Optimistic rollups

What Are Optimistic Rollups?

Optimistic rollups are a type of Layer 2 scaling solution designed to increase the transaction throughput and reduce gas fees on foundational blockchains, such as Ethereum. As a key component within blockchain scaling solutions, optimistic rollups operate by executing transactions off the main blockchain, or Mainnet, and then bundling or "rolling up" many of these off-chain transactions into a single batch. This aggregated data is then submitted to the Layer 1 blockchain, significantly reducing the computational load on the main network. They are termed "optimistic" because they assume that all transactions processed off-chain are valid by default and do not require immediate proof of validity. Instead, a challenge period is introduced, during which anyone can dispute an invalid transaction by submitting a fraud proof.¹⁶

History and Origin

The concept of rollups emerged as a critical innovation to address the inherent scalability challenges faced by early blockchains, often described by the blockchain trilemma. As the adoption of cryptocurrencies and decentralized applications (dApps) grew on networks like Ethereum, the network became congested, leading to higher transaction costs and slower processing times.

The idea behind optimistic rollups began to take shape around 2019, with the aim of offloading computation while inheriting the robust security of the underlying Layer 1 blockchain.¹⁵ Pioneer projects like Optimism and Arbitrum were at the forefront of developing and implementing this technology. Optimism's mainnet initially soft-launched in January 2021 with a progressive approach, gradually enabling more projects.¹⁴ Arbitrum One, another prominent optimistic rollup, publicly launched its mainnet on August 31, 2021, quickly attracting a significant number of decentralized finance (DeFi) protocols and users seeking lower fees and faster transactions.¹³,¹² Both Optimism and Arbitrum utilize the optimistic rollup mechanism to bundle transactions off-chain, thereby enhancing the network's efficiency.¹¹,¹⁰

Key Takeaways

• Optimistic rollups process transactions off the main blockchain, bundling them into batches for submission to the Layer 1 network.
• They operate on an "optimistic" assumption that all off-chain transactions are valid, relying on a challenge period for fraud detection.
• The primary benefits include increased transaction throughput and reduced gas fees compared to directly using the Layer 1 blockchain.
• A "challenge window" or "dispute period" allows network participants to submit fraud proofs if they suspect an invalid transaction.
• Despite their advantages, optimistic rollups typically involve a delay (e.g., 7 days) for withdrawals from the rollup to the Layer 1 chain due to the challenge period.

Interpreting Optimistic Rollups

Optimistic rollups significantly impact the practical usability of blockchains by altering how transactions are processed and validated. By moving the bulk of computation and state storage off-chain, optimistic rollups allow Layer 1 networks like Ethereum to handle a much larger volume of transactions than they could natively. This off-chain execution, combined with data compression, leads to substantial reductions in gas fees for users, making blockchain interactions more affordable and accessible.⁹

The "optimistic" assumption means that transactions are considered valid unless proven otherwise. This design choice simplifies the immediate processing of transactions, as cryptographic proofs of validity are not required for every batch. Instead, a system of validators monitors the rollup, and anyone can submit a fraud proof if they detect an incorrect state transition. This approach ensures that while execution occurs off-chain, the security and integrity of the rollup remain anchored to the robust consensus mechanism of the underlying Layer 1 blockchain.⁸

Hypothetical Example

Consider Alice, a user who frequently interacts with a decentralized application (dApp) for trading digital assets built on an optimistic rollup.

1. Depositing Funds: Alice first transfers 1 Ethereum (ETH) from her wallet on the Ethereum Mainnet to the optimistic rollup's bridge smart contract. This contract locks her ETH on Layer 1 and mints an equivalent amount of "wrapped" ETH on the rollup.
2. Transacting on the Rollup: With her funds now on the optimistic rollup, Alice can execute multiple trades within the dApp. For instance, she swaps 0.1 ETH for Token A, then 0.2 ETH for Token B, and makes a small payment to a friend for 0.05 ETH. Each of these transactions is processed instantly and with significantly lower gas fees compared to direct Layer 1 transactions. The rollup's sequencer bundles these transactions, along with thousands of others from different users, into batches.
3. Batch Submission: The sequencer periodically submits these batches of compressed transaction data to the Ethereum Mainnet. Since the rollup is "optimistic," these batches are assumed to be valid without immediate cryptographic proof.
4. Challenge Period: A challenge period, typically around seven days, begins. During this time, any network participant can review the submitted batch and, if they detect any fraudulent activity or an invalid state transition from Alice's or other transactions, they can submit a fraud proof to the Layer 1 network.
5. Withdrawal: After a week passes without any successful challenges against the batch containing her transactions, Alice decides to withdraw 0.5 ETH back to the Ethereum Mainnet. The withdrawal is processed, and the funds are unlocked on Layer 1, minus any transaction costs. If a fraud proof had been successful, the invalid batch would have been rolled back, and the malicious party would have been penalized.

