Understanding Payment Structures in Taiko's Self-Sustaining Blockchain Network

In order for a network to be self-sustaining, there need to be mechanisms in place that help regulate the way things are done. This is especially important in the context of blockchains, where smart contracts enable trustless and transparent transactions, according to taiko.mirror.xyz.

Different types of network participants play varying roles to ensure these complex systems function as needed. But there’s no such thing as a free lunch. Network participants must be somehow incentivized to play their roles. This is where payment structures come into play.

Today, we’re taking a look at how different Taiko participants contribute to the network, as well as what they stand to gain in return.

The Life Cycle of a Transaction

Before delving into how Taiko participants get rewarded, it’s essential to understand the basics of how a transaction works. On layer 1 (L1), the Ethereum blockchain without any bells and whistles, a simple transaction involves sending 1 ETH from one account to another. The process involves a wallet, a transaction address, and a node that spreads the transaction to all its peers until it gets included in a block.

Things get more complicated on layer 2 (L2). For instance, a transaction sent to a node could be a centralized infrastructure node or a local one. An entity collects all transactions, and the sequencer, managed by the L2 team, orders them, potentially extracting value from ordering changes.

Mempools, or transaction pools, play a key role here. They function as a blockchain node’s waiting room for queued and pending transactions. Mempools can be public or private, with private mempools being closed-off markets where private partnerships can get extra rewards.

The Taiko Transaction Life Cycle

Taiko aims for Ethereum-equivalence, involving slower zk-proof generation. Transactions are first posted to L1, defining the order of blocks, after which the block can be proven. L2 nodes monitor the L1 state, essentially following what happens on L1.

The Taiko transaction life cycle involves a smart contract on L1. Transactions are dumped into the smart contract, and the first one to call it gets the block. The person who calls the smart contract and publishes the block must add a proof within a specified period.

Unlike the Ethereum base layer, congestion fees in Taiko are not burned but go into the Taiko treasury. The miner tip goes to the block proposer, who waits until the fees accumulated in a block are high enough to cover costs and make a profit.

Taiko Network Participants

There are four main participants in the Taiko network: users, L2 block proposers, block provers, and L1 validators. Each participant pays a fee or receives an award for their contributions.

Users

Users make a transaction, paying an L2 Taiko transaction fee fixed in gas terms. The price of gas depends on congestion on the Taiko network.

L2 Block Proposers

L2 block proposers track the Taiko network mempool for transactions, collect them into a block, and submit it to L1 through the Taiko L1 smart contract. The first proposer to bundle the transactions and submit the block to L1 receives all the transactions’ priority fees as a reward. Proposers pay the L1 transaction fee and must periodically withdraw earned fees from L2 to L1 to cover L1 costs.

Block Provers

Block provers generate validity proofs and attach them to blocks. They must pay hardware costs needed to run the infrastructure to prove the L1 proof verification cost. They receive a cut of the fee proposers get for proposing blocks. The prover fee can be zero or in any tokens, including NFTs.

L1 Validators

L1 validators collect transactions, order them, and create a block. They determine the order of Taiko blocks on L1 independently. Validators have to stake, run a node, or delegate by staking to one of the staking pools. They receive a tip from the L2 proposer.

The Taiko DAO

Instead of burning a part of the fee, a portion of each Taiko transaction fee is sent to the Taiko DAO treasury. This allows funds to be used for monetary policy, like risk management. The percentage of the L2 fee going to the DAO depends on EIP-1559 and the current congestion level on L2.