Key Insights:

• Centralized sequencers in Layer-2 rollups pose significant security risks, as shown by Linea’s $2.6M exploit.
• Decentralizing sequencers aligns community and investor interests, enhancing network security and user retention.
• The blockchain community must prioritize decentralization to ensure long-term growth and security, overcoming short-term challenges.

Layer-2 (L2) rollups on Ethereum have experienced growth, with over 50% of all Ethereum-based transactions occurring on L2s in early June 2024. This milestone reflects the increasing reliance on L2 solutions for their efficiency and scalability. However, the centralization of sequencers within these rollups poses substantial security risks, as demonstrated by recent incidents.

A recent exploit on Linea, a Consensys-backed zkEVM rollup, resulted in the loss of more than $2.6 million in ETH. This incident exposed vulnerabilities inherent in the centralized sequencer model. In response, Linea’s team decided to pause the sequencer and censor attacker addresses to protect users and builders, sparking debate over the need for decentralization.

Matter Labs CEO Alex Gluchowski emphasized, “Decentralizing the sequencer isn’t optional. Every serious L2 stack must race to do it first.” This sentiment underscores the urgency of rollups moving towards a decentralized approach to enhance security and maintain user trust.

Dencun Upgrade and Its Impact

The Dencun (EIP-4844) upgrade has played a pivotal role in the growth of Ethereum L2s, contributing to the ecosystem’s total value locked (TVL) reaching an all-time high of $48.2 billion. Despite these advancements, the upgrade does not address the centralization issue of sequencers, which remains a critical concern for the blockchain community.

While achieving higher throughput and performance, centralized sequencers contradict the decentralization ethos of blockchain technology. This centralization introduces risks such as potential censorship, compromised network liveness, and the concentration of network value extraction in the hands of a single entity.

The Path to Decentralization

The Linea exploit has highlighted the complacency within the L2 space regarding sequencer decentralization. Senior officials from Linea compared their progress to older rollup frameworks, suggesting satisfaction with their current pace. However, this attitude threatens the industry’s progress and extends the risk period for users, investors, and builders.

Rollups are currently in a transitional phase and require special safeguards. However, unilateral decisions to shut down the network cannot remain the default response to security threats. Technological advancements now enable the implementation of basic decentralized sequencers and community incentivization frameworks, shifting the focus from capability to intent and prioritization.

Benefits of Decentralized Sequencers

Although challenging, decentralization offers numerous benefits to projects and their communities. Direct participation in network security and governance fosters deeper community engagement and introduces new revenue streams, such as sequencer mining. Additionally, a self-reinforcing model can reduce security costs and enhance the overall security of the network through increased community participation.

Arguments against decentralization often cite latency issues and user experience concerns. However, evidence from decentralized exchanges shows that users are willing to accept slight increases in latency if proper incentives and rewards are provided. 

Furthermore, decentralized sequencers align the interests of short-term speculators and long-term contributors, addressing the industry’s user retention issues.

The tools and technologies necessary for decentralized sequencers are already available. Bitcoin L2s are even preparing to offer mining rewards through decentralized sequencers, demonstrating the feasibility and benefits of this approach.

Layer-2 rollups must prioritize decentralization to secure their future in the blockchain ecosystem. Users have alternatives and will choose networks that prioritize security and decentralization. Early adopters of decentralized sequencers will likely reap significant benefits, but the industry’s strength lies in collective progress and embracing innovative norms.