Rollup: Definition, Types, and Role in DLT Scalability
Definition
A rollup is a Layer 2 scaling solution that executes transactions outside the main blockchain (Layer 1) while posting transaction data or validity proofs to Layer 1, thereby inheriting the security guarantees of the underlying chain. The term “rollup” derives from the process of bundling (rolling up) multiple transactions into a single batch that is submitted to Layer 1, compressing the on-chain footprint of each individual transaction. Rollups are the dominant scaling paradigm for Ethereum and are increasingly central to the architecture of institutional DLT applications.
How Rollups Work
In a rollup architecture, transaction execution occurs on the Layer 2 network, which maintains its own state — account balances, smart contract storage, and execution environment. Users submit transactions to the rollup, where they are processed by a sequencer (a node or set of nodes responsible for ordering and executing transactions). The sequencer batches multiple transactions together and submits them to a smart contract on Layer 1, along with sufficient data to enable independent verification of the rollup’s state.
The key innovation of rollups, compared to other Layer 2 approaches, is the posting of transaction data to Layer 1. This ensures that even if the rollup’s sequencer fails, goes offline, or attempts to censor transactions, any participant can reconstruct the rollup’s state from the data available on Layer 1. This data availability guarantee distinguishes rollups from sidechains, which maintain their own data independently and do not inherit Layer 1 security.
The rollup smart contract on Layer 1 serves as the ultimate arbiter of the rollup’s state. It accepts state updates from the sequencer, verifies their validity (through fraud proofs or validity proofs), and provides the mechanism for users to deposit assets into and withdraw assets from the rollup.
Optimistic Rollups
Optimistic rollups assume that all transactions submitted by the sequencer are valid — hence the term “optimistic.” The sequencer posts transaction batches and the resulting state root to Layer 1 without any accompanying proof of validity. A challenge period (typically seven days) follows, during which any participant can submit a fraud proof if they detect an invalid state transition.
A fraud proof is an on-chain transaction that demonstrates, using the transaction data posted to Layer 1, that the sequencer’s state transition was incorrect. If a fraud proof is verified by the Layer 1 smart contract, the invalid batch is reverted and the sequencer is penalised (typically through the loss of a bonded deposit).
The advantages of optimistic rollups include their compatibility with existing smart contract languages (most optimistic rollups are EVM-compatible, enabling straightforward migration of Ethereum applications) and their relatively simple implementation. The disadvantage is the long challenge period required for withdrawals from the rollup to Layer 1, as assets cannot be released until the challenge window has passed without a successful fraud proof.
Major optimistic rollup implementations include Optimism and Arbitrum, both of which support a broad ecosystem of decentralised applications and have been adopted by some Swiss DLT projects and service providers.
Zero-Knowledge Rollups
Zero-knowledge rollups (zk-rollups) use cryptographic validity proofs — zero-knowledge proofs — to demonstrate the correctness of each state transition. The sequencer generates a proof (a zk-SNARK or zk-STARK) that the batch of transactions has been executed correctly and that the resulting state root is valid. This proof is posted to Layer 1 along with the compressed transaction data, and the Layer 1 smart contract verifies the proof before accepting the state update.
Because the validity of each batch is cryptographically proven rather than assumed, zk-rollups do not require a challenge period for withdrawals. Assets can be withdrawn from the rollup as soon as the validity proof is verified on Layer 1, providing faster finality than optimistic rollups.
The advantages of zk-rollups include stronger security guarantees (validity is proven rather than assumed), faster withdrawals, and potentially higher compression ratios (since less data needs to be posted to Layer 1 when the validity proof serves as a substitute for the full transaction data). The disadvantages include higher computational costs for proof generation, greater implementation complexity, and — historically — limited compatibility with general-purpose smart contract execution.
However, the development of zk-EVMs (zero-knowledge Ethereum Virtual Machines) has addressed the compatibility limitation. Zk-EVMs enable the execution of standard Ethereum smart contracts within a zk-rollup, generating validity proofs for arbitrary EVM computation. Several zk-EVM implementations are in production or advanced development, bringing the benefits of zk-rollups to the full range of Ethereum applications.
Rollup Economics
The economic model of rollups creates cost savings for users by amortising the fixed costs of Layer 1 data posting across many transactions within each batch. The cost of a single transaction on a rollup comprises a share of the Layer 1 data posting cost (divided among all transactions in the batch) plus the rollup’s own execution costs and any margin charged by the sequencer.
The introduction of blob transactions (EIP-4844) on Ethereum significantly reduced the cost of data posting for rollups by providing a dedicated, lower-cost data space on Layer 1. This development has further improved the economics of rollup-based scaling, making high-throughput applications — including financial market infrastructure — more economically viable on rollup platforms.
Relevance to Swiss Institutional DLT
Rollups are relevant to Swiss institutional DLT applications in several ways.
Scalability for tokenised assets. The throughput requirements of tokenised securities markets — including trading, settlement, and corporate action processing — may exceed the capacity of Layer 1 networks. Rollups provide the additional throughput while maintaining the security guarantees that institutional applications require.
Privacy through zk-rollups. The zero-knowledge proof technology underlying zk-rollups can be extended to provide transaction privacy — proving the validity of transactions without revealing their contents. This privacy-preserving property is valuable for institutional applications where transaction confidentiality is a regulatory or commercial requirement.
Cost efficiency. The reduction in per-transaction costs achieved by rollups makes DLT-based processing economically competitive with traditional infrastructure for a broader range of applications, expanding the business case for institutional DLT adoption.
Regulatory considerations. The sequencer in a rollup architecture introduces a degree of centralisation that may raise regulatory questions about the governance, resilience, and accountability of the rollup operator. Swiss institutional users must assess whether the sequencer’s role is consistent with the operational resilience and governance requirements applicable to their use case.
For related analysis, see our coverage of DLT scalability solutions and bridges.
Donovan Vanderbilt is a contributing editor at ZUG DLT, covering distributed ledger technology law, regulation, and institutional adoption from Zurich. The Vanderbilt Portfolio AG provides research and analysis on Swiss digital asset infrastructure.