Rollup Economics 2.0: Analyzing the multi-layer economic relationship of mature Rollup ecology

Original Author: davidecrapis.eth

Compilation of the original text: Deep Tide TechFlow

In February 2022, Barnabé proposed a Rollup economics framework on resource pricing and value flows for thinking about key concepts such as MEV in an L1-dependent economy, the interaction of L1 and L2 fees, and operator revenue and costs. It's a simple framework for a simple world: centralized Rollup on independently running training wheels. A lot has changed in the past 18 months: shared ordering, decentralization, proofs/data aggregation, rollup federations, governance.

We propose a new framework that will help understand the new world Rollup is set to expand into. A lot of experimentation is still going on, but several patterns have emerged. We will analyze key patterns and hopefully provide a tool to help understand where things might go and answer current open questions.

Back to Basics: Revisiting Rollup Economics 1.0

The original Rollup economics framework consists of three entities: users, Rollup operators, and the base layer. It also has a similarly simplified view of value flows: L2 fees and MEV, carrier costs, and data distribution costs. It's a simple framework, but it's useful to start here and build on it, as things get more interesting and complex very quickly.

From these basic flows, we can measure Rollup protocol surplus and reason about related concepts, MEV extraction and allocation, L2 issuance, L2 congestion charge allocation, and the time frame for Rollup to maintain budget balance or achieve budget surplus (L2 ecosystem is a growing economies, may find operating surpluses useful for community public goods funding, development and growth).

Rollup protocol surplus = L2 fees - operating costs - data costs

The Rollup protocol has control over its L2 fees (including congestion pricing and MEV) and operating costs (including issuance and operator incentives). Whether the protocol decides to pursue balance or surplus goals, L2 operations require coordinated technology so that

(1) Optimal setting of L2 congestion charges,

(2) extract and reallocate MEV,

(3) Reduce data costs through optimization and strategic release.

These are the main economic design choices that different L2 ecosystems are currently experimenting with. In the future, the protocol may wish to reduce the uncertainty of data costs through the use of blockspace derivatives.

In the past 18 months, one significant thing has changed. Similar to L1 block building, we see Rollup operators being broken down into more specialized roles. Specialization naturally occurs as the economy grows, which is a good thing because the separation of concerns leads to more resilient systems, if we can account for this in the design. However, the design space is larger now, so we needed a new map to guide our process.

Rollup is maturing

As Rollups mature, Rollups grow in complexity, which we call "Rollup Federations". Rollup Architecture shared between Rollups of the same type is designed to increase security (through shared governance and community coordination), efficiency (through shared functionality and economies of scale) and user experience (through better interoperability and reduced fragmentation ). Meanwhile, independent providers are developing infrastructure to provide one or more of the above benefits to any Rollup that decides to opt for their service. We describe these models in detail below.

Standalone Rollup

A single Rollup is getting rid of training wheels, increasing security and decentralization. From an operational/economic perspective, the main cost areas include:

• Sorting: This incurs operational costs and incentive costs to incentivize the sorters.
• Data Availability (DA): Rollup has to publish data on the base layer, so it incurs data cost, which is the main cost item discussed in the original framework.
• State Verification (SV): This directly increases the operational cost of zkRollup through proof costs.

In all of these cost areas, a single Rollup faces an important trade-off between safety and efficiency. For example, they might choose to use a less secure data availability tier that costs less. Data publishing costs (which we simply refer to as data costs, although this includes some L1 compute costs associated with publishing) have historically been the highest item. With the implementation of EIP-4844 soon on Ethereum and the subsequent implementation of full Danksharding, this will be significantly reduced, giving Rollup the cost efficiencies it needs to scale and support new use cases. In the long run, efficiencies in data costs and related services may be achieved through the aggregation of off-chain innovations to unlock economies of scale.

Concrete examples of aggregation include: shared ordering services; for Optimistic Rollup, an interesting idea is to share batch releases, allowing for faster realization of batch compression gains, especially for smaller participants, providing more benefits through faster data releases Low cost and higher security; shared provers are one of the most exciting Rollup solutions for zk Rollups, especially since they can do these aggregations recursively, gaining in efficient use of the L1 data market Huge gains, but at the cost of more off-chain computations. It is an obvious fact that sooner or later Rollup will choose to adopt shared services, either as part of the Rollup Alliance or as part of the Economic Alliance.

One direction the Rollup ecosystem might take is to have more independent Rollups closely aligned with L1. Although we haven't seen many implementations, there are at least two interesting architectures. One is to delegate its block ordering to L1's Rollup, thereby utilizing the L1 transaction supply network for MEV extraction, but retaining the power to set L2 congestion fees. A more extreme one is that Rollup is established in Ethereum itself. We will dive deeper into the economics of these models when we discuss Rollup’s MEV resiliency and decentralization.

Rollup Cooperative

The first type of integration between two Rollups is a purely economic cooperation, such as an economic cooperative.

