Welcome to Just The Metrics

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Hi Cardano Community,

Last week the Minting of our book “A 3 Step Assessment Framework of Layer 1 Blockchains” went live on Book.io and we are amazed by all your feedback and support! 💙

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Okay, now let’s dive into today's topics. This is what we have for you today:

• 💣 The Ethereum Rollups Reality Check: Understanding the Trade-offs of L2 Scaling Solutions

• 💎 Gem of the Week

TL;DR

• Ethereum rollups struggle with security risks and lack of protocol-level integration.

• Some rollups overlook fraud proofs, compromising user security.

• Decentralization suffers due to centralized sequencers in rollups.

•  Premature, flawed solutions enter the market due to profit-driven VC money.

• Unnecessary L2 governance tokens hinder the development of secure solutions.

The Ethereum Rollups Reality Check: Understanding the Trade-offs of L2 Scaling Solutions

Ethereum's L2 scaling solutions, specifically L2 optimistic rollups like Arbitrum & Optimism, have garnered significant attention, amassing almost 87% of the L2 TVL, or $8.2 billion USD.

However, in this edition of Just The Metrics, we will discuss the critical shortcomings of Ethereum rollups, emphasizing their immaturity and lack of market readiness. We will delve into the fundamental flaws in Ethereum rollup technology, the role of venture capital money in pushing these underdeveloped solutions to market, and the implications of unnecessary governance tokens for Layer 2 solutions.

Ok, let’s dive in👇

What Are Rollups?

Rollups are Layer 2 scaling solutions engineered to enhance the performance and capacity of decentralized blockchain networks. As general-purpose frameworks, they facilitate the processing of diverse transactions and smart contracts to create a broad array of applications.

In theory, rollups derive trust from the decentralized Layer 1 (L1) protocols by leveraging the security and consensus mechanisms inherent to the foundational L1 blockchain. Within rollups, transactional data and aggregated results are committed to the primary chain on a periodic basis, while the computation of these transactions transpires off-chain.

Consequently, rollups inherit the decentralization and trust attributes of the L1 protocol while concurrently mitigating on-chain congestion and gas fees. There are two principal categories of rollups: optimistic rollups and zero-knowledge rollups (zk-rollups).

Optimistic rollups employ fraud proofs to ascertain the accuracy of off-chain computations, optimistically presuming transactions to be valid unless proven otherwise.

Conversely, ZK-rollups utilize zero-knowledge proofs to cryptographically ensure transaction validity without the need for fraud proofs, delivering superior security and efficiency.

This is what should happen in theory, but in reality, the situation of L2 rollups on Ethereum is pretty concerning.

Flaws in Ethereum Rollups Technology: Uncovering the Inherent Risks

Here we go through the reason why these solutions are immature at its core

1. Lack of protocol-level integration:

Any L2 scaling solution is considered decentralized and secure if that L2 solution is integrated into L1 at a protocol level.

Ethereum rollups suffer from a glaring lack of integration into the Ethereum L1 protocol level. They are just smart contracts with admin keys on Ethereum. This oversight makes them considerably less secure than other solutions like Tezos' SCORus rollup, which boasts first-class representation at the L1 protocol level.

Here’s an example of an enshrined rollup that is integrated into the L1 protocol architecture.

This is not a technical issue but more of a leadership issue. Ethereum's leadership has inexplicably failed to incorporate scaling solutions at the protocol level; we will later delve into the details of the motivation for this particular decision.

2. Admin keys control smart contracts

The smart contracts that create these rollups on Ethereum are controlled by multisigs, which are in the hands of just a few individuals.

Admin keys in Ethereum rollups, such as Arbitrum and Optimism, grant substantial control over smart contract behavior, posing alarming security risks.

With the power to upgrade smart contract bridges immediately and without warning, admin key holders wield an unsettling level of authority. This concentration of power is antithetical to the decentralized ethos of blockchain technology and exposes users to potential manipulation and exploitation.

