MT Capital Research Report Deconstructing the

Author | Xinwei, Severin
MT Capital
Abstract
1. Decentralized sequencer, as an emerging technology, aims to optimize the transaction sequencing process of blockchain networks in a decentralized manner to improve transaction efficiency, reduce costs, and solve the MEV problem. The development of this technology marks further efforts in the blockchain field to pursue higher performance and stronger decentralization.
2. Metis’ “self-operated store” model and Espresso’s “outsourcing module” approach demonstrate two main paths to build and maintain decentralized sequencers. The former emphasizes internal management and operational security and stability, while the latter provides more flexibility and openness, promoting technical universality and reducing operational burdens.
3. The development of decentralized sequencers heralds potential progress in network security, censorship resistance, transaction efficiency and costs, as well as ecosystem diversity and interoperability. Further optimization and innovation of these technologies, such as batch processing and state channels, will enhance the performance of L2 platforms, reduce user costs, and promote the formation of a more open and interconnected decentralized ecosystem.
4. Despite facing challenges such as technical implementation, network performance optimization, and governance model design, the key role of decentralized sequencers in building a more efficient, secure, and open decentralized world should not be underestimated. Future developments may focus on researching more efficient consensus mechanisms, scalable network architectures, and developing user-friendly interfaces and tools to meet the growing market demands and user expectations.
Introduction to Sequencers
Sequencer, as the name suggests, is to sort the originally unordered transaction data in the blockchain, organizing it into ordered block data for execution. Every L1 blockchain has its own sorting system, but for L2, centralized sequencers have become an increasingly serious issue.
For L2, sequencers are not necessary. L2 can also choose to use L1’s sequencers. However, for cost and speed considerations, running its own sequencer on L2 can provide users with a cheaper and more convenient user experience. Running its own sequencer on L2 can compress hundreds or thousands of L2 transactions into a single L1 transaction submitted to L1, thereby significantly saving gas fees. Additionally, users can enjoy the fast soft confirmation experience provided by the L2 sequencer without being restricted by Ethereum transaction throughput. Therefore, for L2, running its own sequencer is also an inevitable choice to improve user interaction experience.
Current Status of Sequencers
Although running its own sequencer on L2 can enhance user experience, the centralization of L2 sequencers has become an unavoidable issue. Nowadays, the amount of locked funds in Ethereum L2 has reached 22 billion, with a massive influx of L2, but almost all L2 sequencers are centralized, and L2 relies on a single sequencer to determine the sorting of all transactions on L2. Centralized sequencers face many issues, such as theoretically having the power to exclude user transactions, unrestrictedly extracting MEV from transactions, facing censorship resistance, and the risk of single point of failure.
Source:
https://l2beat.com/scaling/summary
Rollups face a delicate balance between maintaining user protection and profitability when addressing the complex challenges of MEV. This challenge involves how to prevent harmful MEV behaviors such as front-running transactions and sandwich attacks, while effectively utilizing block space to generate revenue. Although traditionally, rollups protect users from MEV impact by relying on a single operator model and adopting a first-in-first-out (FIFO) order, this approach may miss revenue opportunities from block space and overlook the crucial role of economic incentives in promoting rollup stability and growth. Ensuring compliance with the FIFO principle and maintaining block order transparency also poses additional operational challenges. Furthermore, using underlying block space as a source of income, while profitable, raises trust issues for users who must trust operators not to exploit this space to their disadvantage through sandwich attacks, which could erode transaction integrity and user trust.
Shared sequencers offer an innovative solution to address MEV issues by introducing a more secure and fair transaction sequencing mechanism in blockchain networks, particularly beneficial for Ethereum layer 2 solutions such as rollups. By dividing the block space of rollups into top block space to protect user transactions and bottom block space for builders to utilize MEV, shared sequencers effectively balance the needs and interests of network participants. Using Practical Verifiable Delayed Encryption (PVDE) technology, shared sequencers ensure that user transactions are invisible to malicious actors, preventing harmful MEV practices like front-running transactions and sandwich attacks. In addition, by allowing beneficial MEV activities in the bottom block space, shared sequencers generate income for rollups while maintaining network integrity and user trust. This mechanism not only enhances transaction security and fairness but also supports the sustainable development of blockchain networks through innovative revenue generation methods. In summary, shared sequencers bring positive changes to the blockchain ecosystem through their unique approach to MEV, achieving a balance between protecting user interests and promoting network health.
