How far can decentralized sorters go?

Author: Kyle Liu, Investment Manager at Bing Ventures

Introduction: Sequencers are used to address scalability and performance limitations in the Ethereum network. Their introduction aims to alleviate the burden on the Ethereum main chain by offloading most of the computation and data storage work to Layer 2 through batch processing and sorting of on-chain transactions. The ceiling of decentralized sequencers lies in the underlying protocols and network environment they rely on. Although decentralized sequencers can enhance the security and resilience of the system, there are still some limitations and challenges.

Sequencers are a core component of Rollup networks, responsible for key operations such as receiving transactions, sorting transactions, executing transactions, and submitting transaction data. If a single sequencer in the network fails or becomes unavailable, the entire network will stop processing transactions. However, many existing Rollup solutions have only a single sequencer, leading to a level of decentralization that is far inferior to some centralized Layer 1 alternatives. Therefore, the importance of decentralized sequencers is self-evident, and promising decentralized sequencer solutions should effectively enhance the decentralization of the system through design and implementation improvements.

The Importance of Sequencers

Existing Rollup solutions include zero-knowledge proof (ZK) Rollups and optimistic execution Rollups. These solutions have better designs for improving scalability compared to monolithic Layer 1 solutions. However, they also face some issues:

Issues with Zero-Knowledge Proof (ZK) Rollups:

1. Computational Complexity: Using ZK proofs to verify the correctness and validity of transactions requires substantial computational resources and time. This can lead to delays in transaction processing and high computational costs.
2. Dependency on Verifiability: ZK Rollups rely on external verifiability, meaning that external overseers are needed to validate the correctness of ZK proofs. This can introduce trust issues and centralization risks.

Issues with Optimistic Execution Rollups:

1. Reversibility: Optimistic execution Rollups operate under the optimistic assumption that all transactions are valid and conflict-free during execution. However, if there are conflicts or invalid transactions, the entire system may need to roll back and re-execute, leading to some uncertainty and processing time delays.
2. Miner Extractable Value (MEV): Optimistic execution Rollups may face MEV issues, where the abuse of transaction execution order leads to manipulated transactions and unfair transaction prioritization.

These issues limit the performance and security of existing Rollup solutions and may affect user experience and usability. The key to addressing these problems is to improve the performance and decentralization of Rollups by introducing new designs such as sequencers. The role of sequencers mainly manifests in increasing throughput and compressing transaction data. Sequencers can sort incoming transactions, thereby improving the efficiency and throughput of transaction processing. By sorting transactions according to certain rules, conflicts and competition between transactions can be reduced, enhancing the overall system's processing capability. Sequencers can also compress transactions, bundling multiple transactions into a single transaction, thus reducing the scale of transaction data. This compression can lower on-chain storage and transmission costs, improving the overall system's efficiency.

Problems with Centralized Sequencers

Most existing Rollup solutions operate their centralized sequencers because it is more convenient and cost-effective. However, the drawbacks of centralized sequencers are also evident, as they may lead to transaction censorship, excessive fees, front-running in transaction execution, or generating negative MEV (Maximally Extractable Value).

Source: Bing Ventures

We believe that the key to solving the problems of centralized sequencers is to promote technological innovation and explore decentralized sequencer solutions. As mentioned earlier, while current centralized sequencers play an important role in improving throughput and performance, we should actively seek safer, more censorship-resistant, and more decentralized alternatives. These solutions may require trade-offs between security, performance, and decentralization, and face challenges in design and implementation, but they hold promise in addressing the issues faced by current centralized sequencers.

The Path to Decentralization

Currently, decentralized sequencer technology still has room for improvement, with potential directions including more efficient sorting algorithms, more effective verification mechanisms, and smarter sequencer designs. Below, we summarize some routes we believe are beneficial attempts. Undoubtedly, as time goes on, decentralized sequencer technology will continue to improve and evolve. This may include higher throughput, faster confirmation speeds, lower latency, and greater security and composability.

Proof of Authority (PoA): This solution authorizes a group of entities to take turns acting as sequencers in a PoA system. It can effectively improve censorship resistance and has the lowest latency, but still carries the risk of a single point of failure.

1. Rollup-based: This solution allows anyone to submit L2 batches to the data availability layer (DA), which then decides the final block (proposer). Its advantage is inheriting the liveness and censorship resistance of the DA layer, but it may leak profits and be affected by MEV, with slower confirmation speeds.
2. Decentralized Validator Technology (DVT): This solution distributes sequencing responsibilities to a cluster, where each node in the cluster uses a partial share of their validator key to sign independent proofs. This solution offers flexibility and can be combined with other solutions, but may introduce some latency.
3. Shared Sequencer: This solution allows multiple Rollups to choose to enter a shared sequencer, which can simultaneously process transactions on Chain A and Chain B, providing strong economic security and real-time censorship resistance for the sorting layer. Shared sequencers have multi-chain network effects but are still limited by the throughput of L1 data and transaction sorting.
4. Establishing a New Sequencer Set: This solution creates a decentralized sequencer group without permission through a token incentive mechanism. Its advantage is increasing the utility of the token, but it may have latency issues, and the implementation threshold may be challenging for lesser-known Rollups.

Despite the numerous advantages of decentralized sequencers, the various current solutions each have their trade-offs, with their own pros and cons.

Source: Bing Ventures

Potential Opportunities

Now, can decentralized sequencers solve Ethereum's problems once and for all? Have they already buried some hidden dangers for Ethereum in some areas?

First, for decentralized sequencer solutions that rely on underlying blockchain protocols (L1), their performance and scalability are inherently limited by the L1 protocol itself. If the underlying protocol has bottlenecks in transaction processing and consensus, then even if the sequencer has a high degree of decentralization and responsiveness, the overall system's performance will still be constrained.

Second, the network environment's impact on decentralized sequencers is also an important consideration. The synchronization and stability of the network directly affect the activity and security of the sequencer. In an asynchronous network, the sequencer may lose its activity, meaning it cannot process transactions in a timely manner. In contrast, in a strongly synchronized network, the sequencer can more reliably maintain an active state.

This also means that with the development of decentralized sequencers, the related infrastructure will become potential investment opportunities. This includes technology providers offering sequencer services, security audit firms, cross-chain solution providers, and governance and participation platforms. These infrastructures are expected to improve the issues we mentioned. It is important to emphasize that decentralized sequencers are one of the solutions explored by the Ethereum community to enhance system performance and scalability, but they are not the only solution. Other technologies and improvements will emerge in the future to further enhance the performance of the Ethereum network:

1. Multi-chain Interoperability: With the emergence of various blockchains and Layer 2 solutions, multi-chain interoperability will become an important aspect of decentralized sequencers. Future sequencers may need to handle transactions across multiple chains simultaneously and achieve atomic composability to provide a smoother user experience and stronger functionality.
2. Preventing MEV and Enhancing User Protection: Future sequencers may take measures to reduce the impact of MEV and provide better user protection mechanisms. This may include adopting random sorting mechanisms, reasonable transaction fee mechanisms, and better privacy protection measures.
3. Enhanced Governance and Participation Mechanisms: To ensure the fairness and security of decentralized sequencers, future sequencers may introduce stronger governance and participation mechanisms. This can be achieved through voting by token holders, elections of validators, and decentralized decision-making by participants. More open and transparent governance mechanisms can promote community participation and drive system development.

In summary, as decentralized sequencers evolve, we expect to see more innovations in business models. This may include different transaction fee models, data services based on sequencers, and on-chain applications. Innovative business models will provide more economic incentives for sequencers, thereby promoting their widespread adoption and sustainable development.