Think of a few individuals having control of appro. 87% of the L2 TVL on Ethereum through multisigs. Yeah, it’s that scary!

3. Absence of fraud proofs

The security of an optimistic rollup is based on the premise that if someone submits an invalid batch into the rollup, anyone else monitoring the chain can detect the fraud and submit fraud-proof, demonstrating to the contract that the batch is invalid and should be reverted.

Yet, Optimism has failed to implement fraud proofs, leaving users vulnerable to stolen funds through the submission of invalid state roots. This glaring omission is deeply concerning and demonstrates a reckless disregard for user security.

4. Centralized sequencers

A sequencer in a rollup is a designated entity responsible for processing, ordering, and batching transactions within the rollup's off-chain environment. The sequencer's primary tasks include aggregating transactions into rollup blocks, determining their order, and periodically submitting these rollup transactions to the L 1

The sequencer plays a crucial role in maintaining the rollup's security and efficiency, as it ensures that off-chain transactions are correctly executed and organized before being committed back to the L1 chain.

Centralized sequencers in Ethereum rollups represent a single point of failure for liveness and discrimination. These sequencers can price gouge users through fees and more complex MEV, undermining the decentralized nature of blockchain technology.

As monopolists, centralized sequencers pose a significant security risk, as they may be susceptible to bribes that could lead to attacks on the rollup smart contract.

Role of Venture Capitalist (VC) Money in Pushing Half-baked Solutions to Market

The crypto space is inherently risky, and VCs typically seek high returns on their investments. So, the VC-driven approach often prioritizes short-term gains over the long-term health and sustainability of the ecosystem.

This emphasis on rapid growth and profits has led to the premature launch of L2 scaling solutions that are not yet fully matured or adequately tested. As a result, they are more inclined to support projects with aggressive timelines and ambitious roadmaps.

Consequently, L2 rollup development teams face immense pressure to deliver solutions quickly, potentially compromising on security and user experience. This short-term mindset can have detrimental effects on the broader ecosystem, as inadequately developed L2 rollups may not only fail to deliver on their promises but also undermine user trust in the technology.

When the focus shifts from creating innovative, market-ready solutions to meeting unrealistic expectations for rapid growth, the overall quality and effectiveness of L2 rollups suffer.

Unnecessary Governance Tokens in L2 Solutions

Ideally, L2 scaling solutions should provide public goods for users and foster network growth and usage.

For example, there is no Lightning token for the Lightning Network of Bitcoin, nor is there a rollup token for SCORUs on Tezos.

Layer 2 governance tokens in Ethereum rollups draw criticism for their seemingly superfluous nature. A key issue with L2 governance tokens is their primary function as a means for VCs and early investors to exit their positions and secure liquidity.

This focus on short-term gains can overshadow genuine progress in developing scalable and secure Layer 2 solutions, detracting from the core mission of building robust and decentralized scaling solutions.

Additionally, these tokens can introduce complexity and potential attack vectors into the Layer 2 ecosystem, as they grant governance rights to holders. This creates a risk of manipulation by malicious actors or profit-driven entities, undermining the core principles of decentralization and security.

Examples of Half-baked Governance Decisions

Arbitrum issued a governance token called ARB, which has since led to a series of controversial decisions within the community.

One notable decision involved allocating and spending a considerable portion of tokens to establish a nonprofit foundation. This move sparked outrage and dissatisfaction among community members, who felt that the allocation did not benefit the broader community and instead favored a select few.

Conclusion

In summary, Ethereum's scaling solutions, particularly its roll-up technology, present a troubling picture of immaturity and inherent risks.

The lack of protocol-level integration, admin key control over smart contracts, absence of fraud proofs, and centralized sequencers all contribute to an ecosystem rife with potential security breaches and manipulation.

Furthermore, the influence of venture capital money in the crypto space has led to the premature release of these flawed solutions, prioritizing short-term profit over the development of secure and innovative technologies. The introduction of unnecessary governance tokens for Layer 2 solutions only exacerbates these issues, diverting focus from creating genuinely useful and secure solutions.

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