Derivatives Market: Fast Finality for Rollups

Special thanks to Nathan from Factomind for the discussion and review.


This article introduces the derivatives market that enables rollups to achieve fast finality, fostering voluntary participation and fair competition among rollups, proposers, and builders. This alignment of incentives between Ethereum and rollups in the derivatives market helps mitigate operational risks associated with rollups. Our unique design enables rollup to act as a preconf provider, achieving fast preconfirmation and enhancing its censorship resistance. This capability ensures true scalability for rollup users.


Rollups operate by processing user transactions outside of Ethereum and transmitting them to Ethereum in a compressed form. This mechanism allows users to experience lower transaction costs and faster transaction speeds. However, the rapid processing of transactions in rollups is achieved through a pledge between the rollup and its users, and can be easily compromised due to misaligned incentives between Ethereum and the rollups.

Rollups promise to settle the post-execution states of transactions on Ethereum, and users trust this promise to base their next transactions on the received state. This promise of a valid state transition is guaranteed by the rollup's crypto-economic mechanisms. Nonetheless, this does not ensure that a rollup's transactions will indeed be included in Ethereum blocks.

Currently, Ethereum has no obligation to include rollup transactions in its blocks. More precisely, there is a possibility that Ethereum proposers may choose not to include rollup transactions. This situation arise from incentive misalignment, even if including rollup transactions in Ethereum blocks benefits the entire Ethereum ecosystem, it might not necessarily benefit a specific proposer.

Encouraging voluntary cooperation from Ethereum for the finalization of rollup transactions is a challenging task. If Ethereum participants do not cooperate with the finality of rollups, then rollups do not inherit security from Ethereum for extended periods. This situation can lead to delays in finality and potential disruptions in service, causing unnecessary worries for users when creating their next transactions, thereby directly affecting the reliability of the service. To ensure that rollup users can enjoy the true scalability of rollups without concerns, it is crucial to align incentives to encourage voluntary participation in the finality of rollups by Ethereum participants.

Fast Finality Through Based Sequencing

Fast finality refers to the ability of rollups to guarantee that a post-execution state will be settled on Ethereum. To achieve this, a rollup must make two commitments in advance: 1) ensuring the inclusion of the user’s transaction on Ethereum, and 2) verifying that the integrity of state transition is valid

Based sequencing, as proposed by Justin, using Ethereum's proposer as a preconfirmation provider for rollups can fulfill the first commitment. This approach aligns incentives between rollups and Ethereum, allowing users to receive direct assurances from Ethereum about transaction inclusion. The mechanisms of preconfirmation tips and slashing incentives ensure that Ethereum proposers remain motivated to honor their commitments. Three potential methods to implement this include:

  1. Direct Commitment by the Proposer: This involves designating Ethereum's proposer as the preconfirmation provider who directly issues signed preconfirmations to rollup users. The advantage is deterministic assurances directly from Ethereum, inheriting Ethereum's liveness. The drawback are latency and the centralization in Ethereum due to the overhead of the Proposer.

  2. Promise Delivery through Relays: This method increases the likelihood of including user's preconfirmations by enlisting third-party help. The advantage is that it prevents overburdening rollup and proposer with additional roles. The drawback is the potential trust issues with relays and, depending on the methodology, the promise may not be deterministic but probabilistic.

  3. Commitment by Block Space Buyers: This method involves rollups acting as preconf providers, paying proposers for certain slots' block building rights in advance. The advantage is that, by owning a block for finalization, rollups can deterministically promise users and achieve fast preconfirmation through their sequencing. The drawback is the operational risk for rollups due to the difficulty in determining future block prices.

Each methodology holds significant potential, but the third option has not been extensively discussed due to the operational risks associated with determining the value of Ethereum blocks for rollups. This article proposes a derivatives market aimed at mitigating the operational risks for rollups while facilitating active participation for all trading parties.

This derivatives market connect with the delegated preconf and fast preconfirmation implementations mentioned in based sequencing.