Overall, the issues of centralized sequencers stem from the excessive power and risk exposure of sequencers composed of single nodes, while decentralized sequencers composed of multiple nodes can effectively address the problems faced by centralized sequencers. Decentralized sequencers can ensure the robustness and efficiency of L2 sequencing while bringing additional benefits. For example, decentralized sequencers represented by Metis can further empower tokens while achieving profit sharing, and shared sequencers allow L2 to avoid building their own sorting networks while providing more convenient interoperability for multiple shared sequencers on L2. In the long run, the wave of modularization and L2 will drive the decentralization of sequencers, and there is still a huge market space for decentralized sequencers.
Source:
https://joncharbonneau.substack.com/p/rollups-arent-real
Decentralized Sequencer Projects
Metis
Elena Sinelnikova, co-founder and CEO of Metis, has been dedicated to blockchain education and advocacy in the industry. She is the co-founder of CryptoChicks, an educational non-profit organization, currently the largest female blockchain community in the world with members from 56 countries. Kevin Liu, co-founder and product manager of Metis, is also the co-founder and CEO of ZKM, and an active researcher in token economics, DAO, DeFi, and blockchain governance.
Metis is the first to propose and test decentralized sequencers for Ethereum L2.
Metis has changed the originally single sequencer node to a sequencer pool composed of numerous nodes, achieving decentralization of the sequencer through a mechanism of random rotation.
Firstly, Metis’s decentralized sequencer network includes an Admin role. The Admin is responsible for managing the decentralized sequencer system, including adding qualified sequencer nodes to the Sequencer List whitelist, setting individual node staking limits, block reward release rates, etc.
Subsequently, Metis introduced a node staking mechanism. Nodes staking 20,000 METIS tokens can become one of the nodes in the sequencer pool. Nodes in the sequencer pool have the right to see the contents of the transaction pool, and selected sequencer nodes have the right to package transactions.
Moreover, Metis introduced a PoS node rotation mechanism. Metis will randomly select block producers by combining the staked amount of each node with a randomly dropped hash value. The selected sequencer node can then pack block transactions.
Furthermore, the packed transactions Batch require signatures from at least 2/3 of the sequencers to be considered valid and submitted to L1. The sequencer node signature keys are managed by Metis’s PoS consensus layer, which generates and distributes multi-signature keys when sequencer nodes join or exit the network.
Finally, to prevent malicious behavior by sequencers, Metis will introduce a role of validators to randomly sample blocks, check the correctness of transaction order in blocks, etc. Nodes engaging in malicious behavior will face staking fund penalties.
Source:
https://www.metis.io/decentralized-sequencer
Based on the above process, Metis has built a decentralized sequencer architecture based on PoS network consensus. Staking 20,000 METIS tokens allows nodes to become sequencer nodes, making the selection of sequencer nodes more diverse, avoiding single point of failure, single-point control, and malicious MEV extraction by sequencer nodes. The node rotation mechanism and multi-sign confirmation make the selection of sequencer nodes fairer and can to some extent prevent malicious behavior by sequencer nodes. Validator sampling checks and penalty for malicious behavior by nodes can further reduce the risks posed by malicious behavior.
To further incentivize more nodes to participate in Metis’s decentralized sequencer network, Metis has introduced additional incentive mechanisms. After successfully producing blocks, sequencer nodes can not only receive gas income from the original sequencer but also additional METIS token emission rewards. Metis’ incentive mechanism may create a positive growth flywheel. The prosperity of Metis network transaction activities will drive an increase in sequencer node income. The increase in sequencer node income will attract more users to stake METIS, become sequencer nodes, capture sequencer income. The reduction of circulating METIS and the increase in demand for METIS generated by staking will further drive up the market price of METIS.