‘Sequencers’ Are Blockchain’s Air Traffic Control. Here’s Why They’re Misunderstood

By coindesk.com September 07, 2023 In Blockchain, Coinbase, Ethereum

Leading rollup operators are criticized for using “centralized sequencers” to package transactions and pass them down to Ethereum, but the real risks may lie elsewhere.

Sep 6, 2023 at 8:00 a.m. PDT

Air traffic controller (Beckett P/Unsplash, modified by CoinDesk)Air traffic controller (Beckett P/Unsplash, modified by CoinDesk)

Cheap and speedy “rollup” networks like Arbitrum, Optimism and Coinbase’s Base are quickly becoming attractive alternatives to conducting transactions on the oft-congested Ethereum network. Transactions are completed on these “layer 2” networks and then recorded for posterity on Ethereum.

But much has been made recently of these layer 2 networks’ reliance on a crucial piece of infrastructure known as the “sequencer,” which is responsible for bundling up transactions from users and shepherding them down to Ethereum.

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The sequencer is like “the air traffic controller for the specific L2 ecosystem that it serves,” Sandy Peng, co-founder of the Scroll rollup, explained this week in an interview. “So when Alice and Bob attempt to make a transaction at the same time, who comes first? That’s decided by the sequencer.”

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When people make transactions on a “layer 2” rollup network, a sequencer is responsible for verifying, ordering and compressing those transactions into a package that can be shipped down to the layer 1 chain, such as Ethereum. In return for its efforts, the sequencer is paid a small portion of the fees collected from users.

A criticism of the setup is that today’s rollup sequencers are typically run by “centralized” entities, and thus represent single points of failure, potential vectors for transaction censorship, or possibly a choke point if authorities ever chose to shut it all down. Coinbase, for example, runs the sequencer for its new Base blockchain, a role that could produce an estimated $30 million of net revenue annually, based on estimates by the analysis firm FundStrat.

It’s not just Base. Today’s leading rollups all rely on “centralized” sequencers, meaning a single party – generally, the company that built the rollup – takes care of sequencing all by itself. Options for “decentralizing” this system are on the way, but Ethereum’s biggest layer 2s have yet to embrace it – or simply haven’t gotten around to it.

In the world of blockchains, where trust is supposed to be minimized, people tend to bristle at the idea of a single company controlling a pivotal element of how a chain operates.

Talk to experts, though, and one comes away with the impression that bigger risks to layer 2 decentralization and security lie elsewhere.

What are sequencers?

Coinbase’s buzzy new Base network works like other layer 2 rollups: It promises users quick and cheap transactions that ultimately “settle” on the main Ethereum chain.

Alongside convenience, the main selling point of a rollup like Base is that it runs directly on top of the main Ethereum network – meaning it is engineered to borrow its main security apparatus.

When a user submits a transaction on Base, a sequencer node swoops in and rolls it up into a compressed “batch” of transactions from other users. The sequencer then hands those transactions down to Ethereum, where they are officially cemented into its ledger.

Similar to how the other big rollups operate, Coinbase is currently the only sequencer on Base – meaning the company is solely responsible for ordering and batching transactions from Base users.

On Coinbase’s quarterly earnings call last month with Wall Street analysts, CEO Brian Armstrong made a nod to the role that this setup plays in the context of Base’s business model: “Base will be monetized through what are called sequencer fees,” said Armstrong. “Sequencer fees can be earned when any transaction is executed on Base, and basically, Coinbase can run one of these sequencers as others can over time.”

Technology exists for decentralized L2 sequencing – spreading out the sequencer role across multiple parties.

Coinbase says it eventually plans to embrace this tech, and other rollup platforms say they plan to do the same. But thus far, decentralized sequencers have proven difficult to implement at scale without slowing things down or introducing security risks.

The juicy revenue that comes from running the sequencer might seem like a disincentive to decentralize. That goes too for the potential maximal extractable value (MEV) opportunities introduced by centralized sequencing – extra profit that can be drawn from users by strategically ordering how their transactions are executed.

In the meantime, today’s centralized sequencer setups bring risks for users.

Binance zeroed in on the problems in a recent research report: “As the sequencer controls the ordering of transactions, it has the power to censor user transactions (although complete censorship is unlikely as users can submit transactions directly to the L1),” the report stated. “The sequencer can also extract the maximal extractable value (“MEV”), which could be economically harmful to the user base. Furthermore, liveness can be a major issue, i.e., if the sole, centralized sequencer goes down, then the entire rollup gets affected.”

Sequencer systems are likely to remain centralized for the foreseeable future – meaning these risks are likely to stick around for some time. But when it comes to layer 2 security concerns, sequencers may be a red herring.

There are bigger risks

Blockchain users mostly care that their transactions are processed as expected, and their wallets are safe from unauthorized transactions of lost funds.

If they act maliciously, centralized sequencers can theoretically slow things down or re-order transactions to extract MEV – but they don’t generally have the ability to fully censor, augment or spoof new transactions.

“When it comes to the things that make an L2 a good L2,” said Peng, decentralizing sequencers “is lower down on our priority list.”

Notably, the popular Optimism rollup – which Coinbase used as the template for building its own Base chain – currently lacks fraud proofs, which are algorithms on the layer 1 chain that can “prove” that layer 2 transactions have been recorded accurately.

“More than decentralized sequencers, the important part is to actually implement fraud proofs or validity proofs and to have an escape hatch mechanism,” said Anurag Arjun, founder of the data availability-focused Avail blockchain.

Fraud proofs are the primary means by which rollup networks like Optimism and Base are supposed to “borrow” Ethereum’s security – allowing validators on the main Ethereum chain to check that an L2 network is working as advertised.

“The whole point of rollups is that you construct this mechanism so that the rollups themselves don’t have to introduce cryptoeconomic security,” said Arjun. “At a large scale, that’s the point of inheriting from the base layer.”

Without fraud proofs, says Arjun, Optimism, Base and other roll-up networks with similar missing features are essentially asking users to trust their own security practices rather than Ethereum’s.

Optimism and Base also lack an “escape hatch” mechanism for users to withdraw their funds onto Ethereum in the event that a sequencer fails.

“If there is an escape hatch mechanism” and the sequencer fails or goes offline, explains Arjun, “you can actually bridge back your assets and safely exit.” Without an escape hatch, rollup users can potentially lose their funds in the event that things go wrong.

Stages of a rollup

Ethereum co-founder Vitalik Buterin has proposed a set of stages, numbered zero to two, for classifying the decentralization of different rollup networks. The staging criteria are meant to recognize that new rollup networks tend to rely on “training wheels” in order to safely test and deploy to the public before they ultimately decentralize.

L2Beat, a layer 2 watchdog, tracks how different platforms stack up, according to Buterin’s model. Every leading rollup network, according to L2Beat, currently relies on some kind of training wheels.

Until they have working fraud proofs, Optimism and Base will be considered “stage 0” under Buterin’s classification scheme. The most direct competitor to Optimism and Base, Arbitrum scores more highly because it – despite having a centralized sequencer – has fraud proofs.

Arbitrum, too, has shortcomings preventing it from “stage 2” status – currently, it’s still generally considered a “stage 1” rollup.

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The training wheels of L2Best documents stretch from the lack of fraud proofs (or validity proofs, in the case of ZK rollups) to centralized upgrade controls.

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