Forward Contract (Proposer & Rollup)

Rollups can secure Ethereum blocks in advance by purchasing block building right on specific slot from proposers, thereby achieving fast finality for transactions. This process can be likened to forward contract commonly seen in financial markets. To understand the operational risks rollups face due to forward contracts, let’s examine a simple scenario involving a 32-slot lookahead for proposers and slot auctions on the beacon chain.

Overview of Forward Contracts

A forward contract in this context allows a rollup to secure a slot from a proposer at a predetermined price, providing the rollup with a guaranteed space in the blockchain. Here's a step-by-step breakdown of the transaction process:

  1. At t = 0, the rollup knows the proposer for next epoch.

  2. At t = 1, the rollup participates in a slot auction to purchase a forward contract with the proposer for a specific slot.

  3. From t = 2 onwards, after securing the slot, the rollup sequences its users’ transactions, providing preconfirmation to users and generating revenue from their block.

  4. At t = 3, the rollup requests the execution of the forward contract, meaning it compresses its transactions into the Ethereum block and submits them to the proposer.

  5. At t = 4, the proposer fulfills the contract by signing the received block and proposing it on the Ethereum blockchain.

Operational Risks for Rollups

The scenario outlined above exposes rollups to several operational cost risks:

  1. Excessive Cost Payment Risk: Rollups may not be able to accurately predict the value of the Ethereum block at the forward contract time, leading to potentially excessive costs. This is also the case if they purchase more space(i.e., entire block space) than needed for finalization.

  2. Revenue Instability: The primary source of revenue for rollups is the sale of rollup block space. Inability to accurately forecast revenues at the time of the forward contract can expose rollups to financial risks if the costs exceed the generated revenue.

  3. Increased Labor Costs: Rollups must now engage in activities they previously did not perform, such as predicting the value of Ethereum blocks, competing with builders, and accurately forecasting revenues. This expanded role increases operational hurdles and costs.

Derivatives Market

To mitigate the operational risks associated with rollups, I propose a derivatives market that includes specialized participants, known as Builders. This market comprises two derivative products: a forward contract between the Builder and the Proposer, and a swap contract between the Rollup and the Builder. The purpose of this market is not only to mitigate the operational risks that rollups face during the process of achieving fast finality through block space purchasing but also to enhance the efficiency of the products by leveraging the expertise of each participant.

Market Structure

  1. Forward Contract (Builder & Proposer)

    At t = 1, the builder enters into a forward contract for block building rights with the proposer by participating in a slot auction. This contract allows the builder to secure the necessary block space for transactions with the rollup, while the proposer secures a stable source of revenue.

  2. Swap Contract (Builder & Rollup)

    At t = 2, the builder and rollup enter into a swap contract based on the obligation for the builder to include rollup transactions in the block. This contract enables both parties to hedge against challenges encountered during the block-building process. The rollup secures Ethereum blocks needed for finalization by leveraging its future block building rights, while the builder earns potential profits by building blocks for the rollup in exchange for a portion of the Ethereum blocks

Execution of Contracts

  1. At t = 3, the Builder uses the rollup building rights obtained from the swap contract to build rollup blocks, generating revenue by t = 4.

  2. At t = 4, the rollup enforces the obligations under the swap contract, requiring the builder to include rollup transactions within the Ethereum blocks secured via the forward contract. During this process, the builder structures the overall block by placing rollup transactions at the bottom and builder's transactions at the top, optimizing additional revenue generation from the Ethereum block.

  3. At t = 5, the Builder delivers the Ethereum block to the Proposer, who then proposes it on Ethereum in accordance with the forward contract, achieving transaction finalization at a pre-secured moment.

Motivation for Participation

Rollups participate in block purchases to achieve fast finality while hedging operational risks. Through swap contracts, rollups secure the necessary block space in advance, ensuring that all transactions within the preconfirmed rollup are guaranteed to be included in the Ethereum block. This process allows rollups to avoid the risk of spending more than they earn to secure Ethereum block space, eliminating the need for unnecessary labor in price forecasting and auction participation.

Builders hedge the risk of overpaying due to slot auctions. By securing top space in Ethereum through forward contracts and rollup block space through swap contracts, builders are provided with dual revenue streams, diversifying risk and enhancing financial stability.

