Modular Blockchains and Rollups: The Future of Ethereum and Beyond

Introduction to Modular Blockchains

Before we get into it, you need to recognize why blockchain rollups and modularity are ever discussed together. The most important thing to realize here is that both concepts address unravelling different blockchain functionalities in a bid to enhance performance. You'll understand what I'm talking about, just bear with me a bit longer.

Let's start with monolithic blockchains like the initial Ethereum. These blockchains treat all the key components—consensus, smart contracts, data availability, execution of transactions, and settlement—within a one-layer framework. But while this integrated design functions, it also creates scalability challenges because everything is addressed in one layer, relying on the same set of nodes, which results in bottlenecks.

Compare that to modern modular blockchains. They employ a different mechanism by breaking down key functions into specialist layers where different tasks are executed on different nodes. Settlement Layer, for instance, finalizes transaction results, forming a trust-minimized ledger, typically in combination with execution on rollups. Its primary purpose is to provide proof verification and dispute resolution for rollups. Data Availability Layer and Consensus Layer facilitate that the data of transactions is available for off-chain validation and processing because, in order for the network to have a consensus on the state of the blockchain, this is crucial. Smart Contracts are code that executes on the execution layer, which processes transactions for dApps. And Execution Layer processes the transactions and smart contracts and ensures all the computational work is performed efficiently. Rollups are a scaling solution that execute transactions off-chain and post data to an on-chain execution layer.

Monolithic vs Modular blockchains approach

With all that being said, rollups such as Arbitrum and Optimism evolved into a scaling solution for monolithic blockchains such as Ethereum by performing the execution off-chain.

However, they've become essential in this modular approach, often serving as a separate layer that processes transactions and publishes data back to Layer 1. This close relationship between rollups and modular architecture is why they’re frequently discussed together when exploring the future of blockchain scalability. We’ll delve deeper into this topic in the following sections! Stay tuned. Monolithic vs Modular Blockchains So, you already know now how monolithic blockchains and modular blockchains are two different architectural forms in constructing blockchains, each of which has its pros and cons. But instead of talking about theory, let's make the differences explicit and compare some real-use modular blockchains to their monolithic equivalents.

Start with monolithic blockchains like Ethereum before the Eethereum 2.0 upgrades, it had issues with scalability since gas costs were too high and transactions were slower because of network congestion.

With congestion, when Ethereum grew, since it was in monolithic form, with each node processing and storing each transaction, it restricted throughput and made scaling more difficult.

There have been numerous updates since then in order to make these improvements, though. The transition to Ethereum 2.0 introduced the proof-of-stake (PoS) consensus mechanism, we’ve seen a surge in Layer 2 scaling solutions like Optimism, Arbitrum, and zkSync, however, the modular blockchain paradigm is relatively new and one of the latest developments as of 2024. A modular blockchain, like Celestia, separates blockchain functionality into layers, such as execution and consensus & data availability. This leads to the aspect that not every node has to do everything anymore. Nodes can rather specialize in one layer, and in general the load of the network is lower. 

Understanding Rollups 

Rollups generally provide a robust scaling solution, without ever breaking off from the primary blockchain for security and data availability. Essentially, they "roll up" multiple transactions in a batch, reducing the load on the base layer required for consensus and data availability.

How Rollups Work:

If you're doing small transfers of amounts of cryptocurrency and have time to wait a few minutes or hours for your transaction to be verified, you might not need a rollup. But if you need large transactions, faster confirmation times, or are doing lots of transactions, rollups are a big advantage.
 

As of October 7, 2024, gas prices on such Ethereum rollups like Optimism, Arbitrum, and zkSync usually ranged from 0.001 to 0.02 ETH, 0.0015 to 0.015 ETH, and 0.001 to 0.005 ETH, respectively.

Therefore, if you have crypto on Ethereum and would like to save fees or time, employing a rollup is a wise choice.

Here's what typically occurs: You open your wallet, e.g., MetaMask or WalletConnect, and if your balance is held on Ethereum mainnet, you bridge it onto a rollup, like zkSync.

You can then simply send transactions between zkSync accounts. Simple and efficient! But how does it work in the background of a rollup? 

