Original source: Fuel Labs

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The existing token models on Layer 2 are mostly insufficient, and a new model is needed on Rollup. In this blog post, we propose a new token model for Layer-2.

Fuel Labs launched the first Optimistic Rollup on the Ethereum mainnet - Fuel v1 - about a year ago. Fuel v1 supports cross-chain transactions (such as cross-chain transactions between Ethereum and Bitcoin using HTLC). While Fuel v1 can realize all such transactions, it does not require permission, does not require administrator keys, and does not have unilateral upgrades, realizing the initial expectations for Optimistic Rollup at that time.

Tokens can bring many benefits to the project, such as stimulating token liquidity and increasing community activity. However, it's not without its drawbacks. If a token is poorly designed, the outcome is worse than not being well designed. We currently hold a negative view on Layer-2 token design. Although the early token model is relatively good, even the early token model does not satisfy us.

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Token Models to Avoid

One of the characteristics of Rollup is that users can trust it unconditionally without worrying about the funds in the account being stolen or frozen. In Optimistic Rollup, this feature is realized through the combination of data and error proof. In zkRollup, this feature is realized through the combination of data and validity proof. It is worth noting that the security of Rollup is provided by Ethereum, not by individual miners/validators. This is a key difference between Rollups and sidechains.

With this distinction in mind, we believe the following token models should be avoided:

PoS token model. PoS tokens need to obtain the consent of the majority of verifiers before they can be traded on the chain. Allowing validators to censor new blocks means that user funds may be frozen. Developers do not need to use PoS to ensure the security of Rollup, because the security of Rollup is guaranteed by Ethereum. There is no problem with the side chain using the PoS consensus mechanism to ensure security, but it is not necessary for Rollup.

Paid Token Model. Users must pay fees while using tokens. For non-self-operating Layer-2 protocols, such as Rollup on Ethereum, user fees will not bring any benefits, because it will only reduce the amount of user usage on Rollup.

So, what kind of token model is suitable for Layer-2?

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Discuss the problem of resource scarcity on Rollup

As with all blockchains, transaction throughput in Rollup is limited by agreements with its users. The purpose of the protocol is to ensure that rollup runs a full verification node at a cost acceptable to the user. Users of the blockchain must agree on the hardware, bandwidth, and verification rate of full validator nodes. Users who cannot meet the above conditions must rely on third parties for access. These conditions, together with the performance of the node software itself, determine the maximum number of transactions per second (TPS) that can be supported on the blockchain. The transaction processing speed of EVM Rollup with the same full verification node cost as Ethereum is limited by Ethereum, which is also 15 TPS.

In other words, like block space on Ethereum, block space on Rollup measured in gas fees is a finite resource. But the block space on rollup is different from the block space on Ethereum. Therefore, the scarcity of its space is independent of the scarcity of Ethereum block space.

We can generalize the above conclusions to any two-layer blockchain system consisting of two scarce resources. The "two layers" in the two-tier blockchain system refer to the data layer (currently for Rollup, the data layer is Ethereum, but in the future it may include general data layers, such as Celestia), and the execution layer (Rollup itself).

Rollup has limited ability to execute transactions. Because of this limitation, its trading ability can be regarded as a scarce resource and can be tokenized. Note that this scarcity exists whether or not it is tokenized, so adding tokens to the rollup itself does not incur higher fees.

The most intuitive model to tokenize Rollup’s scarcity is the previously mentioned paid token model. Among them, an increased demand for block space means an increased demand for tokens. However, as mentioned earlier, this model imposes additional costs on the user. Can Rollup tokenize its scarcity without adding fees to users?

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summary

summary

The existing token models on Rollup are mostly insufficient, and a new model is needed on Rollup.

The best token model on the blockchain should be able to fully reflect the value of the block space.

Our proposed token model is able to tokenize scarce block space without incurring additional fees for users.