Proposers participate to receive rewards associated with the rollup’s fast finality. Builders participating in slot auctions adjust their bids considering the potential revenue (MEV) generated from the rollup's block. This alignment of incentives regarding the rollup's finality provides proposers with additional revenue opportunities.

A natural question arises: Who is a preconf provider? My succinct answer is ‘Rollup’ which is further elaborated in the 'Building Block in Rollups’ section.

Additional Design in the Derivatives Market

To realize financial products effectively, it is critical to create an environment where all market participants can compete fairly and engage actively. To this end, three key design enhancements are included for the product:

Conditional Swap Contract

The constraints of swap contracts, which typically allocate all profit-making opportunities to the builder, might deter rollups from participating. To encourage rollup participation, a conditional swap contract is proposed.

This contract includes a condition that if the builder earns more than the fixed cost paid in a forward contract with the Proposer through rollup block building, the rollup will cease providing the remaining blocks to the builder. The rollup may either build the remaining blocks itself or assign the block building rights to the builder through a block auction, thereby generating additional revenue.

If the rollup does not use all the Ethereum block space for finalization, the builder still retains opportunities to generate revenue on the Ethereum block. This balances risk and reward for both parties, preserving the rollup's revenue generation potential while maintaining the builder's motivation to participate.

Competitive Markets for Fairness

Finalization, a critical process for rollups to inherit Ethereum's security, requires periodic acquisition of Ethereum blocks. This enforced purchasing creates a high pricing power for the Proposer, potentially leading to an uneven playing field that can undermine market efficiency and fairness.

An efficient market could align the variable value of rollup blocks with the fixed costs of builders' Ethereum block purchases. This alignment could be likened to a financial market where the 'Par Value' of a swap contract is zero, indicating no disparity between the agreed value and the market value.

To reduce the pricing power of individual builders and allow rollups to contract at reasonable prices, it is essential to promote competition among multiple builders participating in swap transactions. This can be achieved by supporting the participation of multiple builders with block building rights in different slots. Additionally, the market for forward contracts should be expanded; multiple proposers (e.g., 32) with block proposing rights in different slots should be encouraged to engage in these contracts.

This structure contributes to maintaining reasonable costs that rollups pay to builders because builders will bid at more competitive prices in forward contracts with proposers. Proposers will still maximize revenue from the blocks, and rollups need Ethereum blocks for finalization, thus contributing to a fair price setting.

A discussion is needed for the lookahead period to match the par value in swap contracts.

Syndicated Rollup Strategy: Derivatives for All Rollups

A swap contract is an agreement that exchanges the value of a rollup's block with a portion of an Ethereum block, predicated on the obligation to include the rollup's transactions in the Ethereum block at a slot. Builders are less likely to engage with rollups whose block value is relatively low. Consequently, app-specific rollups, which may have a lower perceived block value, can be marginalized in the swap market.

To address this, we introduce a syndicated strategy. The syndicated rollup strategy involves grouping multiple rollups into a collective trading group to support market participation. For example, three app-specific rollups—dex, nft, and gaming—are grouped together. This group enters into a swap contract with a single builder who receives the rights to build blocks for all three rollups. When executing the swap contract, the builder is obligated to include all transactions from the rollups in the group into an Ethereum block.

The block value for the included builder may potentially be higher than individual blocks through strategies like cross-rollup arbitrage. If all participating rollups are zk rollups, they can reduce verification costs through proof aggregation as in Avail Nexus, effectively securing fast finality capabilities for app-specific rollups.

Do these additional designs undermine the participants’ motivation to engage?

On the contrary, these designs enhance the motivation for rollups to participate, increasing revenue opportunities for builders and proposers, and fostering a sustainable market ecosystem.

Building Block in Rollups

This section explores the block building methods used by builders who have secured block building rights through swap contracts in rollups. This design achieve the censorship resistance and fast preconfirmation critical for user-centric rollups.

Censorship Resistance in Rollup

Rollups have secured fast finality for users by entering into swap contracts with builders who possess block building rights in specific Ethereum slots. According to these contracts, similar to PBS, builders deliver the most profitable block to the rollup, which then executes it. However, this structure may expose rollup users to censorship, sandwiching, and frontrunning attacks by builders.

