Gen 2 Optimistic Rollups (Arbitrum and Optimism)

What is an Optimistic Rollup?

To understand what an Optimistic rollup is, we need to understand two core concepts:

1. Fraud Proofs
2. Rollups

Fraud Proofs

Fraud Proofs present evidence that a state transition was incorrect. They reflect an optimistic view of the world: the assumption is that blocks represent only correct states of L2 data, until proven otherwise. In reality, a committed block could well include an incorrect state transition.

The main advantage of Fraud Proofs is that they are not needed for every state transition, but only when things supposedly break down. As such, they require fewer computational resources, and are a better fit for a scalability-constrained environment. The main disadvantage of these protocols stems from their interactivity: they define a ‘conversation’ between multiple parties. A conversation requires the parties — the party claiming fraud, in particular — to be present (liveness), and allows other parties to interrupt the conversation by various means. But the heart of the problem is the protocol’s interpretation of silence (the absence of a challenge to a new state) as implicit consent. Indeed, an attacker could attempt to create the semblance of silence with DDoS attacks.

Let us describe the conceptual protocol: Since a block may include an incorrect state transition, the Fraud Proof protocol allows for a time frame — the Dispute Time Delay (DTD) — to dispute this incorrect state. This window is measured in blocks. If no Fraud Proof is submitted within the DTD, the L2 state transition is considered correct. If a Fraud Proof is submitted to the smart contract, and is found correct (i.e., was submitted within the DTD, and indeed proves an incorrect state transition), it results, at a minimum, in the smart contract reverting to the commitment of the last correct L2 state. Additional steps, such as penalties to the violating party, may be applied.

The selection of the DTD duration is of consequence: the longer it is, the higher the probability of detecting an incorrect state transition — that is good. But, the longer it is, the longer users have to wait, for example, to withdraw funds — that is bad.

How do fraud proofs work? the rollup contract keeps track of its entire history of state roots and the hash of each batch. If anyone discovers that one batch had an incorrect post-state root, they can publish a proof to chain, proving that the batch was computed incorrectly. The contract verifies the proof, and reverts that batch and all batches after it.

“We claim that Validity Proofs have a fundamental advantage, in that they ensure that nothing other than correct state transitions are accepted.” — rewrite this quote as the reason why zk rollups are better.

• A fraudulent transaction could find its way onto the blockchain when using optimistic rollups, because someone must manually find and remove fraudulent transactions. It’s impossible for a fraudulent transaction to make its way onto the blockchain when sousing zk rollups because each transaction is mathematically proven by a zkSNARK and nobody has to manually check transactions. Optimistic rollups use humans to verify transactions while zk rollups use computers and mathematics to verify transactions.

Rollups

Rollups are the main way that Ethereum developers plan to scale the Ethereum network. Rollups can increase throughput, measured in transactions per second (TPS), improve transaction finality speed, and lower transaction fees. They do this by developing another blockchain called a layer 2 that runs on top of a layer 1, in this case, the Ethereum mainnet. A mainnet is a fully functional blockchain that is available to the public, as opposed to a testnet, which is used for testing new projects or updates.

In short, rollups allow Ethereum to complete more transactions faster and at a lower cost.

A popular analogy for explaining rollups is the "mail" analogy. Imagine you're sending 5 separate letters to 5 people who all live in the same house. You put each of the letters into separate envelopes and send them. In that scenario, you would have to pay for postage 5 times. It would make more sense to put all of the letters into one envelope and send that one envelope to their house. That would allow you to reduce your postage costs and send more letters.

Rollups work similarly to the mail analogy because they take, say, 2,000 transactions and put them into a single batch. That batch is then sent to the Ethereum layer 1, where the transaction data is stored as a single Ethereum transaction.

For more info on rollups, I recommend Vitalik Buterin's An Incomplete Guide to Rollups and Delphi Digital's The Complete Guide to Rollups.

An Optimistic rollup is a type of rollup that uses fraud proofs to verify transactions.

Why Optimistic Rollups?

The main reason for Optimistic Rollups: While a seven-day dispute period can slow down withdrawals (since it takes longer for transactions to officially “settle”), Optimistic rollups are much easier to implement than zero-knowledge rollups, the primary Ethereum scaling alternative. As a result, Optimistic rollups were the first to come to market (Arbitrum and Optimism both launched in 2021).

Optimistic rollups have limited TVL. Because having too high of value is a security risk (research this)

Top Optimistic Rollup Projects

Arbitrum and Optimism are the leading optimistic rollup projects.

Arbitrum

Arbitrum One

Arbitrum One is a second-layer scaling solution for Ethereum that has been on the Ethereum mainnet since September 2021. It allows users to execute Ethereum smart contracts on an off-chain, low-latency, high-throughput environment. This off-chain environment is backed by an on-chain security model, allowing for secure and reliable transactions. The Arbitrum network is powered by a series of distributed nodes, which verify transactions and execute smart contracts.

Arbitrum Nitro

Arbitrum Nitro is a second-generation optimistic rollup. It was released in August 2022 and Arbitrum One runs on it.

Optimism

Optimism is a scaling solution for Ethereum that has been on the Ethereum mainnet since December 2021. It uses optimistic rollup technology to execute smart contracts and transactions off-chain. It is designed to drastically increase Ethereum's throughput while providing users with a secure, reliable, and trustless experience. Optimism also provides a layer of privacy, as transactions are only visible to the parties involved.

