Blockchain technologies are already part of our daily lives, even if we’re not consciously aware of them. They are applied in such areas as secure online transactions, supply chain management, identity verification, and even in creating and trading digital assets like non-fungible tokens (NFTs). Understanding how exactly blockchain works can shed light on its practical implications for enhancing efficiency and transparency in different aspects of our daily interactions.

In the article, I will share my views on how to maximise blockchain efficiency using rollups. Join me on this journey.

What is Blockchain

In terms of functionality, blockchain can be described as a series of data blocks linked in an uneditable digital chain. These blocks are stored in a decentralised environment, where each block’s information is verifiable by all participating computers. The decentralised structure ensures trust, validity, and usability, departing from traditional hierarchical systems.

Simply put you can think of a blockchain as a digital necklace made up of individual beads, with each bead representing a piece of information. These beads are linked together to form the necklace, just like blocks are linked to form the chain. Each bead holds details about transactions, who sent money and when it was sent.

In a blockchain, blocks not only contain transaction data but also a crucial element known as a hash. These cryptographic hash functions are fundamental to the blockchain’s operation. Hashes are represented by a unique series of characters like:

X23G9K1H4P8Q6L2V5

They act as the digital signature for a block, generated from its data. A key feature is that each block includes the hash of the previous block, forming a linked chain. This interconnectedness through hashes ensures the integrity of the blockchain network. Any attempt to modify the content within a block would alter the hash, signalling potential tampering to the network.

The incorporation of hashes creates a self-regulated network in the blockchain, eliminating the need for intermediaries. This design prevents third parties from monitoring or interfering with transactions, bolstering the security and reliability of the system.

What Makes Blockchain Special

Blockchains set themselves apart from other digital databases in distinct ways. Firstly, they operate as distributed databases, spreading data across multiple servers situated in various physical locations. This decentralisation enhances reliability, performance, and transparency compared to traditional databases. 

What is more, blockchains employ open-source software, allowing the entire network community to scrutinise the underlying code collaboratively. This transparency facilitates the detection and resolution of bugs, glitches, or flaws. 

Notably, once verified, new information can only be added to the blockchain; it cannot be altered. Security and trustworthiness are upheld by requiring majority consensus from network participants, promoting a shared responsibility model instead of relying on a single, central entity.

Current Limitations 

Though blockchain is getting widely adopted, it faces some challenges. One of them is scalability. In blockchain, it means handling more transactions without making things slower or less secure. To understand the grounds of this problem we need to get acquainted with the following concepts.

Block Time

This term refers to the average time it takes for a new block to be added to the blockchain. Different blockchain networks have varying block times. For example, Bitcoin has a block time of around 10 minutes, while Ethereum aims for a shorter block time of around 15 seconds. The challenge is to strike a balance: a shorter block time can lead to faster transactions, but it may also increase the likelihood of forks (divergent branches in the blockchain) and reduce security.

Transactions per Second

This metric indicates the number of transactions a blockchain can process in one second. The TPS varies widely among different blockchain networks. Traditional payment systems like Visa can handle thousands of transactions per second, whereas many blockchain networks, especially those focused on decentralisation and security, may have lower TPS.

For Bitcoin, the most used blockchain, the problem is its small 1MB block size, limiting the number of transactions and making fees higher. They suggested a solution called Segregated Witness (SegWit), but it’s not widely adopted yet. Ethereum, another big blockchain, has a 15-second block time, which is faster but also limits transactions per block. They plan to fix this with Ethereum 2.0, using Proof of Stake (PoS) and sharding. Other blockchains explore ideas like side chains or off-chain methods (like Lightning Network) to handle more transactions without slowing down the main blockchain. Solving scalability is crucial for making blockchains work better.

What are Rollups

Blockchain rollups are a Layer 2 solution for scaling cryptocurrencies, involving the consolidation of multiple transactions on a secondary blockchain (Layer 2). These transactions are then bundled into a unified piece of data, broadcasted onto the primary blockchain (Layer 1). 

In simpler terms, rollups extract transactions from the main blockchain, process them off-chain, compile them into a single data unit, and reintegrate them onto the primary chain. This process is why rollups are often referred to as ‘off-chain scaling solutions.’

At the most fundamental level, layer 1 scaling involves enhancing the scalability of the primary blockchain. On the other hand, layer 2 scaling entails relocating transactions from the main blockchain layer to a distinct layer that can interact with the primary chain.

