Layer 2 sequencers have become dangerously centralized, introducing significant risks that undermine the fundamental principles of blockchain. To preserve the integrity of the network and prevent the erosion of trust, we urgently need to move to a model that more effectively eliminates single points of failure.
Failure to do so compromises network security and exposes entire ecosystems to serious threats, including transaction censorship, security breaches, and potential compromise of customer data and funds.
Since Q2 2024, Layer 2 solutions built on the Ethereum network are processing an average of 12x more transactions than the base layer. Similarly, on June 6, the total value locked (TVL) of the Layer 2 ecosystem hit an all-time high of $49 billion, signaling the growing adoption of these “execution” networks. However, as these solutions have gained popularity, a pressing problem has emerged: the centralization of their sequencing operations.
Sequencers are essential network components responsible for ordering and batching transactions before they reach the Ethereum mainnet. However, they have become a double-edged sword, providing efficiency at the cost of decentralization.
To learn more, read our Opinion section: Web3’s biggest security threat is a familiar monster: centralization
Sequencers manage the flow of data in Ethereum’s Layer 2 solutions by determining the order of transactions when multiple transactions occur simultaneously. When two users attempt to process a transaction at the same time, the sequencer decides who goes first.
However, many of these tools come with potential risks associated with having a single entity in control. While centralized components can allow for faster transaction processing, they also have significant drawbacks, such as the risk of censorship.
These concerns are not unfounded. The current major layer-2s all rely on “centralized” sequencers, which generally means that the company that created the rollup handles its own sequencing operations.
For example, data shows that in March alone, Coinbase’s Base network generated $30 million in first-party revenue for the company based on sequencer fees alone — a figure that amounts to about $360 million annually.
Therefore, in a rapidly decentralizing landscape where trust is supposed to be minimized, the idea of a single company controlling a crucial element of how a blockchain works naturally raises eyebrows.
Christine Kim, vice president of research at Galaxy Digital, argues that decentralization should not be viewed as a binary state but rather as a spectrum, with centralized influence reduced to a bare minimum. She noted:
“A decentralized sequencer can be one of the most difficult initiatives to implement for a rollup… to improve its decentralization and resilience (…)”
Regarding minimizing centralized dependency, users of Linea, a zkEVM deployment program backed by Consensys, recently suffered losses amounting to $2.6 million. However, what was most shocking about this incident was the unanimous decision of the project’s development team to pause the sequencer and “censor attacker addresses to protect users and developers.”
This incident highlights the critical importance of decentralization and the dangers of sequencer centralization. By removing single points of failure, decentralized sequencers make networks more resilient to attacks and technical failures. In addition, they better reflect the core values of blockchain technology, including transparency and efficiency.
In this regard, most Layer 2 solutions are quick to recognize the benefits of distributed control. By leveraging a network of validators and block producers, Layer 2 solutions can randomly select and rotate sequencer nodes. These parties share responsibility for transaction ordering and batch submission, improving network security and resiliency.
This method ensures a fair and secure sequencing process while maintaining high performance, significantly reducing the risk of censorship or manipulation. This in turn encourages community participation and aligns incentives between the network and its users, thereby adhering more closely to the core principles of blockchain technology.
Recently, Vitalik Buterin proposed a classification system for rollup networks—ranging from stage 0 to stage 2—expressing his belief that most top rollups today rely on some form of “training wheels.”
To learn more, read our Opinion section: Ethereum is ‘much more centralized than people think’: Blocknative’s Matt Cutler
In the future, Layer 2s will have to abandon these stopgap measures, or they risk stagnation. While centralization undoubtedly offers lucrative benefits and ease of operation, it primarily serves the interests of the operator. Decentralization, while difficult, brings long-term benefits to projects and their communities.
This “self-reinforcing model” reduces security costs and initiates a positive cycle. Greater community participation leads to increased staking and stronger security, thus attracting more dapps and innovators.
Additionally, the consistent liquidity flows to DEXs following Sequencer decentralization demonstrate that users can accept small latency increases when properly incentivized. Beyond improving security through mechanisms like liquid staking, Sequencer decentralization aligns with the distribution of value to industry participants and contributors.
Revenue sharing models like sequencer mining improve user retention, creating a direct correlation between community participation, network security, and ecosystem growth. With technical primitives and working examples readily available, even Bitcoin’s layer 2s are gearing up to offer mining rewards via decentralized sequencers.
In the future, it will no longer be enough for the Ethereum layer-2 ecosystem to rely on a single network to have decentralized sequencers. It is essential to make the transition between multiple networks to preserve the integrity of blockchain technology. Established layer-2s must act quickly to avoid obsolescence and ensure the security of their users.
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