introduce
One type of company we've been watching closely are rollup-as-a-service providers ("RaaS"). Simply put, RaaS providers help application developers start Rollup as quickly as possible by selling "off-the-shelf" products (such as sorting, indexing, and analysis).
In this article, we'll take a quick overview of what RaaS providers sell, how they differentiate themselves from each other, how they make money, and share some of our inside views on the RaaS business.
RaaS service/product offering
While RaaS service/product offerings are still in their infancy, we noticed that most RaaS providers sell similar bundles of services and products. Through conversations with RaaS founders, I learned that this package of services is roughly as follows.
Serve
Similar to the playbook used by traditional B2B companies, RaaS providers typically start by selling services (side note: surprisingly, the traditional “service-to-product” strategy works very well in the cryptocurrency space).
As part of the service offering, RaaS providers often act as technical consultants to help you evaluate Rollup stacks (eg OP Stack, Arbitrum Orbit) and decide which stack is best for your application.
This service is so valuable that it deserves to be covered in detail. The main customers of RaaS providers are startups that want to launch applications on their own dedicated Rollups. For them, the most important thing is to build the application and grow the number of users, and spending months of development time getting familiar with the Rollup framework is not something they want to spend their time on, nor should they spend their time. Since RaaS providers' entire businesses are based on understanding the Rollup frameworks and building developer tools around them, they are well-positioned to help startups evaluate the available framework options.
For example, they can help startups answer questions like: What are the trade-offs between different frameworks and DA layers? Is there any customization that could improve the Rollup application? What are the trade-offs of increased customization (such as increased complexity of integration)? Save application teams months of development time by providing guidance based on experience with real customers.
infrastructure products
Sequencers: Running a sequencer is a high-risk endeavor—if something goes wrong with the sequencer, your Rollup won't work, leaving users very unhappy. RaaS providers provide highly reliable managed ordering services through redundancy measures. If there is an issue with your sequencer, they can ensure a quick failover process so that your rollups can continue running with minimal downtime. Additionally, you pay the Tier 1 DA cost, and the offsetting sequencer fees accrue on your rollup. For smart contract Rollup on Ethereum, the 7-day withdrawal period means you always need at least a week's worth of ETH to cover DA costs. RaaS providers can help you manage these complexities, and some will even provide you with the liquidity you need for DA costs on Tier 1.
RPC: Unreliable RPC endpoints can also lead to poor user experience, as we saw with Optimism and Arbitrum’s airdrops. If users make transactions, large queries, or contract calls through your RPC nodes, the RaaS provider can ensure that new nodes are automatically launched to meet demand.
Developer Tools
Internal Tools: Because RaaS customers are both Rollup and application operators, they have access to a security infrastructure that helps them protect the multi-signature keys used to implement software upgrades. Some providers also offer control panels for viewing analytics, activity monitoring, and alerts to notify you if problems arise.
Other Tools: It’s difficult to cover everything in this category, but at a minimum, Rollup operators will need data indexing tools to query on-chain information, standardized interfaces to perform operations such as token minting and burning or other transactions, and the ability to access offline oracles machine.
User Interface Tools: At a minimum, Rollup users will need a way to bridge with your Rollup, multiple wallet options (including account abstraction infrastructure), and a blockchain explorer compatible with Layer 1 applications.
RaaS GTM Strategy
There are at least six RaaS providers on the market right now, and it's fair to say that they're all vying for startups (to a large extent). We observed that RaaS providers generally adopt three GTM approaches to differentiate their products.
Vertical integration (e.g. Eclipse)
The Rollup framework and RaaS sell related and tightly coupled products, so vertical integration is a natural choice. In addition to financial incentives, there are strategic reasons between RaaS operators and frameworks to pursue vertically integrated offerings.
From a framework perspective, RaaS offerings bring it closer to customers. With this proximity, they can create a tighter feedback loop to guide product decisions. There may even be an interest in extending RaaS support to third-party frameworks and bringing in the best components to deliver the product.
Similar to any emerging and highly competitive technology category, a significant challenge for the Rollup Framework is finding a monetization strategy that does not impede adoption. RaaS products are the most direct way to achieve both of these goals. RaaS solutions can drive framework adoption by solving important pain points. At the same time, the optionality of RaaS allows you to achieve profitability in a way that doesn't place any burden on customers who choose to run Rollup themselves.
The main challenge with this approach is resource constraints. Building a RaaS business in parallel with building a Rollup framework may be beyond your capabilities.
Work with frameworks (e.g. Conduit)
RaaS providers that work with a specific framework (such as OP or Arbitrum) bind themselves to that framework. By aligning with existing frameworks, RaaS providers can gain significant distribution advantages.
For example, by partnering with Optimism, Conduit is able to leverage Optimism's brand to become the default option for startups that choose Optimism as their framework. Other providers, such as Slush, are aligning with emerging rollup frameworks, such as Starknet, to gain distribution advantages in another ecosystem.
In addition to improving distribution capabilities, this approach allows you to put all your resources into building a truly great product. Consider a recent case study where Aevo switched its RaaS solution to Conduit. They do this because Conduit is running the latest version of Optimism, which greatly improves their product. By focusing on a single framework, Conduit ensures customers are always running on the latest version of the codebase.
The disadvantage is that a single framework is unlikely to support all use cases, so you may limit the market to some extent (at least until expanded to support other frameworks).