Why Blockchain Rollups

Typical blockchain blocks have limited space, causing delays and increased costs as networks grow busier. Blockchain rollups solve this by consolidating transactions into one data piece off-chain, making processing more efficient.

How Do Blockchain Rollups Work?

Blockchain can store two types of information: transactions and data. While processing transactions on-chain is heavy, data resulting from transactions is lighter. Rollups merge transactions off-chain, submitting consolidated data to the mainnet, reducing the burden and enabling multiple transactions in one data piece. This enhances blockchain scalability.

A Step-by-Step Rollups Mechanics 

1. Conducting Off-Chain Transactions

   – Engage in transactions directly on the rollup chain, acting as a blockchain platform.

   – Transaction processing occurs on the rollup chain, overseen by the “sequencer,” who validates, constructs L2 blocks, and submits transaction data with proofs to the primary L1 chain.

2. Aggregating Batched Transactions

   – The sequencer organises multiple transactions into batches, collectively presenting them to the main L1 chain.

   – Batched transactions not only streamline processing but also reduce gas fees, providing a cost-effective experience for end-users.

3. Ensuring On-Chain Security

   – Post-batching, the rollup chain delivers transaction data to a dedicated smart contract on the L1 chain.

   – Upon finalisation of the L1 block containing rollup transactions, the data becomes immutable, safeguarded against modification or censorship, ensuring constant data availability for verification.

4. Generating Verifiable Proofs

   – Some rollups enhance transaction data with cryptographic “summaries” or “proofs.”

   – These proofs, serving as cryptographic assurances, are deposited on the L1 chain, validating the successful execution of the designated batch of transactions by the rollup.

Types of Blockchain Rollups

1. ZK Rollups (Zero-Knowledge)

 – ZK-SNARK: Uses short proofs for quick transaction processing and enhanced security but has vulnerabilities to certain hacks.

 – ZK-STARK: More scalable and transparent than ZK-SNARK, with larger proof sizes, providing improved security.

2. Optimistic Rollups

 – Assume all transactions are valid by default, approving them to the mainnet without extensive validation.

 – Use fraud-proving mechanisms to identify illegitimate transactions and penalise validators accordingly.

 – Depend on Ethereum mainnet for security, making them easier to implement and cost-effective compared to ZK-rollups.

Here are examples of operational rollup blockchains that simplify complex blockchain technology:

• Optimism: an Ethereum optimistic rollup with a TVL of $700 million in November 2023. Optimism stands out for its standardised and open-source development stack, the OP Stack. Developers use it to launch their blockchains, and the native token is known as OP.
• Base: An Ethereum optimistic rollup developed by Coinbase, one of the world’s largest crypto exchanges. Base does not have its own native token.
• StarkNet: An Ethereum ZK-rollup leveraging zero-knowledge technology (STARK) for transaction computation and verification. The native token is called STRK.
• Polygon Hermez: Polygon provides a suite of ZK-rollup solutions, Polygon Hermez is one of them, it employs Proof of Efficiency (PoE) consensus, allowing anyone to be a sequencer or aggregator.  Sequencers compile transactions, while aggregators validate and provide proofs to Ethereum. Polygon Hermez incentivizes honest behaviour and boasts decentralisation.

Benefits of Rollups

High Throughput

As can be seen from above, rollups, as a scaling solution for blockchains, deliver a remarkable boost in throughput. By efficiently processing and bundling multiple transactions together, they significantly enhance the overall capacity of the network. This surge in throughput ensures that a more extensive volume of transactions can be seamlessly handled, contributing to a smoother and more efficient blockchain experience.

Reduced Wait Time

Another prominent benefit ushered in by rollups is the substantial reduction in transaction wait times. Through the aggregation of transactions into batches, users experience quicker confirmation and processing.

Limitations of Rollups

Layer 2 blockchain solutions, while improving transaction speed and lowering costs, still face some important limitations. One concern is the risk of fraud by validators in Layer 2. Additionally, these solutions often sacrifice a bit of decentralisation for efficiency. Withdrawing from Layer 2 can be slow, as seen in plasma chains, and might involve added costs. 

Moreover, implementing Layer 2 solutions demands substantial computational power, making certain options less cost-effective for scenarios with lower activity. Despite these challenges, ongoing development in Layer 2 solutions remains vital for addressing blockchain scalability issues, playing an important role in the blockchain ecosystem’s future growth.