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Ethereum Layer 2 sorting Decentralization: addressing centralization risks and enhancing user experience
The centralization issue of Ethereum Layer2's sequencer: Decentralized sequencer analysis
With the popularity of Ethereum Layer 2 scaling solutions, transaction ordering has become an increasingly serious issue. The main purpose of Layer 2 rollups is to provide users with a secure environment for low-cost transactions. Rollups provide an execution layer for users, and then submit transaction data to Layer 1, such as Arbitrum, Optimism, and zkSync on Ethereum.
Sorters are entities responsible for organizing these transactions into groups. They receive unordered transactions from users, batch them off-chain, and then generate a batch of compressed ordered transactions. These transactions can then be placed into a block and sent to the parent Layer 1.
Rollups do not actually require a sequencer; it is merely a design choice aimed at providing users with lower fees and faster transaction confirmations. For instance, rollups can use the base layer for ordering, just as most rollups utilize the Ethereum base layer for data availability. However, the Ethereum base layer can be relatively inefficient and expensive. This means that so far, every major Layer 2 rollup project has found it more convenient, cheaper, and user-friendly to operate a centralized sequencer.
Due to the sorter controlling the transaction order, it has the ability to review user transactions ( although a complete review is unlikely, as users can submit transactions directly to Layer 1 ). The sorter can also extract the maximum extractable value (MEV), which may cause economic losses to the user base. Additionally, availability could also be a major issue - if the only centralized sorter goes down, users will be unable to use that sorter, and the entire rollup will be affected.
The solution is a shared, decentralized sequencer. The shared sequencer essentially provides decentralized services for rollups. In addition to addressing issues such as censorship, MEV extraction, and availability, the shared sequencer also introduces cross-rollup functionality, opening up various new possibilities. Espresso, Astria, and Radius are developing innovative shared sequencing solutions, each with unique features in their respective architectures. Espresso attempts to leverage EigenLayer to guide its network, while Astria maintains close ties with the modular data availability network Celestia. Radius brings its unique encrypted mempool into the conversation.
With the continuous popularity of the Ethereum Layer 2 rollup ecosystem, one often overlooked aspect is the sequencer. Sequencers are responsible for transaction ordering, and by using sequencers through rollups, they can provide a better user experience, lower fees, and faster transaction confirmations. However, the issue is that, so far, all major Ethereum Layer 2 companies have found it most convenient, user-friendly, and cost-effective to operate their own centralized sequencers. Considering the power that sequencers hold in transaction review, MEV extraction, and creating single points of failure ( usability issues ), this can be seen as an undesirable outcome that does not align with the spirit of cryptocurrency.
Although most cryptocurrency companies have addressed the decentralization issue of their respective sorters and included it as part of their roadmap, there is still no real consensus on how to achieve decentralization. We should also note that Arbitrum and Optimism have launched their own solutions since the second half of 2021, and it can be said that they have not made substantial progress in terms of decentralized sorters.
To take a step back, blockchain is a distributed data ledger consisting of timestamped transaction data sorted by blocks. Initially, this transaction data was unordered and unorganized. After sorting, it can be organized into blocks and executed to create a new state of the blockchain. For Layer 1 blockchains like Ethereum, this transaction sorting occurs at the Ethereum base layer itself.
In the most popular scalability solution on Ethereum—the Layer 2 rollup layer, transaction ordering has become an increasingly serious issue. Remember, the main purpose of rollups is to provide users with a secure and inexpensive trading venue. Simply put, Layer 2 rollups provide users with an execution layer, and then submit their transaction data to the upper Layer 1, which includes Ethereum's Arbitrum, Optimism, zkSync, and others. A single batch of transactions submitted to Layer 1 usually contains hundreds or thousands of compressed Layer 2 transactions, thereby reducing the cost of sending data to Layer 1.
In the Layer 2 rollup world, the sequencer is the entity authorized to order transactions into groups. The sequencer receives unordered transactions from users, processes them off-chain into groups, and then generates a batch of compressed ordered transactions. These transactions can then be placed into blocks and sent to the parent Layer 1. Batches of transactions can also be made available in data availability (DA) layer (, which is typically Ethereum, used for most current rollups ). It also provides users with a soft commitment, meaning that after receiving the user's transaction, the sequencer will provide an almost instantaneous receipt as a "soft confirmation." A "hard confirmation" is received after the transaction has been sent to the Layer 1 layer.
Fundamentally, the sorter has a very clear goal: to improve user experience. Using the sorter for Layer 2 transactions is akin to using a "fast lane", which means lower fees and faster transaction confirmations. In fact, the sorter can batch hundreds or thousands of Layer 2 transactions into a single Layer 1 transaction, thereby saving gas fees. Additionally, the soft confirmation provided by the sorter means that rollup transactions can offer users quick block confirmations. This combination helps enhance the user experience when using Layer 2 rollups.