Framework agnostic (e.g. Caldera)
Framework-agnostic RaaS providers support RaaS products and services for various Rollup frameworks (such as OP, Arbitrum).
If a framework-agnostic provider is able to be the first point of contact for a startup, you can see how the underlying framework might just be a technology choice to facilitate various use cases rather than a signal of brand alignment.
A framework-agnostic approach allows RaaS providers to offer customers more choices during the onboarding process. By running multiple frameworks in production, they can see which components are most valuable and incorporate those lessons into the guidance they provide to new customers.
Similar to the vertical integration approach, the challenges with this approach are primarily related to resource constraints. Each framework requires significant investment to support, and trying to support too many frameworks can lead to an immature product.
RaaS business model
It currently appears that RaaS providers have two revenue streams: (i) sequencing fees and (ii) infrastructure and tools. From our observation, service components are often provided free of charge.
sorting fee
The RaaS provider runs the sequencer to sequence transactions for the application. In return, they charge a fee.
We see two ways in which RaaS providers charge sequencing fees: One is to charge a revenue share, where the application shares a percentage of the revenue paid by the end-user of transaction fees; the other is to charge a simple monthly SaaS fee for Hosted sorter.
Fee dynamics are an interesting issue, so let's touch on that briefly. For RaaS providers, there are fixed costs to run the sequencer and variable costs that vary with the number of transactions. As mentioned above, some providers also bear the risk of the cost of providing DA on Ethereum on behalf of their clients. In an ideal world, as a RaaS provider, you can simultaneously charge monthly SaaS fees to cover fixed operating costs, collect revenue share to cover variable costs, and generate revenue from applications that are growing rapidly. The latter is very important - the economics of running a sequencer product aren't going to be very good if you don't get revenue from customer growth. If you have the capital, it's easier to justify this revenue sharing component in order to provide these DA costs on behalf of your customers.
However, whether the RaaS provider is able to collect revenue share in the steady state will depend on the pricing influence of the application on the RaaS provider. At this point, it's too early to determine who has pricing influence. (If anything, similar to how the payments industry works, our feeling is that large applications will have pricing influence over RaaS providers, while smaller applications will not).
Infrastructure, tools and more
RaaS providers can charge SaaS fees for a variety of critical infrastructure services. By owning the customer relationship, they are better positioned than existing providers to capture the highest value services and offer bundle discounts (for example, use our RPC service instead of Alchemy's and we'll provide you with the other services) Discount). Additionally, RaaS providers may have a cost advantage over existing providers because their architecture allows them to easily scale to support new chains.
Due to resource constraints, RaaS providers often need to partner with external companies to meet all of their customers' needs. For example, Conduit recently launched its integration program, and Caldera has announced a number of similar partnerships. As a distribution channel for these partners, RaaS is perfectly positioned to establish a marketplace or resale business model, much like AWS and its third-party "plug-ins."
other ideas
There were a few things I wanted to discuss that didn't fit into the earlier chapters, so I decided to put them all in this capture section.
RaaS and frameworks
While RaaS providers and frameworks are currently on relatively friendly terms, I think they will inevitably compete, particularly to capture the sorting market. If competition intensifies, I think RaaS providers are most likely to benefit. Here are some reasons:
As we've begun to see, most of these startups turn directly to RaaS providers to outsource the complexities of deploying Rollup. If this continues, the RaaS provider will own the top sales channel and therefore the customer relationship. If things do come to this, RaaS providers may view the underlying frameworks as nothing more than technology choices that facilitate various use cases.
However, the framework also has the potential to counter RaaS providers. In this regard, here are some of the issues we discussed:
Are frameworks able to charge applications to use their framework? (While the network effects of framework adoption are very powerful, I think it would be difficult to achieve profitability solely on the framework itself. Still, it’s an interesting question worth thinking about).
Every framework supported by a RaaS provider requires them to invest significant resources (mainly development time). At this point, it's unlikely that a single RaaS provider will be able to support every framework on the market and design custom products for it. So, can frameworks compete with RaaS providers by providing key services that solve unique pain points of their stacks? For example, the ZK Rollup framework can provide better pricing for proofs by aggregating demand from rollups and routing it to a set of proof systems and operators.
MEV across Rollup
The current consensus is that Rollup will have a considerable MEV, and the MEV across Rollup will become a honeypot. Based on this assumption, most people believe that a shared sorter is most likely to capture this value. I think this hypothesis is still a very open question, and I would even question the results of this hypothesis.
If cross-chain MEV does become a significant part of the market, RaaS providers will have to decide whether to integrate with shared sequencer partners or launch their own shared sequencer products. Let's assume that in the future RaaS providers will run sequencers for most new Rollups, and this service will account for the majority of their revenue (and also provide a view into the memory pool of every Rollup using their service) . In that case, I think it's more likely that the RaaS provider will launch its own shared sequencer product rather than partner with an external vendor.
Additionally, RaaS providers can leverage their observation of all these mempools to offer order flow auctions, and leverage their control over the sequencers to offer block top auctions for settlement. This will enable searchers to view valuable transactions, populate them, and simultaneously settle on supported chains.
in conclusion
There are many other interesting questions about RaaS providers, but for the sake of brevity, we'll stop here. One thing that is clear to us is that RaaS providers are a very exciting class of business in the cryptocurrency space. This is an area we are paying close attention to.
