Rollup Economics & MEV: The Smartest Wins (Feat. Radius)

Key Takeaways

• As the Rollup-based L2 ecosystem grows to address Ethereum's scalability, network fees, MEV, and DEX arbitrage are now occurring on L2 as well. MEV, in particular, operates differently from L1 due to the presence of sequencers.

• MEV is a key revenue model in the Rollup economy, but challenges such as sequencer centralization, liquidity shortages, and user protection remain. Radius addresses these issues by offering Lighthouse and SBB (Secure Block Building) solutions.

• As the Rollup economy evolves, MEV utilization will become more sophisticated, establishing new economic models for network operations and user rewards. Transparent and fair MEV operations will enhance the sustainability of the Rollup economy.

1. Background - The Emergence and Growth of the Rollup Economy

It has been about five years since the Layer 2 (L2) ecosystem based on Rollup technology began addressing Ethereum’s scalability issues. During this period, various L2 projects such as Optimism and zkSync have emerged, primarily utilizing Optimistic Rollup and ZK Rollup technologies. Over time, the L2 ecosystem has become more specialized and robust, establishing itself as an essential pillar of the blockchain ecosystem.

As this pillar took shape, new opportunities began to arise around it. Revenue sources that were once exclusive to Layer 1 (L1) blockchain networks have also shown potential on L2, benefiting participants within the L2 ecosystem through profits or incentives. Among these revenue models, MEV strategies have evolved differently from traditional L1 methods due to the distinct environment of L2. The Rollup Economy, which has emerged from the expansion of the L2 ecosystem, is still a relatively new concept but continues to grow steadily.

1.1 Rollup Economy: New Opportunities in a New Arena

1.1.1 A Growing New Layer

As the blockchain ecosystem continues to expand, L2 solutions have emerged to address scalability issues while maintaining L1 security. This allows users to access blockchain services more quickly and affordably. As users recognize these benefits, a significant amount of capital and activity that once remained solely on L1 is now shifting to L2.

In particular, services that were difficult to implement on L1 or were costly and time-consuming to use are now thriving on L2, taking advantage of its fast transaction speeds and lower fees. Some projects have even launched their own L2 solutions. For example, Uniswap recently introduced Unichain, an L2 solution built on Optimism’s Superchain, to expand its DeFi services. Similarly, Immutable X was designed as an Ethereum L2 solution to efficiently handle high-transaction environments, such as gaming and NFT trading.

With the increasing diversity and expansion of the L2 ecosystem, it has evolved beyond being a mere satellite chain of L1, establishing itself as an independent and robust layer. The influx of capital and users has given rise to a distinct economic structure within L2, laying the foundation for a "Rollup Economy", a new stage of opportunities.

1.1.2 Traditional L1 Economy vs. Rollup Economy

Source: Dune | @sealaunch

While the traditional L1 economy and the Rollup economy share structural similarities, differences in technology and scalability approaches have led to distinct revenue models and economic structures. As the Rollup economy grows, key economic activities that were once dominant in the L1 economy—such as network fees, Maximal Extractable Value (MEV), and decentralized exchange (DEX) arbitrage—are now operating independently within the Rollup Ecosystem.

• Network Fees: At first glance, the significantly lower network fees on L2 might seem unprofitable. However, from the perspective of L2 network participants, the more active the L2 network becomes, the more profit it can generate. This is because Rollup-based L2s bundle multiple transactions together before submitting them to L1. As long as the total L2 fees collected exceed the L1 submission fees, L2 networks can remain profitable. Lower fees also make blockchain services more accessible, incentivizing more users to migrate to L2.

• MEV: MEV refers to the maximum profit a block producer can extract by manipulating transaction order or selectively including specific transactions. On L1, miners or validators controlled transaction ordering, enabling MEV strategies such as front-running, back-running, and sandwich attacks. In the Rollup economy, MEV remains a key economic factor, but since Rollups introduce sequencers, the way MEV is executed differs from traditional L1 methods.

