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Intro
Ethereum layer-2 scaling solutions, such as rollups, reduce transaction fees while retaining layer-1 security. It’s that simple, right? Short answer: yes. Long(er) answer: there’s a lot to it.
Breaking Down the Rollup Economics Framework
At its core, the rollup economics framework is divided into three main entities: users, rollup operators, and the base layer. It provides an elemental view on value flows encompassing Layer 2 (L2) fees, Maximum Extractable Value (MEV), operator costs, and the costs associated with data publication.
Entities/roles in a rollup:
- Ethereum mainnet: Provides data availability, security, and consensus for the rollup
- User: Bridges funds onto the rollup and submits transactions on the rollup
- Rollup operator: Runs the sequencer, does the computation, generates proofs, and batches transactions
- These operators/entities run sophisticated, high-performance hardware to do all these things. This is a real cost that the operator must bear. Therefore, they need to be economically incentivized by charging fees.
Rollup Costs
To put it succinctly: A rollup's profit = L2 fees - Operational Costs - Data Costs
What aspects of the rollup-L1 relationship incur a cost?
- Transaction execution (L2 fees): As previously mentioned, executing and batching transactions together, as a Sequencer does, costs compute power and real resources
- Settlement/state transitions: A cost associated with settlement (i.e., updating account balances across all nodes when Alice sends 1 ETH to Bob)
- Data availability: Ensures all relevant transactional data is available to anyone
Data availability is critical in this regard because it lets anyone, if they so choose, verify the data for themselves, preserving the trustlessness (via mitigating data-withholding attacks) and auditability tenants associated with blockchains. Additionally, as long as all of the execution data is made available on the mainnet, the chain doesn’t require every node to execute every transaction to validate transactions and reach consensus.
Because rollups can cryptographically guarantee (via a proof) that the transactions are valid, these transactions can now be executed by just a single node and posted to the L1 where it can be cross-checked by L1 nodes. All L1 nodes download the rollup’s data, but only a certain portion of them execute the transactions/construct the rollup state, thereby reducing overall resource consumption. Additionally, the data within a batch is highly compressed prior to being submitted to the L1, further decreasing the resource burden. This is how rollups help trustlessly scale a blockchain without requiring an increase in node resources.
However, a rollup’s TPS is dependent on the data capacity of their L1 for throughput. The more data availability on L1, the higher the (theoretical) throughput for rollups. Once an L1 runs out of data capacity for the rollup, the limit’s been reached and no additional transactions can be processed. Therefore, now the limiting factor for a blockchain’s scalability is its data availability.
As polynya’s tweet above illustrates, L1 data fees (data availability costs) make up the majority of the current cost. However, EIP-4844 offers a solution and could bring this cost down by 10-50x! This is discussed in detail in later sections.
As L2 ecosystems grow, the concept of running a surplus (profit) becomes particularly important. Such surpluses can be redirected towards community-centric endeavors, like funding public goods, bolstering development, and facilitating growth.
Fixed vs. variable
Rollup costs can also be split into two separate categories: fixed and variable. Fixed costs are the rollup costs that must be paid, independent of how many transactions are included in the batch. Variable costs are the marginal costs that accumulate with each additional transaction.
Fixed
Fixed costs include:
- State commitments
- Validity proofs (ZKRs)
ZKRs have a larger fixed cost (10x) than ORs due to the validity proof.
What’s not fixed is the cost of the validity proof, which is determined by whether it uses a SNARK or STARK.
SNARKs are cheaper, requiring ~500K – 1 million gas in the EVM, whereas STARKs cost ~1 million – 5 million gas depending on proof size. Because ORs only require proofs in the event of a dispute, they aren’t subject to this cost.
Want to learn more about zero-knowledge proofs and the various implementations? Click here.
Variable
Reducing the frequency of L1 interactions is one cost-saving method, but so, too, is batching more transactions into one block (the denominator in the image above) to “socialize” the L1 calldata cost. By socializing gas cost across bundled users and only posting calldata to mainnet, rollups can reduce transaction fees by 70-95%.
As rollup activity increases, the variable cost of transaction data becomes the primary factor influencing rollup transaction prices. The rollup submits transaction data to Ethereum in the form of calldata, which costs 16 gas per byte. In contrast to the fixed cost of calldata, the price per unit of gas varies based on the demand for block space. As more transactions are included in each batch, the rising overall cost is spread among all transactions.
This is due to the fact that the marginal cost of adding additional transactions to the batch is smaller than the average transaction cost. Note that the marginal cost consists solely of variable expenses, principally transaction data, as fixed costs are shared across the entire batch and are paid regardless.
In sharp contrast to monolithic blockchains that exclusively experience negative network effects—fees grow with each additional user–the phenomenon of decreasing fees while rising activity is characterized by decentralized blockchains. Rollups are the first type of blockchain that might incur positive network effects in terms of transaction costs.