1. Off-Chain Processing: In modular blockchains like Celestia, the majority of the off-chain computational work, like execution of transactions and processing of smart contracts, occurs on the rollup layer, offloading main chain congestion. Instead of executing every single transaction directly on the main blockchain, rollups aggregate millions of transactions into a single bundle, which reduces the computational overhead. 
2. Batch Submission: Once off-chain processed, they are sent together in a batched submission to the main chain. The submission is of minimal size and contains only verification-relevant data that is much smaller in comparison to processing each transaction separately on the base chain. 
3. On-Chain Data Availability: Execution is done off-chain, but data must be available to be verified and achieve consensus. Rollups publish proofs of compressed data, Validity or Fraud Proofs, to enable open transaction verification on the main chain. Two types of rollup proofs are available: Validity Proofs (used by ZK-Rollups) and Fraud Proofs (used by Optimistic Rollups).
4. Layer 1 Security Dependency: Rollups still rely on the security and consensus of the Layer 1 chain. If the rollup is optimistic, anyone can challenge the validity of transactions via fraud proofs. In ZK-rollups, the validity proof ensures that only valid transactions are accepted. We’ll get to that in just a second, hang tight!
5. Transaction Finality: Once the batch of transactions is settled on the Layer 1 blockchain, the transactions within the batch are final. Depending on whether the rollup is optimistic or ZK-based, finality can virtually happen instantly.

Time to talk about different types of rollups, because I'm sure you have questions.

Optimistic Rollups Explained

Optimism and Arbitrum are highly popular implementations of optimistic rollups, but some other notable solutions are Base, Metis, and Cartesi. 

Some other notable solutions are Base, Metis, and Cartesi.  

Optimistic rollups are a category of Layer 2 scaling solution meant to increase Ethereum's throughput by executing transactions off-chain.

Optimistic rollups take transactions as valid by default, and therefore the name "optimistic" to refer to this verification method.

Instead of verifying all the transactions on-chain, optimistic rollups just report a batch summary of a transaction to Ethereum Layer 1, offloading Layer 1's computational load and storage, and decreasing the computational and storage burden for Layer 1. That is quite different from zk-rollups that rely on cryptographic proofs to verify the validity of the transactions. The security model of optimistic rollups is based on fraud proofs, with users able to contest fraudulent transactions within a dispute period. After transactions are settled off-chain, there is a window of time—typically several weeks—in advance when anyone can dispute a unclear transaction by providing a fraud proof. Upon finding fraud, the system re-executes the transaction to check whether or not it was legitimate. It balances scalability and security by enabling most transactions to go through without direct verification, but with the means to undo malicious activity. Optimistic rollups like Arbitrum and Optimism offer scalability benefits via the reduction of gas fees and enhanced capacity for transactions, hence ideal for dApps that are optimized to reduce gas fees and expand transaction capacity. The drawback is in the form of longer finality time due to the challenge period, rendering it less ideal for time-sensitive operations.

ZK Rollups: A Deep Dive 

Zero-Knowledge (ZK) rollups offer a high-end solution for scaling, leveraging cryptographic proofs for transaction validation and efficiency, specifically for Ethereum. In contrast to optimistic rollups, which assume transactions are valid until otherwise established, ZK rollups use cryptographic proofs to ensure that all transactions within a batch actually are valid. The use of cryptographic proofs makes ZK rollups a robust secure choice, especially for usage where immediacy and high-trust finality matter. The operation of ZK rollups involves a series of key steps. Firstly, similar to optimistic rollups, ZK rollups execute transactions off-chain. The distinction, however, lies in the approach by which they authenticate these transactions: ZK rollups generate validity proofs (zk-SNARKs) of transactions in batches, enabling verified integrity before being submitted to the main chain. Then, for a transaction batch, ZK rollups generate a brief crypto proof referred to as a zk-SNARK (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge). The proof verifies the correctness of all transactions within a batch without exposing any underlying information and without requiring the main blockchain to validate each transaction

Once the zk-SNARK is generated, only the proof and a small segment of batch-specific data need to be sent to the main blockchain.

This reduces the amount of data and the gas fees for processing transactions.

After posting, the main blockchain checks the zk-SNARK proof against the data provided.

If it checks out, the whole batch is taken as valid without any further checks, resulting in nearly instant finality.

This quick verification mechanism greatly enhances the user experience, particularly for those use cases where timing is critical.

Security and trust-wise, ZK rollups inherit the security from the base Layer 1 blockchain (e.g., Ethereum) and enjoy a high level of confidence in transaction correctness due to the cryptographic proofs. This approach diminishes the possibility of fraud that can occur during the challenge period of optimistic rollups.

The advantages of ZK rollups are considerable. They greatly improve scalability through a large multiplier in transaction throughput with decreased gas costs since they effectively squeeze multiple transactions into one proof. With near-instant finality made possible by zk-SNARKs, they are especially ideal for applications where transactions need to be confirmed immediately, like payments and trading. Also, ZK rollups reinforce user anonymity since the details of specific transactions are concealed within the proofs being presented to the main blockchain and are consequently well-suited to applications with confidentiality requirements. Popular zk rollup offerings like zkSync and StarkWare have become part of the Ethereum ecosystem due to their efficiency. Such offerings have gained traction within the Ethereum ecosystem due to being efficient and employing new-age zero-knowledge technology. Gas fees of zk-rollups like zkSync, as of October 2024, range between 0.001 ETH and 0.005 ETH, which is a huge selling point for users looking to conserve money while transacting at a faster rate.