“A cooperative is a group of entities that share or work together to achieve a common goal, such as economic benefit or savings.” — Wikipedia

In its simplest form, there is a joint procurement agreement for some kind of service between Rollups. Imagine having a shared bulk publishing service that Rollups can subscribe to and get lower data publishing costs. Deeper economic integration is also possible, such as a shared ordering service that both provides cost efficiencies and makes it easier for transactions between Rollups to be atomically settled, lowering trade barriers between them. This mindset is similar to that of the European Economic Community or other similar common market associations.

We can enhance the simple model of independent Rollup economics by introducing an intermediate service provider. In this case, there are two new economic effects on the Rollup ecosystem.

• Rollup cost structure: Rollup operator costs now include operating costs, service costs, and data distribution costs.
• Shared service economics: The new entity needs to achieve a balanced budget.

Examples of such services include Espresso Sequencer, a shared service for sequencing and publishing limited to shared batch publishing, or shared proofs. In all these cases, there are two important economic issues with shared services.

• Service cost sharing at L2: The total service cost needs to be apportioned to Rollups using shared services in an economical and fair manner.
• Decentralization of shared services: achieve a certain level of decentralization, depending on the type of service, striking the right balance between performance and robustness. This standard is lower than the base layer, but it includes management incentives and MEV.

Rollup Alliance

Rollup federations differ from economic cooperatives in that they have both economic integration and some form of political integration. This mindset is similar to a federal state.

Technically, political integration is achieved through shared cross-chain bridges, but it also requires a shared governance system. Here, we will largely set aside political and governance considerations, and we will assume the existence of a shared cross-chain bridge and focus on the economic relationships it implies. This rollup federation architecture is emerging on all major rollup systems, which are becoming platforms for deploying interoperable peer-to-peer rollups.

For example, Optimism Superchain, Polygon 2.0, StarkWare SHARP, zkSync Hyperchains, and other related projects share similar patterns in their architectures. We outline this in the figure below. Note that for the sake of effect, we make the realistic assumption that the Rollup federation automatically selects the shared service and incurs no direct data publishing costs.

The existence of shared cross-chain bridges introduces additional economic variables. In particular, native L2 tokens, such as the OP token in the Optimism ecosystem, provide significant decision-making power through governance for allocating resources, roles, and economic flows within the ecosystem (e.g., OP governance is a hybrid-based An Experiment in the Governance of Token Identity). Once the Rollups tech stack has matured and level one security issues have been addressed, the next concern is robustness, which may involve some level of decentralization.

When Rollups consider building decentralized services (for ordering, proofs, or verification), they will need to run a consensus protocol. This is when a sufficiently sized ecosystem sees an opportunity to "upgrade" its native token into a production asset (which is what Polygon 2.0 plans to do with POL). This is not the only way to decentralize L2 services, as Ethereum L1 can also take advantage of its better security properties. However, for larger ecosystems that wish to retain more internal controls/governance and associated rewards/incentives, using native tokens may be an attractive direction.

The native token is an important economic tool to help bootstrap the L2 ecosystem/economy. Issuance can be used to reward service operators, fund ecosystem support projects, or public goods. However, when native tokens are used to support decentralization through some native proof-of-stake protocol, security may decrease with more dilution. Even if the native token is only used for governance, excessive dilution could lead to more sales by budget-constrained holders, potentially leading to a concentration of ownership. Therefore, it seems important to have a token issuance program that matches the growth in demand. Finally, another important consideration is making the L2 economy more reliant on the native token (rather than ETH), which also makes it less robust to certain failure modes, as moving to L1 may not be an option. At the limit, L2 still has the security provided by Ethereum, but loses the security provided by Ethereum as an external currency.

more layers

Another area of active development is the development of application-specific or custom execution environments that eventually settle on the base layer, if not directly. These are usually aimed at applications that require low execution cost and simple deployment, and are willing to make a trade-off in security. Examples include games, social media, NFT products that don't require launching their own service economy or attracting/guaranteing a lot of liquidity.

These include different types such as L3, Validium, and Rollup as a Service (RaaS) platforms. For example, Arbitrum Orbit is a platform that supports the deployment of L3 chains on Arbitrum L2 (One or Nova), with some configurability such as choosing the Arbitrum authorized Data Availability Committee (DAC) or Ethereum L1 as the data availability layer. StarkNet and other zk rollups projects have also been trying to implement L3. An extreme example in terms of ease of deployment is AltLayer or Caldera, which provide no-code solutions to deploy "customizable" Rollups and empower users to make security and efficiency trade-offs.

We specialize in L3 systems. This is essentially an added layer on top of L2. From an L2 Rollup perspective, this is another source of L2 fees. For the Rollup ecosystem, L3 is a new entity with its own budget balance constraints:

*L3's revenue may come from fees, subscriptions (e.g. games), or other mechanisms such as revenue sharing (e.g. NFTs).

• L3 costs include operating costs of the system as well as L2 charges for compute/data. These costs can be borne directly by L3, or paid by the RaaS platform in the case of managed services. This is another service provider that needs to balance the budget.

This is another example of economic specialization in the Rollup ecosystem.