Rollups employ Radius's sequencing engine, offering users cryptography-based preconfirmation, ensuring transactions are not censored. The method involves users encrypting their transactions using delay encryption and submitting them to the rollup's encrypted mempool. This encryption keeps the transactions confidential until a commitment to include them in the rollup block is made, preventing deliberate censorship. Once the inclusion is decided, the transactions decrypt automatically, allowing the rollup to execute them and provide preconfirmation. The inclusion of order in this promise ensures that after decryption, no one can reorder the transactions, thus protecting users from frontrunning and sandwich attacks.

For more details, refer to the Radius sequencing engine and delay encryption.

Fast Preconfirmation

Rollups can achieve instantaneous fast preconfirmation by appointing a preconf provider as their sequencer and segmenting the block space into Top-of-Block (ToB) and Bottom-of-Block (BoB).

ToB is the most valuable space in a rollup's block. The rollup allocates ToB building rights to the builder contracted via swap agreements. The builder generates backrunning bundles based on the state of the rollup's previous block, delivering them for execution and profit generation.

BoB is designated for regular user transactions within the rollup. It sequences user transactions into BoB, providing preconfirmation.

This structure showcases the synergy of Radius's Sequencing Engine, protecting users from intentional harmful MEV by builders, as all user transactions included in BoB are encrypted. Even if a single sequencer sequences BoB, it protects users from centralized risks like censorship, sandwich, and frontrunning attacks while achieving fast preconfirmation.

As for preconfirmation liveness: Radius has demonstrated on the Protico Testnet how rollups can autonomously ensure the liveness of preconfirmations.

Syndicated Rollup Strategy

I have introduced the Syndicated Rollup Strategy above as a way to maintain their custom scalability while effectively achieving fast finality. This section demonstrates how blocks of rollups that have chosen this strategy are built by builders.

Under the Syndicated Rollup Strategy, Rollup A and B, having contracted with builders as a group, assign the ToB (Top-of-Block) building rights to the builders. The builders create cross-rollup bundles to be included in the ToB and submit them to each rollup. The rollups verify whether the submitting builders are the parties contracted under the warrant agreement and include the bundles in ToB. During this process, rollups may utilize a shared sequencing engine to facilitate smooth enforcement of contracts.

In BoB sequencing, rollups can choose between an independent sequencing engine and a shared sequencing engine. If rollups wish to offer users the composability between rollups, they opt for the shared sequencing engine, where the selected sequencer acts as a shared preconf provider. If each rollup selects its sequencing engine, they can provide users with fast preconfirmation independently.

For detailed insights into multi-rollup sequencing using a shared sequencing engine, visit this link.


I am enthusiastic about the future of rollup-centric Ethereum and am particularly committed to advancing rollups in a more user-centric direction. Fast finality is the capability that allows users to enjoy the true speed of transactions on rollups, and the voluntary participation of Ethereum in the derivatives market can contribute effectively to achieving fast finality. Radius's sequencing engine ensures that rollups participating in the derivatives market secure their own censorship resistance and fast preconfirmation, even in contracts with builders.

What’s Next?

  1. Explore the technical requirements needed for the derivatives market. This includes a clearing house for settling contracts, monitoring to track and manage the fulfillment of contracts, and slashing mechanisms to enforce commitments.

  2. Explore rollup designs utilizing Blobspace. Rollups using blobspace must purchase the entire blob regardless of the required space, which should seamlessly integrates well with the market structure I propose. The blobspace derivatives recently suggested by Tamara are also intriguing.

  3. Propose additional designs that contribute to the decentralization of Ethereum. This market can encourage the voluntary participation of proposers through incentives aligned with rollup finality, but this could lead to centralization in Ethereum due to the pooling factor of proposers. The design separating beacon proposers and execution proposers, as suggested by mikeneuder (Execution Ticket) and barnabe (APS-Burn), could be a potential solution.

I am exploring various ways to achieve fast finality, not only in the derivatives market. Those interested in collaborating on market implementation and exploring solutions for fast finality are welcome to contact me on my Twitter. I welcome all types of research collaborations and aim to enhance user-centric rollup design through diverse community feedback.

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