• DEX Arbitrage: Just as arbitrage opportunities arise from price differences between DEXs on L1, similar opportunities exist on L2. In fact, L2’s lower fees and faster transaction speeds make arbitrage even more dynamic. For example, traders can exploit price discrepancies that occur during asset transfers between L1 and L2 bridges, or take advantage of liquidity differences across multiple L2 DEXs, leading to the development of new arbitrage strategies.

Ultimately, while the Rollup economy inherits key elements from the L1 economy, the technical and environmental differences between L1 and L2 have led to a reconfiguration of economic structures and revenue models.

1.2 The MEV Phenomenon in the Rollup Economy

Among various aspects of the Rollup economy, MEV is one of the most critical areas to watch. While MEV in the Rollup economy shares similarities with MEV in the L1 economy, structural differences create unique characteristics.

First, MEV still exists within the Rollup economy, allowing profits through transaction order manipulation. Strategies such as front-running, back-running, and sandwich attacks, which are widely discussed in L1 MEV, can also be applied in the Rollup economy. Additionally, arbitrage opportunities can emerge within L2 DEXs, where certain DEX transactions can be prioritized or excluded to extract MEV.

However, unlike L1, where miners or validators produce blocks and determine transaction order, L2 relies on sequencers to manage transactions. This alters the actors and mechanisms involved in MEV extraction compared to L1. Moreover, while MEV profits on L1 go directly to block validators, in L2, MEV revenue distribution depends on the design of each Rollup, meaning that specific entities within the L2 ecosystem may share these profits.

The migration of capital and blockchain activity from L1 to L2, combined with the distinct characteristics of MEV in the Rollup economy, has drawn significant attention to the potential scale and growth of MEV in L2.

So far, the total atomic arbitrage MEV volume across major L2 platforms has reached approximately $3.6 billion, accounting for 1–6% of DEX trading volume on these chains. This growth is particularly prominent in Arbitrum and OP Mainnet, with increasing MEV activity also observed in newer L2 platforms such as Base and zkSync.

At the same time, demand for a marketplace catering to MEV hunters continues to grow. While precise numerical data for the L2 ecosystem is not yet available, existing figures suggest a billion-dollar MEV marketplace could emerge within the rollup economy. For instance, Flashbots's MEV-Boost on Ethereum has generated approximately $968M in annual block revenue, while Solana's Jito Labs MEV solution has enabled validators to earn over $338M per year. These numbers indicate a strong potential for MEV-driven markets in the rollup space.

2. Takeaway – MEV in the Rollup Economy

2.1 The Still Unstable MEV in the Rollup Economy

As the L2 ecosystem grows to address the scalability issues of L1, it is creating new economic opportunities. In particular, MEV is emerging as a promising profit model within the rollup economy. However, several challenges currently hinder its full potential.

• Centralized Sequencer Issue: Many existing L2 rollup solutions operate with a single sequencer, granting exclusive control over transaction ordering. This increases the likelihood of centralized MEV extraction, potentially leading to excessive profits for specific entities.

• MEV Extraction Opportunities and Liquidity Issues: Since L2s generally have lower liquidity compared to L1, the opportunities for executing MEV strategies are limited. This not only increases the risk for participants seeking to extract MEV as a continuous revenue source but also affects arbitrage and liquidity provision strategies.

• MEV Protection and Fair Trading Environment for Users: In both L1 and L2 ecosystems, MEV is rarely driven by blockchain users' direct requests. Instead, it arises from the fundamental structure of blockchain systems, allowing MEV operators or block producers to profit. Therefore, leaving users exposed to unwanted MEV exploitation is undesirable from a user experience perspective. Since it is impossible to entirely eliminate MEV due to the system's inherent nature, it is crucial to ensure its fair distribution or operate it in a more transparent manner.

Given that the market is still in its growth phase, issues such as sequencer centralization, fair distribution for sustainability, and user protection from unchecked MEV can be seen as growing pains. However, neglecting these issues could dampen the rapid growth momentum. Against this backdrop, Radius is gaining attention as a project that proposes solutions to make MEV in the rollup economy more sustainable while protecting blockchain users from unfair losses.