Optimism Bedrock

Optimism Bedrock is a second-generation optimistic rollup.

Key Differences

Fraud Proof Differences

Arbitrum and Optimism use different dispute-resolution processes when validating transactions. Arbitrum uses multi-round fraud proofs that are executed off-chain. Optimism uses single-round fraud proofs that are executed on the Ethereum mainnet. Arbitrum's multi-round process is cheaper and more efficient than Optimism's single-round.

EVM Equivalency

Abritrum and Optimism are both EVM compatible, but Optimism is more EVM-equivalent than Arbitrum. This theoretically allows Solidity smart contracts to be deployed on Optimism more easily than Arbtirum.

Also, while Optimism and Arbitrum are both EVM compatible, Optimism uses Ethereum’s EVM, whereas Arbitrum runs its own Arbitrum Virtual Machine (AVM). This results in Optimism having only a Solidity compiler, while Arbitrum supports all EVM-compiled languages (Vyper, Yul, etc).

Development Roadmap

Another area where Optimism and Arbitrum differ is in their development roadmap. Optimism clearly lays out its development roadmap until 2024, and some of its goals include the implementation of next-generation interactive fraud proofs, sharded rollups, and a decentralized sequencer.

Arbitrum does not have any of its future plans publicly available on either its website or Github. Though, one can speculate that as a competitor to Optimism, Offchain Labs may be tempted by the release of $OP to launch their own governance token sometime in the future.

Overview

I recommend this article for a more technical explanation of the differences between Arbitrum Nitro and Optimism Bedrock.

Which Project Will Win?

Arbitrum vs Optimism

In my opinion, both Optimism and Arbitrum each have advantages over the other without one of them being objectively better. I find Arbitrum’s team makes their marketing prowess quite clear through their ability to rapidly expand their social media presence and attract DApp developers to their chain. And in its current state, the rollup architecture of Arbitrum trumps that of Optimism in both security and longevity due to their superior fraud-proof mechanism and their proprietary VM. Something I quite like about Optimism’s team is that they place a strong emphasis on both the decentralization of its protocol and its governance, more so than Arbitrum’s. It’s also currently cheaper to transact and swap tokens on Optimism, and their promising future plans may enable them to lead the charge in Optimistic rollup innovation which could eventually sway the market in their favor.

Can Arbitrum and Optimism beat zkEVM projects? Yes, if they develop a zkEVM, because they already have the community, but it will still be difficult to beat Polygon. Polygon is working on many solutions including multiple zk rollups and a combined zk and optimistic rollup. Zero-knowledge technology holds a number of advantages over Optimistic technology. Proving that transactions are correct (as ZK rollups do) is more fool-proof than trusting people to reject malicious transactions within a certain time window (as is required with Optimistic rollups). Once zkEVM technology matures, optimistic rollups could be used as a backup for when zkEVMs fail. Kelvin Fichter of Optimism has said that they plan to expand into zk rollup technology. Vitalik has said that a system with 3 branches (optimistic rollups, zk rollups, and governance). The optimistic and zk rollups are the provers and the governance is the tie-breaker, in the case that the provers reach different conclusions.

How will zk rollups and optimistic rollups work together?

Until zkEVM is fully stable and mature, the workflow is as follows:

1. publish the block
2. wait 24 hours
3. a) If there are no fraud challenges during this period, release the ZKP and fully finalize the block. b) If there are challenges, Governance is introduced to adjudicate the final result through the 2 of 3 model.

After zkEVM is stable and mature:

1. release the block
2. Publish ZKP periodically.
3. a) If the ZKP is released properly during the specified period, it will prevail. b) If the ZKP is not released properly during the period (Prover failure or bug), the Optimistic mechanism is introduced first, until the ZK mechanism is restored.

Both options require the existence of the Optimistic mechanism to ensure the liveness and safety of the entire Rollup system.

Therefore, the development of the Optimistic mechanism is still the vital part of the Rollup universe.

“I personally would much rather trust $10 million of my own money to an EVM Optimistic rollup than to an EVM ZK rollup for at least the next couple of years. But in the long term ZK rollups are, I think, going to be everything. And so, my advice to teams like Optimism and Arbitrum is that I think they should start ZK-ifying themselves fairly soon.” — Vitalik Buterin. It will be years before zkEVM technology is sufficiently secure to the point of reliability. During that time, optimistic rollups will continue to be the dominant layer 2 scaling solution. Optimistic rollups are cheap for users and developer-friendly.

And finally, Justin Drake – a researcher at the Ethereum Foundation who has partnered with teams like Scroll and Matter Labs on their zero-knowledge protocols – points to community as a potential saving grace for protocols like Optimism and Arbitrum. Having users that are loyal to your brand is powerful. There are likely many loyal Arbitrum and Optimistm users that would use their networks regardless of the underlying rollup technology.

“It turns out that in this space, oftentimes it is not just about technology. Sometimes, it’s the network effects – the culture of the community – that is actually the most important thing. I think a team like Optimism really got a lot of things right from that perspective,” Drake told CoinDesk.

This is why I think Polygon, Arbitrum, or Optimism will likely win. They have the investors, cash, technical team, users, brand, and community to win the scaling wars.