It is important to remember that rollups do not require a sequencer; it is merely a design choice made for a better user experience. For instance, just as most rollups use Ethereum Layer 1 to enhance data availability, they can also use it for sequencing. Justin Drake from the Ethereum Foundation recently referred to these as "rollup-based." However, the base layer of Ethereum is likely to be relatively inefficient and costly, especially considering the high transaction volume on Layer 2. Essentially, the transaction throughput of rollups will be limited by the data sequencing rate of Ethereum Layer 1. Users will also experience the same transaction confirmation delays as when trading on Ethereum. This means that, so far, every major Layer 2 scaling project has found it more convenient, cheaper, and easier for users to run a centralized sequencer. Although Layer 2 users can submit transactions directly to Layer 1 to bypass the sequencer, they have to pay gas fees for Layer 1 transactions, and these transactions may take longer to finalize. This largely undermines the intention of using Layer 2 rollups to execute transactions.
Since the sequencer controls the order of transactions, theoretically it has the right not to include user transactions within it (. However, if users have the capability and are willing to pay gas fees, they can also submit transactions directly to Layer 1 ). The sequencer can also extract MEV from the transaction pool, which may cause economic losses to the user group. If there is only one sequencer, as is the case with all major rollup transactions currently, the risk of centralization increases. In this case, availability may become an issue, meaning that if the only sequencer fails, the entire rollup will be affected. A multi-sequencer setup can reduce this risk.
With this setup, the sorter can be seen as a semi-trustworthy party for the user. Although the sorter cannot prevent users from using Layer 2, it can delay users' transactions, resulting in users paying additional gas fees and extracting value from users' transactions.
MEV is particularly important here. MEV refers to the value obtained from block production that exceeds the first-level mining ( or staking ) block rewards and gas fees. It is extracted by manipulating transactions within the block, namely by including, excluding, and changing the order of transactions. For example, common forms of extracting MEV include front-running and sandwich attacks.
Given the role that sequencers play in Layer 2 rollups, they can see all user transactions off-chain. Furthermore, since these sequencers are often operated by the projects themselves or affiliated teams, such as the Optimism Foundation for OP Mainnet and the Arbitrum Foundation for Arbitrum One and Nova, many users are concerned that they cannot see potential MEV extraction. Even without these concerns, as projects operate their own centralized sequencers, the trustworthiness and level of decentralization of these protocols will also affect users. The credibility and decentralization of these protocols will certainly be questioned.
At the time of writing this article, all major Ethereum Layer 2 versions rely on centralized sequencers. As more and more Ethereum transactions move to Layer 2 solutions, despite the fact that the validator set of Ethereum itself is decentralized, it appears that a large number of transactions (, specifically those on Layer 2, are influenced by centralized forces in the form of a unique sequencer.
As expected, most of these companies have already addressed the decentralization issue of their respective sorters and included it as part of their roadmap. While this is a positive sign indicating that decentralization is part of the Layer 2 vision, we should note that Arbitrum and Optimism launched their own solutions at the end of 2021, and it can be said that they have not made substantial progress in decentralized sorters.
Most top companies seem to allocate resources to improving their core products and features, rather than focusing on decentralization. This is not entirely a criticism, as in a competitive environment, focusing on decentralization before having a competitive product is not in any company's best interest, which is somewhat understandable. However, as internet companies mature, this perspective is changing, and discussions are rapidly shifting towards decentralized sorting and enhancing credibility.
It is worth emphasizing that there is some discussion about the level of risk brought by relying on centralized sorters.
As mentioned above, since the sequencer controls the ordering of transactions, they can exclude user transactions and extract MEV. However, the sequencer ultimately cannot completely exclude users from rollup transactions. Users can bypass the sequencer and submit transactions directly to Layer 1, ), as long as they are willing to do so and willing to pay the increased gas costs, (. While misbehaving sequencers may lead to transaction delays and users incurring additional fees, they cannot fully censor transactions. Prior to this, no major Layer 2 company was extremely focused on decentralizing its sequencer, which is likely one of the reasons. Nevertheless, the reordering of transactions by sequencers to extract MEV remains an issue, especially in private mempools like OP Mainnet.
Perhaps a bigger issue is real-time performance. Given that the main rollup programs run a single centralized sequencer, if these sequencers encounter problems, the entire rollup program will be adversely affected. Although users can still complete transactions by directly accessing Layer 1, this is not a particularly durable method and is unlikely to work for most transactions. Keep in mind that the whole point of using Layer 2 rollups is to save on transaction costs. Given that one of the fundamental ideas behind cryptocurrency is to prevent reliance on a single centralized provider, just like in traditional finance, the centralization of sequencers is clearly an important issue that needs to be addressed, and it is one of the key unlocks that shared sequencers will bring to the Layer 2 rollup market.
The new solution to the above problem is a decentralized shared sequencer. Although the solutions of different projects vary, the fundamental idea of replacing a single centralized sequencer is the same. Here, "shared" refers to multiple different rollups being able to use the same network, meaning that transactions from multiple rollups are aggregated in a memory pool before sorting, which helps reduce the possibility of MEV extraction and censorship. Here, "decentralization" refers to the concept of leader rotation, where sorting of all transactions is not always done by a single actor, but rather a leader is chosen from a group of decentralized actors. This helps prevent censorship and provides validity guarantees.
This is very similar to how various Layer 1s operate using a leader rotation mechanism. In fact, building a decentralized sorting layer is similar to building a decentralized Layer 1, which requires constructing a set of validators.