch."

Pros and Cons of Centralized Sorters

When operated by a single entity or a small group, sorters can effectively order transactions without the delays associated with decentralized consensus or Ethereum's 12-second block time.

The blockchain trilemma illustrates the challenge of optimizing decentralization, scalability, and security simultaneously.

For many Layer 2 networks, sacrificing decentralization to provide throughput unmatched by the Ethereum mainnet is worth it, although this itself brings risks.

Knox explained: "If the sorter fails… it will impact performance, or they could easily censor your transaction without any other functionality."

Using centralized sorters reintroduces many of the issues that decentralization and blockchain originally sought to solve, such as censorship and single points of failure, with the exploitation of MEV (maximum extractable value) being a significant concern.

However, while these worries may keep Ethereum idealists awake at night, the biggest concern for ordinary users is the convenience of switching between Layer 2s.

Duncan Townsend, a smart contract engineer at the 0x protocol (a decentralized trading protocol), stated that the current process of transferring funds from one Ethereum Layer 2 to another "is not a great experience."

"Unless you use a chain abstraction protocol, the cross-chain user experience in DeFi is poor," he explained, "If you have Based features, you have composability. It doesn't matter which chain your tokens are on because you can obtain them at low cost on any chain you need."

If Rollups share this Based sorting framework, then tokens and assets should be able to interact directly with each other without relying on separate cross-chain mechanisms, achieving native interoperability between Rollups.

Challenges of Adopting Based Rollup

Based Rollups leverage Ethereum's validator network to sort transactions across multiple Layer 2s, restoring decentralized transaction sorting and creating a more unified and efficient ecosystem where developers can build DApps that run across all participating Layer 2s (those adopting Based Rollup).

As of November 20, the Ethereum mainnet has over 1 million validators. Source: Dune Analytics

However, getting existing Layer 2s to agree to give up lucrative sorter revenues is not a simple task.

Townsend said, "The shift to Based sorting faces a significant hurdle, which is that all current centralized Layer 2 sorters are making a fortune."

Sorter revenues of some top Layer 2 networks on Ethereum, measured in ETH

According to data from Dune Analytics, as of November 20, ZKsync, which uses ZK Rollup, has accumulated nearly 40,500 ETH (approximately $125.5 million) in sorting revenue. Additionally, its competitor Base, which uses Optimistic Rollup, has earned 20,904 ETH ($64.7 million), Arbitrum has earned 62,001 ETH ($192 million), and Optimism has earned 6,916 ETH ($21.5 million).

Will they really give up this revenue for the sake of idealism?

Based Rollup is the cure for Ethereum.

Although Taiko's Daniel is indeed an idealist, he stated that the mechanism of Based Rollup helps ensure the security of Ethereum's base layer; as Layer 2 activity reduces Layer 1 activity, it consequently decreases the income of validators.

Daniel said, "Based Rollup does provide additional fees, tips, and MEV opportunities for Layer 1 validators, which will encourage more validators to protect the Ethereum blockchain, ultimately making all Base Rollups more secure."

According to data from Growthepie, Taiko is the Layer 2 that pays the most to the Ethereum mainnet. As of November 21, over the past 30 days, Taiko paid $1.29 million in gas fees, nearly five times that of the second-ranked Arbitrum One.

Taiko is the largest rent payer in Rollup on Ethereum, Source: Growthepie

Based Rollup makes it more profitable to become an Ethereum mainnet validator, encouraging staking, reducing the circulating supply of ETH, and potentially contributing to an increase in ETH prices in the long term.

The Future of Ethereum: Based Rollup? Or Fragmentation?

The blockchain of Based Rollup offers a potential solution to unify liquidity in the Ethereum ecosystem, but returning to the Ethereum mainnet for sorting may also trigger old problems.

Daniel said that the key trade-off of Based Rollups is that they are limited by Ethereum's current 12-second block time. Other Rollup transaction times are much shorter, such as Arbitrum's transaction time of less than 1 second.

"We are working with partners on (transaction) pre-confirmation, which will allow Based Rollup to overcome the longer block time limitations of the Ethereum mainnet, providing users with a changed transaction experience. Users will see their transactions included in blocks almost in real-time," Daniel stated.

Without solutions like Based Rollups that enhance interoperability, the Ethereum network is destined to remain fragmented, while challengers in the DeFi space, like Solana, will continue to make progress as a unified Layer 1, providing users with a more seamless trading experience.

Solana returns to the DeFi stage in 2024, with TVL continuing to rise.

"This essentially boils down to 'in terms of transaction throughput, how large can we make a single chain and a single Rollup, and how quickly can we settle them when liquidity needs to move from A to B?' Assets can get there quickly, and users don't have to wait," Knox stated.

Layer 2 needs to adopt the Based Rollup approach to succeed, but not everyone agrees with this. Source: Charlie Noyes Twitter

Townsend stated that Based Rollup is "definitely" an effective solution to unify the Ethereum ecosystem, but it is still a novel concept, and there is currently no active ecosystem.

Townsend said, "The obstacle we face is convincing these Layer 2s to give up their lucrative source of sorter income and join and participate in this interoperability ecosystem."

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