The L2-MEV Concept

MEV, or Maximum Extractable Value, is the profit obtained from reordering transactions in blockchain networks. Since it was formally defined in the "Flash Boys 2.0" paper in 2019, MEV has been a burning topic, particularly with the advent of L2 solutions such as rollups. MEV is what arbitrage bots try to extract in DEX transactions, and miners and validators can accrue profits from reordered transactions. The sequencer also plays a dominant role in MEV extraction in rollups, managing transaction ordering and block submission to Layer 1. And the problem is that most existing Ethereum L2 rollups have one, single, centralized sequencer dominating transaction ordering. The centralized sequencer has great control over MEV extraction, affecting transaction ordering and profits. But the size of MEV extractable varies between rollups based on the sequencing mechanism. In Arbitrum's First Come, First Served system, ordering of transactions occurs in receipt order with less room for MEV manipulation.

Optimism's sequencer, however, possesses a higher degree of transaction ordering control, allowing greater flexibility for MEV extraction.

All the same, Optimism does have checks, i.e., time windows for posting transactions, which restrict the sequencer from exercising this power maximally.

With Ethereum's rollup-oriented roadmap, looking ahead to the future when 99% of all things will end up happening on L2s as rollups take full shape, deploying rollups with mechanisms to scale back the MEV extraction race will be crucial to ensure fairness and efficiency on the network.

Impact of L2-MEV on Ethereum

Layer 2 adoption has changed the Ethereum ecosystem, especially how Maximum Extractable Value (MEV) dynamics occur. With Ethereum scaling forward with rollups, transaction sequencing and MEV extraction dynamics shift into these L2 networks, where sequencers, whether centralized or decentralized, control the order of transactions. This creates a series of implications for Ethereum as a whole: 

1. Scalability with Trade-Offs

L2 solutions like Optimism and Arbitrum considerably enhance Ethereum's scalability by shedding its Layer 1 blockchain. However, centralization of sequencers gives rise to a bottleneck wherein MEV extraction potential can increase. Ethereum's rollup-centric roadmap is bound to deliver greater scalability but disrupts the equilibrium with fair sequencing of transactions.

Unshackled centralized sequencers can take advantage of transaction ordering at the cost of Ethereum's decentralization spirit, potentially driving prices higher or favoring certain transactions—sacrificing the decentralized spirit of Ethereum.

2. Decentralization of Sequencers

One of the existing efforts against MEV extraction is decentralizing sequencer function. Deploying decentralized sequencing protocols or competitive sequencer systems can neutralize MEV attacks and be in line with Ethereum's decentralization goals, rollups can potentially reduce MEV abuse. This is especially significant since Ethereum is increasingly open to L2 technologies. Decentralization would be in line with Ethereum's long-term goal of decentralization and increase overall security in the network.

3. Economic Incentives and MEV Auctions

As MEV becomes more prevalent, there are already some L2s testing out MEV auctions, in which the profit of MEV extraction goes back to validators or end-users rather than being reaped by the sequencer. This protocol could redeploy economic incentives to deprioritize the ill effects of MEV, so value would come back to the overall Ethereum ecosystem rather than only become concentrated with a few. 

4. User Experience and Gas Fees 

L2-MEV extraction can lead to higher transaction fees and delayed finality, particularly on rollups with centralized sequencers that can reorder transactions for profit, particularly on rollups with centralized sequencers that can reorder transactions for financial gain. By contrast, more decentralized or more engineered rollups that minimize MEV extraction can deliver a lower-cost, lower-latency, and more secure experience.

Lower gas prices on L2s also might allow Ethereum to reach broader adoption, yet the challenge is how to ensure fairness in the ordering of transactions among these solutions.

5. Security Considerations

The more transactions are processed on Layer 2, the more the security of Ethereum will rely on the MEV management techniques in Layer 2 rollups. Maliciously constructed rollups that facilitate excessive MEV extraction could diminish trust in the network, while Rollups with fraud/validity proofs, decentralized sequencers, and MEV limits will improve Ethereum's security and decentralization.

Specifically, while L2 solutions like rollups provide a compelling path forward for Ethereum's scalability, they create new problems of Ethereum L2-MEV. The success of Ethereum's rollup-based future hinges on the resolution of these problems through decentralization, openness, and economic rebalancing, rendering Ethereum both scalable and fair.