2.2 Radius: Solving Two Problems at Once

Radius presents a solution to address the challenges of MEV in the rollup economy simultaneously. To achieve this, it offers two key solutions: Lighthouse and Secure Block Building (SBB).

2.2.1 Lighthouse: Sustainable MEV Extraction and Fair Distribution

Lighthouse enhances fairness in the MEV market and optimizes revenue distribution within the rollup ecosystem by introducing an auction-based block space allocation mechanism. This ensures that MEV opportunities are not monopolized by a select few participants, allowing the entire network to benefit in a balanced manner.

Radius’s Lighthouse is designed to bridge rollups and searchers, enabling the identification of profit opportunities based on user transaction execution. By eliminating harmful MEV practices such as censorship and transaction reordering, Lighthouse improves market efficiency while supporting "Good MEV" strategies (e.g., back-running, arbitrage, liquidations) to generate sustainable revenue.

Specifically, Lighthouse strengthens fairness in the MEV market and optimizes revenue distribution within the rollup ecosystem by leveraging an auction-based block space allocation mechanism. This prevents a small group of participants from monopolizing profit opportunities and ensures a balanced distribution of benefits across the network.

How Lighthouse Works:

1. Searchers identify profit opportunities within rollups and generate bundles.

2. These bundles are submitted to Lighthouse, where searchers engage in a bidding competition to have their bundles included in the block.

3. The rollup executes the winning bundles, generating additional revenue beyond standard transaction fees.

Through this mechanism, Lighthouse supports various revenue-generating strategies, including CEX-DEX arbitrage, atomic arbitrage, and cross-rollup arbitrage.

2.2.2 Secure Block Building (SBB): Protecting Users from Unchecked MEV

SBB is designed to protect user transactions from malicious MEV while still capturing revenue opportunities. By preventing unwanted MEV practices such as front-running and transaction reordering, SBB ensures that rollups can generate revenue in a sustainable and user-friendly manner.

SBB achieves this by encrypting user transactions directly within the browser, eliminating the need for additional software installation while protecting transactions from malicious MEV extraction. The encryption method used is zk-based, allowing the generation of reliable cryptographic keys and achieving fast proof speeds.

Additionally, SBB introduces a slashing protocol to prevent a centralized sequencer from reordering transactions. This mechanism mitigates MEV monopolization by a single sequencer and minimizes user losses caused by intentional transaction reordering.

With these solutions, Radius is positioned as a project that simultaneously addresses both the efficient utilization and fair distribution of MEV. It is expected to play a crucial role in balancing the MEV market within the rollup economy.

2.2.3 Remaining Challenges

While Radius’s solutions are designed to make MEV utilization fairer and safer, several challenges still need to be addressed.

First, the potential decrease in searcher profits within the Radius ecosystem compared to L1 or major L2s that have not yet adopted SBB. In highly active transaction environments like L1, or L2s without SBB, searchers have historically generated higher profits. If the adoption of SBB results in lower earnings for searchers, attracting participants in the early stages could become difficult. This could hinder the formation of a sufficient market, ultimately making it challenging to establish a sustainable MEV extraction model. The long-term success of Radius will depend on how well it can attract L2s into its ecosystem.

Another challenge is governance. Although Lighthouse is built on L1 smart contracts, its governance structure plays a crucial role in its operation. If governance decisions are made in a centralized manner, Lighthouse could still be subject to centralized control, contradicting its purpose. This issue is particularly tied to how Lighthouse ensures sequencer reliability through L1-backed collateral. The rules governing collateral size and slashing conditions directly impact participants, and if these rules are determined unilaterally rather than through consensus, it could lead to conflicts within the ecosystem.

For Lighthouse to establish itself as a sustainable MEV revenue source and a key player in the rollup economy, additional considerations and efforts will be necessary.

