# Blockchain Industry Seeks Solutions for Scalability and Decentralization

The blockchain sector is actively seeking various solutions to address scalability and decentralization issues. Among these, Based Rollup technology stands out as a key innovation, helping to mitigate the centralization of sequencers while enhancing Ethereum’s economic security.

Taiko Labs, a pioneer in Based Rollup, is proposing a new revenue model and implementing a decentralized economic ecosystem. Through the Taiko report, we delve into the economic structure of Based Rollup, Taiko’s unique economic model, and its future potential.

# Difference Between Traditional Rollups and Based Rollups: Reward Distribution in Decentralized Networks

Traditional rollups operate with centralized sequencers that monopolize the ordering of transactions, capturing all the Maximal Extractable Value (MEV) and priority fees arising from it. This centralization allows a few operators to dominate the network’s primary revenue, somewhat deviating from the original purpose of a decentralized network.

In contrast, Based Rollup allows anyone to propose blocks, returning a portion of the MEV and priority fees to the Ethereum network. This differentiates the revenue generation methods of Based Rollup proposers and operators from traditional rollups, ensuring fairer economic opportunities within a decentralized network.

Centralized sequencer structures employ various transaction order adjustment mechanisms, such as Priority Gas Auction, Timeboost, and First Come First Serve, enabling sequencers to monopolize MEV. In contrast, Based Rollup’s decentralized block proposal system allows anyone to propose blocks and capture part of the MEV, distributing economic rewards among diverse participants. This process further strengthens Ethereum’s economic security.

# Taiko’s Economic Structure: Multi-Proof Mechanism and Fee Distribution

Taiko operates as a Based Rollup on Ethereum Layer 2, adopting an innovative multi-proof mechanism to establish a decentralized economic ecosystem. Taiko’s economic model is based on the fees generated from user transactions.

When users submit transactions on Layer 2, priority and base fees are generated. Priority fees go to block proposers, while base fees accumulate in the Taiko DAO (Decentralized Autonomous Organization) treasury. Block proposers earn revenue from these priority fees, for which they must pay fees to Ethereum Layer 1 and compensatory fees to block validators.

Taiko ensures stability through a dual-proof mechanism during the verification process. Block proposers submit blocks and stake deposits alongside the first proof (typically using a Trusted Execution Environment, or TEE). During a 24-hour cooldown period, anyone can contest the proof competitively. If a new validator disproves the original proof with higher-level proof, the original validator’s deposit goes to the competitor. Conversely, if the original proof is validated, the validator retains the deposit along with additional rewards, bolstering network reliability and fair economic distribution.

# Transition of Taiko Based Rollup Fees to Maximize Proposer and Operator Revenue

Taiko’s Based Rollup proposers generate revenue from priority fees arising from user transactions. For example, the net profit of a block proposer is calculated by subtracting Ethereum Layer 1 gas costs and base fees from the remaining gas fees. When Ethereum Layer 1 gas prices are high or when more gas is utilized on Layer 2, proposers can achieve higher earnings.

Taiko plans to transition to a fee structure similar to Ethereum to enhance the profitability of proposers and operators within the network. Following the upgrade, Taiko will apply the EIP-1559-based fee mechanism to efficiently manage fee revenues generated in the Layer 2 network. This fee overhaul is expected to help maximize the profits of proposers and operators.

# Enhancing Network Finality with Preconfirmation and Additional Revenue Models

Taiko aims to fully transfer block proposing roles to the DAO in the long term and increase the profitability of proposers. To this end, Taiko plans to introduce a preconfirmation feature that allows users to immediately confirm transactions, thereby improving transaction speed and user experience.

Preconfirmation speeds up transaction confirmation but may slightly compromise stability. Proposers using preconfirmation must stake collateral via a registration contract, which can be provided in either Taiko or ETH. While this raises the entry barrier for participating in Based Rollup, it fosters fairer competition within a decentralized network.

With preconfirmation, proposers can earn additional fees from users seeking faster transaction confirmation, creating another revenue stream while potentially reducing Ethereum Layer 1 fees. Taiko is collaborating with Nethermind and Gattaca to implement this feature, having completed two Proof of Concept (PoC) internally, and plans to disclose the final design in the future.

# Improving Profitability Through Ticket Sales and Outsourcing Block Building

To maximize the economic potential of Based Rollup, Taiko is exploring multiple additional revenue models. One such model involves selling tickets for transaction order allocation, inspired by the execution ticket concept used in Layer 1.

Taiko envisions a dynamic pricing mechanism to adjust ticket issuance and align ticket prices with demand and supply. This allows proposers to secure additional revenue by selling tickets at desired prices.

Additionally, Taiko is considering outsourcing block building to preconfirmers. This enables preconfirmers to delegate the block building process to specialized builders, allowing more efficient block creation using the MEV-Boost PBS pipeline, where Layer 1 builders generate Layer 2 blocks. This approach, proposed in Nethermind’s Taiko preconfirm design, leverages the expertise of existing Layer 1 builders to enhance the economic ecosystem of Based Rollup.

Taiko’s Based Rollup is designed to establish a decentralized economic ecosystem, distributing economic opportunities among diverse participants. Decentralization is not merely a technical ideal but a crucial component for the economic stability of sustainable networks.

Through multi-proof, preconfirmation, ticket sales, and various revenue-generation models, Taiko is pushing the economic possibilities of Based Rollup to new heights, overcoming the limitations of centralized sequencers. Taiko’s innovative approach is expected to serve as a pivotal milestone in ensuring fairer economic distribution and stability in decentralized networks.