Practical Applications

Optimistic rollups are primarily utilized to enhance the performance of blockchain networks, making them more practical for widespread use. Their main applications include:

• Decentralized Finance (DeFi): Many DeFi protocols, including decentralized exchanges and lending platforms, leverage optimistic rollups to offer users faster and cheaper transactions. This enables more active trading, smaller loan sizes, and a broader range of financial activities that would be cost-prohibitive on congested Layer 1 networks. Arbitrum, for instance, became the most popular optimistic rollup by total-value-locked (TVL) and user count, hosting numerous DeFi applications.⁷
• Non-Fungible Tokens (NFTs): The high transaction volumes associated with minting, buying, and selling NFTs can lead to exorbitant gas fees on Layer 1. Optimistic rollups provide a more economical environment for NFT markets, allowing for more accessible participation.
• Gaming and Social Applications: High-throughput dApps, particularly those in gaming and social media, benefit immensely from the increased transaction speed and reduced costs offered by optimistic rollups. For example, Arbitrum Nova, another rollup by Offchain Labs, is designed for high-throughput dApps, including gaming, and is notably used for Reddit's Community Point system.⁶
• General Smart Contract Execution: Any application relying on frequent smart contract interactions, from supply chain management to digital identity solutions, can gain efficiency and cost savings by deploying on an optimistic rollup. The Ethereum Foundation actively promotes the adoption of rollups as a core scaling strategy for the network.⁵

Limitations and Criticisms

While optimistic rollups offer significant scalability benefits, they also come with certain limitations and criticisms:

• Withdrawal Delays: The most notable drawback is the "challenge window" or "dispute period," which typically lasts around seven days.⁴ During this time, funds moving from the optimistic rollup back to the Layer 1 blockchain are locked, as this period allows for the submission and resolution of fraud proofs. This delay can be inconvenient for users who need quick access to their assets on the main chain, although third-party "fast bridging" services have emerged to mitigate this by providing immediate liquidity at a small fee.³
• Reliance on Honest Validators: Optimistic rollups assume that at least one honest validator will be monitoring the rollup and will submit a fraud proof if an invalid state transition occurs. If all validators collude or fail to act, an invalid transaction could potentially go unchallenged and be finalized on Layer 1. However, the economic incentives are designed to make such collusion costly and unlikely in a well-decentralized system.
• Centralization Concerns (Sequencers): Many optimistic rollups initially operate with a centralized "sequencer" that orders and batches transactions. While this provides efficiency, it introduces a potential point of centralization or censorship, as the sequencer controls the order of transactions and can choose which ones to include. Projects are actively working on decentralizing these sequencers over time.
• Computational Cost of Fraud Proofs: While fraud proofs are only needed in the event of a dispute, their execution on the Layer 1 chain can be computationally intensive and costly.

Optimistic Rollups vs. Zero-Knowledge Rollups

Optimistic rollups and zero-knowledge rollups (ZK-rollups) are both prominent Layer 2 scaling solutions, but they differ fundamentally in their security models and operational characteristics.

The core distinction lies in how they guarantee the validity of off-chain state transitions. Optimistic rollups are "innocent until proven guilty," while zero-knowledge rollups are "guilty until proven innocent" (meaning they require immediate cryptographic proof of correctness). This difference impacts withdrawal times and the complexity of their underlying technology.

FAQs

How do optimistic rollups achieve lower transaction fees?

Optimistic rollups achieve lower transaction fees by bundling a large number of individual transactions off-chain into a single batch. This batch is then submitted to the Layer 1 blockchain as one transaction, spreading the fixed cost of the Layer 1 transaction across all the individual transactions within the batch. Additionally, they use data compression techniques to reduce the amount of data posted on the main chain.²

What is a "challenge period" in optimistic rollups?

The "challenge period," also known as the "dispute window," is a set timeframe (commonly around seven days) after a batch of transactions from an optimistic rollup is posted to the Layer 1 blockchain. During this period, any participant can review the transactions and submit a fraud proof if they identify an invalid or fraudulent transaction. If no challenges are successfully raised within this period, the batch is considered final.

Are optimistic rollups as secure as the main Ethereum blockchain?

Optimistic rollups inherit the security guarantees of the underlying Ethereum Mainnet because the transaction data is ultimately posted to and secured by Layer 1. While the execution happens off-chain, the ability for anyone to submit a fraud proof and challenge invalid states, with disputes resolved on the main chain, means that the rollup's integrity is ultimately protected by Ethereum's robust security mechanisms.¹