Thanks to Anders Elowsson, Barnabé Monnot, and Julian Ma for review and feedback.
In February 2022 a framework for rollup economics was proposed by Barnabé to think about resource pricing and value flows in an L1-dependent economy. It introduced key concepts to think about MEV at L2, interaction of L1 and L2 fees, operator revenues and costs. It was a simple framework for a simple world: centralized rollups on training wheels operating in silos. A lot has changed in the past 18 months: shared sequencing, decentralization, proof/data aggregation, rollup federations, governance.
We propose a new framework that will help make sense of the new world in which rollups get ready to scale. There is a lot of experimentation still going on, but several patterns are emerging. We will analyze key patterns and hopefully provide a tool that helps to understand where things might be headed and helps frame/answer current open questions. This is the first in a series of posts called “Rollups are Real”. Following posts in the series will go deeper on Aggregation and Interoperability, Decentralization and MEV Resiliency, Governance and Resource Allocation.
The original rollup economics framework has three entities: users, rollup operators, and base layer. It also has a similar simplified view on value flows: L2 fees and MEV, operator costs, and data publication costs. It’s a simple framework but it is useful to start from here to anchor to, because things will soon get more interesting and complex.
Rollup economics flows in the original framework.
From this basic flows one can measure rollup protocol surplus and reason about related concepts such as MEV extraction and allocation, L2 issuance, L2 congestion fee allocation, and the time horizon for a rollup to maintain a budget balance or run a budget surplus (L2 ecosystems are growing economies that may find it useful to run a surplus, to be allocated by the community to public goods funding, development, and growth).
<aside> 👉🏻 rollup protocol surplus = L2 fees - operational cost - data cost
</aside>
The rollup protocol has control on its L2 fees, including congestion pricing and MEV, and its operational costs, including issuance and rewards for operators. Whether the protocol decides to target a balance or a surplus goal, L2 operations require the orchestration of technologies that allow to (1) optimally set the L2 congestion fee, (2) extract and reallocate MEV, and (3) reduce the data cost via optimizations and strategic posting. These are the major economic design choices that different L2 ecosystems are experimenting with today. In the future, it is possible that protocols will want to reduce the uncertainty in data cost, for example using blockspace derivatives.
In the past 18 months, one major thing has changed. Similar to what happened to block building for L1, we are seeing an unbundling of the rollup operator role in more specialized roles. As the economy grows it naturally specializes, this is a good thing as separation of concerns leads to more resilient systems if we are able to design our way around it. But the design space is much larger now, so we need a new map to guide us through the process.
As rollups mature and start taking off training wheels, sophistication is increasing both within each rollup and between rollups of the same type, which we call rollup federations. Shared rollup architectures between rollups of the same type are being designed to increase security (via shared governance and community alignment), efficiency (via shared functions and economies of scale), and user experience (via better interoperability and less fragmentation). At the same time, independent providers are developing infrastructure to deliver one or more of the above benefits to any rollup that decides to opt into their services, no matter their type. We call these rollup coops. We go into these models below, starting from the updates to individual rollup economics.
An Ethereum rollup successfully taking off training wheels.
Single rollups are taking off training wheels, increasing security and decentralizing. From an operations/economics perspective the main cost areas include: