Traditional Business Model of Rollups

Overview

Rollups, initially designed to be off-chain computation were developed to only extend existing public networks like Ethereum. They have lately transformed into a lot more than just an extension of Ethereum, developing their own identity. This is majorly due to the innovation in modular blockchain landscape. However, due to their starting point they naturally adopted a business model resembling that of Web2 applications given that they esentially were just off-chain compute.

Revenue Flow

The revenue of the Rollup operator in this case would come from the fees accumlated from the transactions on top of the Rollup itself. This is very similar to how validators gain a size of their revenue form transaction fees as well, however in this case the fees goes only to single sequencer which is owned by the Rollup operator. The revenue could be on the native token of the underlying chain, usually Ethereum or a custom token which is usally issued on the L1 chain itself.

Expense Flow

The expenses of a typical rollups can be understood as following recurring costs,

• Network Infrastucture - Basically the cost to host, monitor, manage & operate the infrastructure. This cost can vary from rollup to rollup based on factors like - (a) type of rollup - optimisitc or ZK, (b) settlement times or withdrawl time

• L1 costs - Pushing the required details like batch hashes, state root hashes, exit roots, execution proofs and more, to the L1 contracts for settlment costs in the L1 gas fees.

• DA costs - Pushing the transaction data to the DA of choice to making it available in a decentralized fashion.

So How Does It Hold?

Based on the above defined revenue model and expenses, a Rollup can become profitable only at a certain transaction volume where its break even would exist. Below this break even point, it is not feasible to sustain the rollup. It is important to note that the break even itself would would vary on a number of factors such as:- L1 gas price, L1 token rate, L2 gas price, L2 token rate & transaction volumes on L2.

Benefits

• The design gives a simple and straight forward model of clear revenue and expenses to any business application which is much closer to Web2 based business models.

• It allows to add more utility to the custom token as the blockspace can be charged with help of this custom token.

Cons

• Unpredictable Expenses: While in a typical business the expenses scale increase alongside the volume of good exchanged, the voltality of gas price and the token price on L1(ETH) is a big factor. A Rollup may have same or even lesser transcation volumes on top of it, yet it may be 3 or even 4 times more expensive when gas price on the network misbehaves while L1 token's price itself is also very volatile.

• Volatile Revenue: The transaction volumes on the networks can be more or less, contributing to volatility. But perhaps even more importantly, reliance of revenue accumalationg all on one token, whose rate itself can be very volatile can be damaging to business.

• Lack of Revenue Streams: There is only one primary revenue stream which is the transaction fee. While rollups are free to create additional business models to sustain the business, this still remains the primary revenue channel. For private rollups or non-user facing Rollups, they don't even have the above described revenue stream which limits the adoption only to public use cases.