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Why rollups are the future of Ethereum

There has been much talk in the Ether world about Rollups and their uses. We aim to enlighten readers and describe what they are, and why we are excited about them coming into effect. 

As a refresher, a Rollup is a layer-2 solution on top of Ethereum where transactions are grouped together – or rolled up – off-chain, processed, and then the transaction data is submitted on-chain. This is a scaling solution for Ethereum with the effect of increasing from 45 transactions per second to virtually an infinite number when these Rollups are aggregated. Super. Cool.

Optimistic Rollups 

This Rollup variation gets its name from the assumption that submitted translations are all trustworthy. The trust only goes so far though, as the transaction data is publicly posted so it can be checked by the community, and you can bet it will be checked.
At the moment, there are two main optimistic style Rollups: Optimism and Arbitrum. 

These two are already much used in the Ethereum community, and as of today the total value locked in each amounts to $250 million and $1.2 billion respectively, as sourced from these charts . It can also be seen that the number of transactions using the solution is on the rise.

These hot new products have also raised development funding in the past months with Optimism raising $150 million, bringing it to a $1.6 billion valuation, according to the team. A portion of this round came from the investment firm Paradigm as well as the venture capital firm Andreessen Horowitz in March. Arbitrum is no slouch raising $120 million, now sitting at a comfy $1.2 billion valuation as of last September. 

Optimism and the $OP token

Since the soft launch of their mainnet in June of 2021, many big protocols have established themselves on Optimism , meaning they deployed their smart contracts such that you can use the protocol on Optimism. The list includes Synthetix, Uniswap, Aave and Curve. It has also witnessed the creation of native protocols like Lyra , which provides an option trading experience designed for layer-2 solutions. A more recent addition, Velodrome , competes with Curve on large trades and is the second project to use a new governance model, introduced by Solidly on Fantom a couple months ago.

At the end of May 2022, Optimism airdropped the first batch of its native token $OP, rewarding early users of the network. Holding those tokens will give users the power to participate in the Optimism Collective, a future DAO with two chambers: the Token House and the Citizens’ House.

The sequencer – which creates blocks and submits user transactions to the Ethereum mainnet – will then be decentralised and deployed by third-parties generating further revenue which will be reinjected into the $OP token and the overall ecosystem. A good project to follow.

capturede28099ecc81cran2022-06-17acc8015.56.43
Optimistic Ethereum Daily Transactions Chart

Arbitrum

When compared with Optimism, Arbitrum is more advanced in terms of development and size, and yet holds no token with no news of one on the horizon. This isn’t stopping their growing community from getting stoked for a possible for an airdrop; feels like the right time to ‘unroll’ the details of this Rollup!

Many of the larger DeFi players including Sushi, Curve, Uniswap and Aave have made their platforms available on both Optimism and Arbitrum, with others opting only for the later like Abracadabra or GMX. It will be interesting to see how the optimism side of Rollups evolves and what’s coming down the pipeline.

capturede28099ecc81cran2022-06-17acc8015.57.05
Arbitrum Daily Transactions Chart

Bridges

Blockchain bridges are connections between blockchains, or networks, that allow for the secure transfer of tokens and other data from one to another. Using a bridge allows you to transfer a token from one network to another to use their dapps. As a simplified example, you could bridge your USDC from Ethereum to Polygon to use Polygon’s dapps. When doing this, your USDC is made unavailable on the starting Ethereum wallet, and available in the Polygon wallet.

As bridges act as the link between layer-1 and layer-2 protocols, they are required for the adoption of Rollups. Fortunately, multiple options are already available to bridge from the major chins to Optimism and Arbitrum.

In a nice move, Arbitrum has made their own bridge available to the DeFi community, while Optimism relies on third party bridges like Anyswap, cBridge and Hop – all of which also work for Arbitrum.

Recently, some centralised exchanges have also started supporting Rollups, with Binance enabling Ethereum withdrawals directly to Arbitrum, while for Optimism only deposits are allowed until their wallet is funded uo to a certain amount. 

SwissBorg will also add support for these two Rollup networks soon with Premium members having a vote on the listing of the $OP token inside the app!

Zero-knowledge Rollups (ZK-Rollups)

The other type of Rollups compatible with Ethereum are based on zero-knowledge proofs which bundle a huge amount of transfers off-chain in a cryptographic proof.

Instead of being optimistic and considering that transactions are trustworthy, ZK-Rollups will validate the transactions and use a validity proof to prove that the transactions are valid. This proof is then posted to Ethereum mainnet.

When comparing the speed difference between the two, ZK-Rollups will support even more transactions per second than their optimistic friends, and will greatly help to scale Ethereum. Although they are still mostly in development, they have generated significant traction and funding, with Starkware raising $100 million pushing the L2 protocol to a valuation of $8 billion two weeks ago, quadrupling its valuation in 6 months!

Starkware is a growing tech startup with the goal of making the use of blockchain more efficient. They are creating security and scaling solutions for Ethereum and developing Starknet , poised to be their layer-2 ZK-Rollup. They have recently opened their mainnet beta for early users who have been able to deposit Ethereum and DAI. Back in 2020 they launched StarkEx, a layer-2 customisable ZK-Rollup designed for specific projects. Major players in the DeFi ecosystem use StarkEx, like dYdX, using the protocol to provide lower fees, more trading pairs and instant trade settlement. Sorare is another example of a project leveraging these solutions, having been able to scale the NFT transactions taking place on their platform.

Other similar projects like zkSync and Loopring are also generating traction.

Not wanting to miss the party, Polygon has also been looking into ZK-Rollups, acquiring Mir Protocol for a cool $400 million, the new addition in the seven scaling solutions under theri development. Polygon already has the active ZK-Rollup Polygon Hermez , Polygon Zero from Mir, Polygon Miden, which uses another type of zero-knowledge proof, and Polygon Nightfall, adding privacy for enterprises – and the winner of having the one of the coolest names in crypto. 

Looking forward

It is clear that Rollups have emerged on the scene to play a major role in the coming scaling of Ethereum. 

With other networks quickly following suit by creating their own solutions, and the possibility of new types of Rollups on the way, including layer-3 and 4 solutions being imagined and discussed as you read this, we are closely following their evolution and are excited to see what comes next in the efforts to scale Ethereum to the moon!

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