What is Rollup Technology and How Does It Improve Ethereum's Transaction Capacity?

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What is Rollup Technology and How Does It Improve Ethereum's Transaction Capacity?   

Bitcoin, when introduced by Satoshi Nakamoto in 2009, showed the world that peer-to-peer money transfer without intermediaries was possible, and it could be done in a completely decentralized manner. While Bitcoin enabled person-to-person value transfer, Vitalik Buterin and several blockchain developers realized in 2014 that blockchain technologies could have more use cases than just transferring value, which led to the announcement of Ethereum in 2015.

The Ethereum blockchain has further developed the idea of value transfer in Bitcoin, turning the decentralized peer-to-peer payment network into a decentralized finance system that allows for decentralized applications and financial systems. While Bitcoin allows you to send your Bitcoins to anyone without intermediaries, Ethereum allows you to borrow and lend money in a decentralized way, invest your money, and earn interest from your deposits (DeFi — Decentralized Finance).

Comparing Ethereum to a smartphone would not be wrong. The applications developed on Ethereum are similar to those downloaded on smartphones. However, blockchain technologies have limited transaction capacity, even though they provide a decentralized and secure system that is immune to censorship.

Bitcoin can process 5–7 transactions per second, while Ethereum can perform more complex transactions (borrowing, investing, etc.) in addition to peer-to-peer transactions, as mentioned above. Therefore, the speed of transactions on Ethereum depends on the complexity of the transaction. While the Ethereum network can process 40 transactions per second for simple ETH transfers, the number of transactions per second may drop to 5–7 for more complex transactions (the reason for this difference will be explained in the rest of the article). When Ethereum first emerged, it aimed to be a "World Computer," and with the widespread adoption of DeFi, it aimed to become the focal point of decentralized finance worldwide. However, Ethereum was known to be far from achieving its goal at its current speed, which led to the start of Ethereum projects to increase its transaction capacity.

As its name suggests, blockchain technology is based on the principle of forming a chain of blocks, like a chain of beads, and downloading and storing all the information in the chain by everyone in the world, and deciding which blocks to add to the chain. Blocks store transaction data, and new transfers are recorded in new blocks. Here comes the issue of transaction fees.

Each block has a capacity, and in Bitcoin, blocks have a size of 1 MB (although SegWit softfork allowed for the creation of 2 MB blocks, we will continue with the 1 MB example). The transfer amount that 1 MB can carry is around 3,000 transactions. Since each block is generated in 10 minutes:

3,000 transfers per block / 10 minutes = 300 transfers per minute or 5 transactions per second

The limited transaction capacity of blockchain technology led to the development of scaling solutions, one of which is Rollup technology.

Rollup technology aims to increase transaction capacity by processing and bundling transactions outside the main blockchain, and then submitting them to the main blockchain in batches. This process not only increases transaction capacity but also reduces transaction fees and enables faster transaction processing. In Rollup technology, two types of rollups are used: ZK-rollups and Optimistic rollups.

ZK-rollups (Zero-Knowledge rollups) perform calculations off-chain, which provides privacy and reduces the amount of data that needs to be uploaded to the main blockchain. However, this privacy comes at the cost of higher computational power requirements.

Optimistic rollups, on the other hand, operate under the assumption that all transactions are valid, which reduces the computational requirements but also requires a dispute resolution mechanism in case of fraudulent transactions.

Rollup technology is an exciting development for the Ethereum blockchain, as it has the potential to significantly increase the transaction capacity and reduce gas costs. Rollup technology is a layer 2 scaling solution that allows multiple transactions to be bundled together and processed off-chain, before being settled on the main Ethereum blockchain. This approach can increase the number of transactions that can be processed per second, while also reducing the fees associated with each transaction. By offloading some of the computational burden to the rollup chain, the Ethereum network can become more efficient and scalable, making it possible to handle more users and applications. As a result, rollup technology has the potential to improve the overall user experience of the Ethereum blockchain, while also reducing the network's environmental impact by reducing the energy consumption required for transaction processing.

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