The rationality and trade-offs of the Rollup-centric roadmap

Author: Jiawei Source: X, @0xjiawei

Inspired by @BanklessHQ and @KyleSamani podcasts, I recently rethought Ethereum's Rollup-centric roadmap. This strategy has far-reaching implications for improving Ethereum's scalability and maintaining decentralization, and also brings a series of trade-offs and valuation issues worthy of discussion.

1. The rationality of the Rollup-centric roadmap

@VitalikButerin proposed the "Rollup-centric Ethereum roadmap" in October 2020, advocating that Ethereum should focus on supporting Rollup in the short and medium term. The rationality of this strategy is mainly reflected in the following two points:

First, Ethereum's base layer expansion will focus on expanding the data capacity of the block rather than improving the efficiency of on-chain computing or IO operations. Ethereum's sharding design is designed to provide more space for data blobs (rather than transactions), and Ethereum only needs to ensure the availability of data without interpreting the data.

Second, Ethereum is adjusting its infrastructure to better support Rollup, such as L2 support for ENS, L2 integration of wallets, and cross-L2 asset transfers. In the future, Ethereum will become a highly secure, single execution shard and scalable data availability layer that everyone can handle.

In December 2021, Vitalik further described the final picture of Ethereum in "Endgame": block output is centralized, but block verification is trustless and highly decentralized, and ensures anti-censorship. The underlying chain provides data availability guarantees, and Rollup provides block validity guarantees. The future of Ethereum is an ecosystem where multiple Rollups coexist, all based on Ethereum's data availability and shared security. Users can move between different Rollups through bridges without paying the high fees of the main chain.

These arguments determine the direction of Ethereum's development: optimize the construction of the base layer to provide services for Rollup. Rollup can obtain security equivalent to Ethereum and achieve super expansion. The logic behind this strategy is that now that Rollup has been proven to be effective and well adopted, it is better to focus resources on Rollup instead of waiting for complex and uncertain expansion solutions.

2. The trade-offs behind rationality

L1 delegates execution to L2, implying the following two major trade-offs:

• Gas collection and deflation relationship
  Transactions occur on Rollup, which means that gas fees are collected by Rollup rather than Ethereum L1. Gas fees are linked to ETH's deflation mechanism. In the EIP-1559 proposal after the London upgrade, the base fee of each transaction will be burned, directly affecting the supply of ETH.
  After "The Merge" switched to PoS, Ethereum entered a 20-month deflation cycle due to the sharp reduction in ETH issuance and the burning mechanism. However, due to the sluggish L1 transactions in the past few months, L1 gas prices are often lower than the level required for deflation. As more transactions move to Rollup, Ethereum may enter a state of inflation again.

• MEV (Maximum Extractable Value) Capture
  When transactions occur on Rollup, MEV is captured by Rollup, not Ethereum validators. Although Rollup pays fees such as data availability (DA) and proof verification to Ethereum L1, these fees are not comparable to the value captured by the execution layer. In addition, after the implementation of EIP-4844, DA fees will be further reduced.

3. Is the current status of L2 consistent with expectations?

The actual development of L2 has not fully met early expectations. From a technical point of view, Rollup can be regarded as a "computational shard" of Ethereum, but in reality, each L2 faces a series of problems that need to be solved, such as the interoperability problem mentioned by Vitalik. At present, there are many L2s and the competition is fierce. Although ETH is the main unit of account, this position may be replaced by L2 native tokens. More Rollups turning to Alt-DA solutions may also weaken the profitability of L1.

4. How should Ethereum be valued?

Kyle Samani mentioned that due to the particularity of Bitcoin, people look at Bitcoin and Ethereum differently. Ethereum has the completeness of smart contracts, so it can be valued from the perspective of a "company". In the future, the question we need to think about is: Should Ethereum be valued and priced from the perspective of the execution layer or the security layer? How will Ethereum's valuation standards and direction evolve in the next few years, or even ten years later?

Summary

The Rollup-centric roadmap is an important strategic choice for Ethereum to improve scalability and maintain decentralization, but it also brings implicit trade-offs and challenges. The development of L2 is not entirely as expected, and the competitive situation and interoperability issues of various Rollups still need to be resolved. The valuation of Ethereum needs to find new ways to balance execution and security to lay the foundation for future growth and development.