2.3 The Future Indicated by MEV in the Rollup Economy

MEV is becoming an increasingly critical component of the blockchain economy, and its role within the rollup economy is expected to grow even further. As the rollup ecosystem continues to expand, efforts to discover new opportunities within it will also accelerate. In this context, MEV is likely to evolve beyond merely serving as a profit mechanism for block builders—it may become a key driver of economic vitality in L2 networks.

In particular, as users gain a deeper understanding of the differences in MEV strategies between L1 and L2, demand will rise for services that leverage asset movements between L1 and L2, DEX liquidity shifts, and transaction structure variations to create innovative MEV strategies. Additionally, various protective solutions designed to minimize the negative effects of MEV are expected to emerge.

Thus, MEV in the rollup economy is poised to go beyond simple arbitrage opportunities and develop into a sustainable economic model that supports network operations. MEV-generated revenue could potentially be used for network maintenance, user reward programs, and other ecosystem incentives.

With projects like Radius proposing solutions to make MEV utilization more transparent and fair, the rollup economy is set to grow in a more robust and balanced manner. Now is a crucial time to closely monitor how MEV within the rollup economy will evolve and what direction the broader blockchain ecosystem will take as a result.

3. Others’ Opinion

3.1 Heechang from Four Pillars - So How Much More Revenue for Rollups?

When discussing MEV, we categorize it as good or bad based on its impact on users and the overall ecosystem. For blockchains, incorporating infrastructure to capture good MEV translates to additional revenue. While Ethereum and other Layer1s have actively built infrastructure to capture MEV, rollups haven't incorporated MEV-related infrastructure due to their unique attributes: faster block time, cheaper blockspace, and relatively more centralized governance.

This is now changing. Unichain has internalized MEV with Rollup-Boost, and Arbitrum will soon incorporate Timeboost, a new transaction ordering policy. This introduces an express lane at the sequencer, where valid transactions are processed immediately without delay, while other transactions experience a nominal delay. The right to control this express lane is determined through a sealed-bid second-price auction. I believe this will be implemented in other Arbitrum Orbit rollups, and soon other rollup frameworks will develop their own methods to capture good MEV.

Radius is building exactly this for rollups. Their two products - SBB(Secure Block Building), which allows a single sequencer to capture good MEV, and Lighthouse, a marketplace for cross-rollup MEV opportunities - would improve rollup economics. But how much additional revenue will this generate for rollups? The metric will varies significantly between rollups, as some focus on DeFi while others target consumer dapps. DeFi focused rollups will naturally capture more arbitrage opportunities.

Rollups taking good MEVs will be inevitable in the future, and the success of SBB and Lighthouse by Radius will be determined by the size of the good MEVs in each rollup, and between rollups.

Source: L2 MEV Dashboard

3.2 Tariz from Radius - Sustainable L2 MEV: Shaping the Future of Rollup Economy

We are building economic infrastructure for the Ethereum ecosystem, dedicated to supporting economic activities across the Ethereum network. Our core goal is to drive sustainable economic growth in L2 and ultimately establish a rollup-centric Ethereum ecosystem as the mainstream.

MEV plays a crucial role in the rollup economy, and to further develop this opportunity, we introduce two key solutions: Lighthouse and SBB. Lighthouse efficiently connects searchers and rollups, enabling diversified revenue strategies across multiple L2s, thereby enhancing economic incentives for all participants. Meanwhile, SBB ensures the execution of searcher transactions while protecting users from transaction reordering and front-running, establishing a responsible revenue-generating structure.

Our sustainable MEV model consolidates and amplifies the economic potential of the L2 ecosystem. By doing so, we aim to support the balanced growth of the L2 economy and create an environment where more users choose Ethereum L2 solutions. With this vision in mind, we are accelerating technological development and preparing for our mainnet launch in Q4 of this year.

4. Resource

Related Articles, News, Tweets etc. :

• https://cryptoslate.com/insights/ethereum-layer-2-revenue-hits-277-million-in-2024-spearheaded-by-bases-92-million/?utm_source=chatgpt.com

• https://docs.theradius.xyz/

• https://collective.flashbots.net/t/it-s-time-to-talk-about-l2-mev/3593