What are Rollups?

No, we’re not talking about cigarettes (or fruit rollups). 

In crypto, rollups are touted to become the next big thing for cryptocurrency scaling solutions, which could have massive ramifications for all smart-contract blockchains. 

But what exactly are they, and what problem do they solve? 

When an unexpected surge in network activity occurs, such as during 2017 when CryptoKitties first came to Ethereum, or the DeFi boom of 2020, and pretty much half of 2021 as a whole, network charges skyrocket too. 

As you can imagine, an unexpected jump in fees, especially when it goes up by hundreds of dollars overnight for the same transaction, can be pretty irritable for those who have to endure them. 

Fundamentally, this is the problem rollups look to address by reducing network congestion and, therefore, network fees too. 

But, to help us, let’s quickly catch up on some terminology and go over our definitions. First, we have layer-1 scaling, where you scale the blockchain itself. 

Often this is achieved by employing a technique known as sharding. 

When sharding, the entire blockchain is broken down into smaller, more manageable datasets with a specific group of nodes working a single shard each. 

Consequently, the nodes only hold the transaction data of their shard rather than the whole network, which leads to faster transaction times and lower network fees. 

Alternatively, layer-2 scaling is where you’re sending data off-chain to be processed by another blockchain and then later returned once processed. 

Similarly, like layer-1 scaling, this leads to faster transaction times and lower network fees. 

Though, it does come at the expense of supposed security, as it is another variable that needs to be accounted for when addressing potential failure points within a crypto network. 

You might be questioning why layer-1 scaling isn’t the preferred method, and this is because, often, you will find layer-1 scaling solutions in tandem with layer-2s can create even faster network and transaction speeds than on their own. 

With that in mind, today, we are specifically focusing on rollups, which exist somewhere in between.

Unlike layer-1 and layer-2 scaling solutions, rollups aim to take the best of both approaches and combine them by developing an on-chain-off-chain scaling solution that processes and compresses data elsewhere, which saves space and relieves congestion. 

However, unlike traditional layer-2s, rollups still work through the main chain to ensure the network security isn’t potentially compromised. 

Although sharding is different from rollups on a technical level, they ultimately provide a similar function of reducing space. 

The smaller the source data becomes from sharding means more transactions can be fit onto each block of the chain, which reduces the overall competition to be on the next block. 

Since available space has already increased on the block before it reaches the rollups stage, this process ultimately makes an already nicely compressed file into a super-compressed one. 

So, how does this save you money? 

As we briefly described above, every transaction on the block takes up a tiny bit of digital space. Still, that means only a certain number of transactions can fit on a block before it’s full. 

When significant demand is placed on the network, for example, when the overall crypto market is in bear mode and many people are looking to exit their crypto positions quickly, this causes additional, sudden stress on the network. 

If too many people compete for space on the blockchain, they will offer miners more money to ensure their transactions are processed first. 

Naturally, the miners prefer the largest transaction rewards for their work, essentially guaranteeing their selection. 

Meaning that the more space saved on each block, the less competitive people need to be to secure a place on that next block. 

Predictably, off-chain or layer-2 scaling solutions have been some of the biggest winners in market cap increases during the 2021 bull run due to this ability to allow Ethereum transactions, in particular, to be processed faster. 

A good example is the popular layer-2 solution Polygon, which earned so much money that it spent around A$ 868’000’000 on acquiring the companies Hermez Network, which focuses on ZK rollups, and Mir, an additional scaling-startup company. 

However, the days of layer-2 dominance may soon be over.

Since Ethereum is slowly launching upgrades towards what they call “Ethereum 2.0,” soon, Ethereum will tackle this problem internally through sharding technology. 

However, as rollups work in tandem with sharding, rollups could take their place once layer-2 scaling solutions begin to disappear from certain networks. 

Unfortunately, a significant criticism of most layer-2s is that they have their own consensus models running on their own blockchains, and effectively this has become viewed as an additional vulnerability. 

But, I assume you might be wondering, how does this all work? Well, this is where it can get a little complicated. 

When we say “rollup,” we refer to a type of scaling solution that works by executing transactions off the main chain while relying on its parent chain for security, which then posts the completed transaction data directly back to the main chain. 

The name rollup comes from the fact that data is compiled – or rolled up – into a single, smaller data entry before returning to the main chain. 

Here, non-essential information is also removed before being sent back, further reducing the space required on each block. 

Clearly, the dream is to do all the work on-chain while replicating the speed of off-chain solutions. For this reason, rollups are often considered the best of both worlds. 

To achieve this best of both worlds strategy, rollups on the Ethereum blockchain run a rollup-specific version of the Ethereum Virtual Machine, which among other things, is the method used for agreeing on transactions before being committed to the immutable blockchain. 

Briefly put, this allows this separate blockchain to run independently from Ethereum but still utilises its network protocol for security – as, at least in crypto, the more extensive the network, the more secure it generally is. 

To conclude, what are rollups, and what do they do? 

In short, they compile data entries to save space per block on the blockchain. 

Given there is only so much space for data per block, anything that can successfully and safely reduce the data size will, in theory, reduce the amount of money required to pay for performing transactions on the network.

Naturally, as far as the consumer is concerned, be it sharding, a successful layer-2, or a type of rollup, anything that either brings gas fees down or at least makes them more predictable will be a winner in their eyes.

Elbaite is the Australian cryptocurrency exchange that allows you to buy & sell crypto directly from your crypto wallet. Make an account today to start your crypto investment journey!

Disclaimer: The information on this website is purely for information. Elbaite is not a financial adviser, and nothing stated here is to be taken as financial advice. You should seek independent legal, financial, taxation or other advice relevant to your financial situation before making any investment decisions.

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