Smart contract platforms should become rollups

Riffing off this excellent post, an absolute must-read for anyone into crypto: Will we see a multi-chain world? – The Catalyst (substack.com)

A smart contract blockchain can be broken down into two main components: the virtual machine on which applications are built and the consensus mechanism. For new platforms, consensus is very challenging, with highly centralized token distributions. Most smart contract platforms have opted for a delegated-type proof-of-stake solution where stakeholders vote for validators – essentially leading to plutocratic cabals over the long term. Needless to say, this has significant decentralization and security compromises. Of course, the delegated-type setups have evolved over the years. For example, Cardano, Cosmos and others improves on EOS/Steem by "pre-bribing" voters with "staking rewards" – although even in this case, further agreements can be made between validators and stakeholders over and above that. The likes of Polkadot and Tezos improve further by requiring validators to post a minimum number of tokens themselves, and adding slashing mechanisms. Yes, we do have non-delegated-type chains like Zilliqa and Lukso but they have their own challenges. These consensus mechanisms can be very expensive, typically requiring protocol inflation in the 5%-15% range.

What rollups allow is for smart contract platforms to build their own application layer, while simply contracting Ethereum to do the challenging consensus and data availability work. Ethereum brings massive economies of scale into play. The Merge is top priority post London, and soon we'll have Ethereum being secured by proof-of-stake. Unlike many of the delegated-type chains mentioned above, Ethereum uses "real" proof-of-stake, where validators are actually proving their own stake instead of others'. Combined with Ethereum's far more decentralized token distribution – thanks to running PoW for 6+ years, a higher market cap/larger economy, and executing significant economic activity on-chain ($20+ billion is settled on Ethereum everyday now!) – this means Ethereum's consensus mechanism can be several orders of magnitude more secure and decentralized than any newly minted chain. After The Merge happens, I expect around 500,000 validators securing Ethereum. (There are 115,000 already.) The overall inflation from proof-of-stake is capped at a maximum 2%, but very likely much lower, not even accounting for EIP-1559 fee burns. Yes, staking pool services and protocols will be built on top of Ethereum too, but they still have to run multiple validators for each 32 ETH stake, each validator still has an equal responsibility, and slashing mechanisms are a strong deterrence. I should note that as mentioned above, some chains do feature aspects of "real" proof-of-stake despite delegations – where at least portion of their validation is their own stake and slashing (like Polkadot, Tezos), or randomly selected validators (like Algorand), so there definitely are chains with some hybrid elements. Of course, there's always the possibility that some network comes up with an even better consensus mechanism – we can definitely have another discussion then.

What rollups can do now is to simply focus on building a world-class application-layer, potentially surpassing what any L1 VM can offer. Currently, we see application-specific rollups like ImmutableX, Loopring, zkSync, dYdX etc. offering massive scalability for specific purposes today. Gas is so low that these platforms are effectively zero gas, fees abstracted away from the end user. ImmutableX does ~9,600 TPS for minting NFTs, and they only have to pay $0.003 in gas to Ethereum L1. That is only $30 for all NFTs in existence today! Sure as hell a lot cheaper than building and paying or your own consensus mechanism. By focusing on the most efficient application layer possible, and contracting out security to Ethereum, they are able to outscale any L1 today, while not materially sacrificing decentralization either. Oh, and transactions are confirmed instantly. Overall, they offer an experience simply not possible on any L1 platform. Of course, we also have generalized rollups incoming shortly, like Optimistic Ethereum or zkEVM, where anyone can deploy smart contracts arbitrarily.

Rollups can also have their own token and economic incentives, their own clients, sequencers and provers etc. I'm just not seeing enough teams leveraging the potential here. Optimism, Arbitrum, zkSync 2.0 and StarkNet have a significant headstart, to be sure, but it's not too late to jump into what will likely be crypto's most intensely competitive field in the years to come.

There's plenty of room for innovation on the application layer with more efficient VMs, clients, programming languages, developer tooling etc. while at the same time letting Ethereum do the hard part of a highly decentralized and secure consensus mechanism and data layer. For example, zkSync 2.0's ZincVM is based on LLVM, which offers a fantastic alternative to L1 EVM for developers, and enables supporting programming languages like Rust. It's a win-win-win for all: platforms, developers and users. At this point, building an alternate L1 is more hubris than reason.

Well, with one exception – when marketing can overpower the security weaknesses, and decentralization is no longer important. Currently, I see only two platforms that have achieved this – Binance Smart Chain and Flow. Both are leveraging very popular centralized platforms – Binance CEX and NBA Top Shots – to build a strong user base and network effects. Or, by building a strong niche – some smart contract platforms may have features not possible with rollups. One such example will be a highly centralized but highly performant chain like Solana which can potentially offer greater throughput than even Ethereum rollups – at least till data sharding releases in the next year or two – but at this level of centralization it's a complete different type of product anyway.

One last thing – addressing composability and interoperability. Nothing changes here, solutions for L1 <> L1 situation today can be extended to L2 <> L2 and L1 <> L2 communication. Indeed, it could be better than fragmented L1s, for example multiple L2 AMMs can use a common liquidity pool on L1. We have several projects with these type of solutions like Celer, Connext and Hop.

With all that said – which L1 do you think will be the first to pivot to being an ethereum rollup?

PS: I had originally posted this in r/cc but it got deleted. Really, this is about more than ethereum, it's about all smart contract platforms working together to creating a better whole. Feel free to share the message across the cryptoverse, I do not require credit.