There are many phrases parroted frequently throughout the crypto community but one of the most common is "A rising tide lifts all boats". Usually this is said in reference to the price action of cryptocurrencies being likely to follow Bitcoin upwards, but does it also apply to scaling solutions? The Human Rights Foundation and Starkware teamed up to sponsor a four month study researching this very question. The plan was to look at the variety of rollup technologies that have been successfully implemented on the Ethereum Network to see if any could work for Bitcoin.
What are Validity Rollups?
A Validity Rollup is a method of batching blockchain transactions into a highly compressed format. They are also often referred to as ZK-Rollups, or Zero Knowledge Rollups.
On a traditional Blockchain network users submit transactions that miners verify by solving complex mathematical equations. On a network with rollups implemented users have the option to submit transactions on the rollup layer which sends their transaction to a Prover. The Prover then computes all of the recently submitted transactions to compress them, generates a validity proof, and sends the data to a smart contract known as the verifier contract. The verifier contract confirms that the validity proof as well as the state root submitted by the Prover are legitimate and submits the compressed data from the batched transactions to the next available block. Some may find it easier to understand using the analogy in the image below.
Advantages Beyond Scaling:
One additional advantage to implementing validity rollups on the Bitcoin blockchain would be the reduced cost of transaction fees. Unlike traditional fee structure the more users that submit transactions on the rollup layer the cheaper transactions become. Since almost all of the computing is being performed outside of Layer 1 there is virtually no limit to the amount of transactions you can batch, and the transaction fee is divided between all of the users in the batch. As the amount of users in a batch increases, the transaction fee per user continues to decrease.
Using the Ethereum Network we can pull some data to see what the reduction in transaction fees may look like. Settling a complex smart contract transaction on the Ethereum Mainnet costs 200,000 Gas, and settling the same transaction using Validity Rollups costs 500 Gas. This represents a 99.75% reduction in fees, an absolutely massive win for the usability of blockchain.
Another advantage to implementing rollups would be the added functionality that could become possible outside of Layer 1 without the need for time intensive structural changes to the Bitcoin protocol. If developers of Layer 2 validity rollups choose to implement an execution environment that supports more flexible smart contract language then you could implement privacy technologies or advanced smart contracts outside the capability of Bitcoin's base layer. It's possible that this would allow you to create a turing complete layer on top of Bitcoins base protocol that allows the simulation of any possible computation.
Possible Risks of Implementation:
One issue to consider is that if Bitcoin transaction speed scales successfully using Validity Rollups then there will likely be an eventual increase in bandwidth and storage costs for Bitcoin full nodes. This issue would only occur much further down the line as there's currently empty space in most Bitcoin blocks that could be used effectively by Rollups without a noticeable difference in storage or bandwidth requirements. If the demand for Rollups becomes very high then blocks could reach maximum capacity and there would likely have to be a change in block size to increase transaction speed further.
Another possible problem that may occur if Rollups become more popular than Bitcoin's Layer 1 for settling transactions is that mining profits will steadily decrease. Slowly a higher percentage of transactions will flow through rollups and transaction fees per block will continually decrease. With Bitcoin Miners holding a significant position of power within the community it's likely that they would rally against any changes that could make them less profitable.
Regulatory concerns may be at the top of the list because Bitcoin has generally strayed away from poking the bear with any development decisions. If rollups are implemented with expressive smart contracts then it would be possible to implement fully private transactions, a surefire way to anger regulators globally.
There are also a variety of new attack vectors that could be taken advantage of. I've listed some examples and linked to more details below.
- Miner Extractable Value - An MEV attack is when cryptocurrency miners use a variety of methods to extract value at cost to the end user, usually by ordering a block's transactions in a specific way to increase profit
- Algorithmic Incentive Manipulation Contracts - An AIM attack is when a smart contract is created to incentivize miners to attack each other or specific users. This contract could offer a reward for excluding transactions, increasing wait time, or not adding solved blocks from certain miners to the blockchain
- Majority-vulnerable Contracts - Similar to a 51% attack if any entity was able to control the majority of Bitcoin's mining power then they could remove funds from any smart contract they pleased. This represents a flaw in the current incentive system. Currently miners have an incentive to collude together and withdraw any funds locked in smart contracts should the social and criminal ramifications of doing so ever be valued less than the amount of money locked in these contracts
- Re-org Wars - If the Smart Contracts implemented on Layer 2 are flexible enough then they will likely be are used to battle MEV attacks by further reorganizing the transactions within a block. It's then possible a re-org war may begin as contracts controlled by miners try to reorganize transactions for extra profit, and those controlled by others try to disrupt them
It's unclear how much of a threat most of these attacks pose until we have more information. We've seen MEV attacks on both Bitcoin's network and Ethereum's old POW network, as well as proof that other attacks are possible but there is little data regarding their success rates.
All though it's probable that implementing Validity Rollups would revitalize usage of the Bitcoin network it seems improbable in the current environment. Bitcoin's developers, miners, and community seem to find security in how slow moving its development has become. They will probably prioritize avoiding regulatory risks and protecting their current investment in the network over improvements for the end user.
Despite Validity Rollups providing advantages to scaling, privacy, smart contract flexibility, transaction fees, and adoption they will likely not be implemented to Bitcoin anytime in the near future.