What are "Rollups" in crypto?

Over the last year, DeFi, NFTs, and a range of other Web3 related activity has pushed the Ethereum network to work harder than ever before — and all this increased traffic has caused a corresponding rise in gas fees (fees users pay network participants to make transactions happen and provide certain safety guarantees).

Although gas fees have settled down in recent months, Ethereum transaction costs are still materially more expensive than they were in Ethereum’s network formative years (2015-2018).

But many believe hope is on the horizon. Ethereum’s developers promise that the long-awaited upgrade to a proof-of-stake consensus mechanism is coming soon (read more about what it will entail) — which could increase transaction speeds and lower costs for users.

But this fundamental upgrade to the core Ethereum blockchain is just one way of looking at the problem. Another way of approaching it comes under the umbrella of “Layer-2” networks — which are speedy parallel blockchains that work kind of like HOV lanes on a highway.

These Layer-2 blockchains process take some of the transaction load off of the main blockchain before eventually recording them on the blockchain’s mainnet.

Rollups are a popular type of a Layer-2 scaling solution. Two of the most popular varieties are called Optimistic rollups and zk-Rollups. While they both work by processing hundreds of transactions off-chain, they vary in terms of exactly how the final transaction is anchored to the Ethereum network.

How do rollups work?

Rollups are a kind of Layer-2 scaling solution. Their goal is to help reduce congestion on Ethereum’s network, resulting in more processed transactions and lower fees — while maintaining Ethereum’s high security levels. Rollups reduce the effects of network congestion by aggregating, or ‘rolling’, batches of transactions into a singular transaction that is ultimately posted to the Layer-1 Ethereum blockchain. Ethereum’s security is retained as these transactions are ultimately verified on the Layer-1 Ethereum blockchain. Beyond Ethereum, Layer-2 networks built on other networks are growing in popularity, such as Bitcoin’s Lightning Network.

While different types of rollups exist, rollups generally gather together large batches of transactions and move them to a speedy parallel blockchain. Instead of each transaction incurring a gas fee, a split fas fee is charged to the entire batch — significantly reducing costs. Rollups support Layer-2 networks, which are blockchain networks built on top of an existing network such as Ethereum, that improves transaction efficiency through transaction batches while retaining the Layer-1 network security level.

There are two major categories of rollups: Optimistic rollups, and zKrollups.

Optimistic rollups

Optimistic rollups come by their name because of the way they work: they assume that every transaction in the batch is valid, and employ a grace period where a proof of fraud can be used to dispute a batch containing an invalid transaction. If there is no dispute after the grace period ends, the transaction batch is anchored to the Ethereum blockchain. Unlike other Ethereum scaling solutions such as sidechains, Layer-2 networks are built directly on top of the Ethereum network and offer far more security, as they are intertwined with transaction validation on the Layer-1 Ethereum network.

There are two major competing Optimistic rollup projects working hard on this solution: Arbitrum and Optimism. The Arbitrum and Optimism networks are both supported by Coinbase Wallet. These networks can be accessed under Default Network within Settings.

Arbitrum basics:

• Arbitrum, developed by Offchain Labs, is a Layer-2 network that makes use of an optimistic rollup. Arbitrum offers an asset bridge that can be used to transfer assets from the Ethereum network to the Layer-2 Arbitrum network. 

• One unique Arbitrum feature is the Arbitrum Virtual Machine, which automates the process of migrating an Ethereum dapp to the Layer-2 Arbitrum network. 

Optimism basics:

• Optimism also offers an asset bridge, which allows the transfer of assets between the Ethereum network and the Optimism network — including both ERC-20 tokens and NFTs. 

• Once the assets have been transferred to the Optimism network, users can efficiently transact on top of the Ethereum network. That includes transactions ranging from simply sending assets to another wallet to purchasing an NFT on a marketplace that supports the Optimism network. 

• Optimism has seen significant developer interest, and its Layer-2 network offers a plethora of decentralized applications that can interact with your self-custodial wallet once the asset bridging has been completed. Optimism dapps can be found at https://www.optimism.io/apps/all. 

• Optimism recently announced the launch of a governance token that will be airdropped to qualified addresses over the coming months. The token is part of the Optimism Collective, which will transition the Layer-2 network’s development to a decentralized governance structure. The OP token will provide voting rights within Optimism’s Token House, responsible for governing the network along the Citizens’ House.

Arbitrum and Optimism transactions both require gas fees to be paid in ETH, unlike other Etherum scaling solutions such as the Polygon network’s offerings.

zK rollups

zkRollups derive their name from cryptographic “zero knowledge proofs” — which are used to authenticate the validity of transactions.

Unlike optimistic rollups, zkRollups send their transactions back to the Ethereum network when they’ve all been deemed valid by a cryptographic proof. In other words, the difference between the two rollup types is that zkRollups assume every transaction is invalid until proven valid, whereas optimistic rollups assume every transaction is valid unless proven otherwise.

Here’s some examples of zK rollups:

• StarkWare’s recently launched StarkNet is a zkRollup Layer-2 network designed to offer a lower-cost experience within the Ethereum ecosystem. StarkNet offers a suite of developer tools that make it easy to transition dapps to the StarkNet Layer-2 network. Just like Optimism and Arbitrum, transactions on the StarkNet network require gas fees to be paid in ETH. Once StarkNet’s asset bridge completes testing, it will allow asset transfers between the Ethereum and StarkNet Layer-2 network.

• Loopring is another zkRollup Layer-2 network. Loopring seeks to make DeFi transactions faster and cheaper. When compared to Ethereum-based decentralized exchanges, Loopring’s decentralized exchanges offer nearly immediate transaction finality and lower slippage costs, among other advantages. For example, Loopring can settle north of 2,000 trades per second.