The Endgame for Rollup Frameworks

There has been a lot of talk about the modular chain and rollup narrative lately, but I’d argue that people have had an overly optimistic outlook about it.

While I'm bullish on the modular space as a whole, I see it playing out differently and more conservatively than others building and analyzing it.

Rollup frameworks have been attracting a lot of attention recently and it feels right to start by analyzing them, as they will serve as the foundational layer upon which this new rollup-centric world will be built.

Here’s how I’m envisioning the endgame for rollup frameworks… prepare for some potentially spicy takes.

Thousands (not millions) of chains

We're already seeing the early adoption of modular chains, due to the customizability and control that they offer developers, and it seems inevitable that this trend will continue. However, I disagree with others who predict that there will be "millions" of rollups in the future. It doesn't make sense for every dapp to launch its own chain in the future.

There are certainly use cases where modularity and sovereignty have a lot of potential. For example, gaming and social projects are prime candidates. Liquidity is less of a concern for these consumer verticals than it is for defi. Plus, sovereignty enables projects to offer gasless transactions and customize fee structures, which can be effective customer acquisition tactics for consumer verticals.

However, I would argue that other sectors and use cases do not make as much sense, as modularity can sometimes present more challenges than benefits. This is especially true for sovereign rollups (rather than smart contract rollups on Ethereum), as they come with greater tradeoffs. For example, some defi projects will choose not to sacrifice access to liquidity and atomic composability in exchange for greater sovereignty.

Additionally, a lot of dapps will likely continue to use existing chains / ecosystems as their initial launchpads, and most will never reach the scale where it would make sense to launch their own chains.

Rollup frameworks are having their moment: a mini hype cycle

Despite what I predict will be lesser demand for rollups in the end, hype for the modular narrative has led to a recent explosion of rollup frameworks (rollup SDKs & no-code rollup-as-a-service platforms), which are now experiencing their own mini hype cycle.

With so many rollup frameworks emerging, I recently made these charts to track and compare them:

What started as 2 rollup frameworks – OP Stack for smart contract rollups & Rollkit for sovereign rollups – has quickly expanded into an entire competitive landscape of smart contract and sovereign frameworks to choose from. Existing L2s are launching their own open-source smart contract rollup SDKs, while new players are emerging in the sovereign rollup space, mostly tied to the Celestia ecosystem.

Competition will likely intensify from here. Some rollup SDK projects may launch their own no-code RaaS platforms, rather than outsourcing to RaaS partners, so they can collect hosting fees as revenue, gain direct access to their developer customers, and explore additional revenue opportunities. This follows a model common in web2 open-source software, where an open-source software provider builds a self-service platform on top of its software and charges a SaaS subscription fee for hosting services.

Hype -> Convergence

When hype cycles mellow, they typically converge around a few key players. (Can I use Alt L1s as an example without anyone getting mad?) With so many ‘general purpose’ rollup frameworks competing, it seems logical that this space will converge.

The category leaders will be those that attract robust ecosystems and establish strong network effects.

I predict that smart contract rollup frameworks launched by existing Ethereum L2s will capture most of the market, while sovereign rollups using Celestia will capture a smaller slice of the pie.

Smart Contract vs Sovereign Rollups

A couple reasons why smart contract rollup frameworks tied to existing Eth L2s are likely to dominate:

  • Ethereum-based SC frameworks can target a broader developer audience, whereas Celestia-based sovereign frameworks are limited to a subset of this audience because of their inherent design tradeoffs.

    Even within this audience subset, SC frameworks tied to existing Eth L2s still have the upper hand. As later-stage projects leveraging Ethereum, they simply have more to offer developers – more established ecosystems, greater resources, and larger teams to provide customer support – that make it hard to compete.

  • Given these limitations, sovereign frameworks must go to market with clear positioning and a strong value prop to persuade developers to forgo Ethereum’s security and ecosystem and choose their solutions instead.

    Yet, these teams still seem to be undecided on the use cases they should target. They continue to assess which use cases make sense with their architecture while factoring in each’s revenue potential. This ‘build it and then look for a problem to solve’ approach feels misguided. While some teams will ultimately figure it out and find product-market fit, the current lack of direction will slow down adoption.

  • We can also draw parallels between the Sovereign Rollup and Cosmos ecosystems. They both embrace a ‘sovereign’ ideology that resonates with people, and my guess is that the Sovereign Rollup ecosystem will play out similarly to how the Cosmos ecosystem has.

    Cosmos & Ethereum have been around for about the same amount of time, and while many people are aligned with Cosmos’ ideology, when it comes to actual ecosystem activity and user adoption, Cosmos pales in comparison to Ethereum. This is because Ethereum's strength lies in its vibrant ecosystem and network effects. We’re likely to see the same Ethereum vs Cosmos dichotomy play out with SC Rollups vs Sovereign Rollups.

Overall, these differences underscore the power of network effects and the potential hurdles Sovereign Rollup frameworks are likely to face in their pursuit of distinct identity as they search for the optimal problem(s) to solve.

Verticalization on the horizon

As the space starts to converge and optimal use cases for rollup frameworks become clearer, we will likely see some sovereign rollup frameworks verticalize in an effort to stay competitive and distinguish themselves from their general-purpose competitors. They will narrow in on a specific vertical of the market and build for this vertical’s developer audience with sector-specific product features and ecosystem growth initiatives. By verticalizing, they will ideally be able to capture sustainable market share by establishing network effects within a specific vertical.

Established Eth SC Rollups with greater resources at their disposal may compete by launching verticalized frameworks on top of their existing general purpose frameworks, so they can offer both vertical-specific and general purpose frameworks to their broader developer audience.

Examples of what these verticalized frameworks might look like:

  • A gaming rollup framework might optimize for speed (i.e. central sequencer, custom VM), congestion relief via sharding or auto-deployed chains, and low cost (i.e. Celestia for DA), offer gaming-focused dev tools and features, and have gaming distribution partnerships in place.

  • A defi rollup framework might optimize for low latency and speed, provide oracle, bridging, and MEV optionality/customizations, and offer defi analytics tools, among other things.

A final thought

I mentioned that the rollup framework space (not rollups broadly) has been experiencing a mini hype cycle, so it seemed right to track where it currently is on the Gartner Hype Cycle so we can anticipate the shifts that lie ahead.

Gauging by the sky-high valuations at which many of these companies have raised over the last ~9 months, as well as the explosion of competitors who have entered the space, it seems we have recently hit the peak of the hype cycle and are just starting to trend downward. Companies are beginning to feel increasing competitive pressure ahead of the space’s convergence.

Additionally, many of these companies are now launching their testnets and gauging initial user interest. As they start gearing up for mainnet, they will shift more of their focus towards driving user growth to their platforms and these competitive pressures will heighten.

When the mini hype cycle for rollup frameworks enters its later stages, the larger hype cycle for modular rollups will begin to take its place. Following the same pattern, an explosion of new rollups will come to market before leveling out to what I expect will be thousands, not millions, of rollups.

DM me on Twitter @kay_phillips_ if you’re analyzing or building in the rollup space and want to chat!

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