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.

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.

Before we get into how Taiko participants get rewarded, let’s first get back to the basics of how a transaction works. The simplest way to understand the life cycle of a transaction is on layer 1 (L1), just the Ethereum blockchain without any bells and whistles. Let’s say you want to send 1 ETH from one account to another.

You open your wallet, put the transaction address in, sign it, and et voilá! The magic happens. Your transaction is sent to a node that is either infrastructural or local. The node will spread your transaction to all its peers. At one point, if the reward is high enough, one of the peers that is building a block will pick up the transaction and include it in the block. Your money is then sent.

Things get a little more complicated when it comes to transactions on layer 2 (L2). For instance, you could send your transaction to a node that is either a centralized infrastructure node or a local one, which would then send the transaction to all the other L2 nodes. An entity will collect all the transactions. In most L2s, the sequencer, which orders the transactions, is managed by the team that runs the L2. This means they can reorder transactions and extract value from ordering changes.

Mempools, or transaction pools, play a key role here. They’re essentially like a blockchain node’s waiting room for queued and pending transactions. Every node may have a different view of the mempool, for instance, they can be geographically influenced (a transaction in Canada may get approved faster than one in Brazil).

There are two types of mempools: public mempools and private mempools. Public mempools are open to everyone, while private mempools are closed-off markets that private partnerships have created to get extra rewards from, including each other’s transactions.

So what’s Taiko’s approach?

Taiko is achieving Ethereum-equivalence, although this involves slower zk-proof generation. Transactions are posted to L1 first, which defines the order of blocks, after which (or even at the same time), the block can be proven.

L2 nodes actively monitor the L1 state i.e. Ethereum, and essentially follow what happened on L1.

The Taiko transaction life cycle consists of a smart contract on L1. People can just dump transactions into the smart contract, and the first one to call the smart contract will get the block. Once this happens, the person who calls the smart contract and publishes the block will have a certain period of time to add a proof to the block they just committed to producing.

It is worth noting here that everybody calling the function successfully will append their block to the L2 chain, not just the first person. But in practice, being first is key to building a new L2 block against the latest known state.

However, unlike on the Ethereum base layer, congestion fees are not burned. Instead, they go into the Taiko treasury, and the miner tip goes to the block proposer. Block proposers won’t propose a block until the fees accumulated in that block are high enough to pay all the costs related to proposing a block and also make a profit.

Confused or have questions? Keep reading, we’ll get into this a little later. Let’s talk about the different participants in the Taiko network.

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 a desired outcome.

Figure 2: Block proposing in the Taiko network

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

L2 block proposers, or block builders, track the Taiko network mempool for transactions, collect them into a block, and submit to L1 i.e. Ethereum, through the Taiko L1 smart contract. The first Proposer to bundle the transactions and submit the block to L1 gets all the transactions’ priority fees as a reward. Proposers pay the L1 transaction fee. For aggregating and transmitting a block of transactions, Proposers receive a transaction fee immediately on L2. Proposers must periodically withdraw earned fees from L2 to L1 to cover L1 costs.

Block provers generate validity proofs and attach them to blocks. Transactions are submitted to the L2 mempool (similar to an L1 mempool). From there, the L2 block Proposers pick and bundle the transactions into an L2 block. The L2 block is sent to L1, after which the prover will submit the validity proof for that respective block inside the L1 smart contract.

When an L2 block is added to an L1 block, the L2 block is queued on the Taiko L1 smart contract, allowing nodes to detect it and track its onchain finalization status. The validity of the block is immediately known after the block is proposed.

Provers must pay the hardware costs needed to run the infrastructure to prove i.e. the L1 proof verification cost. They receive a cut of the fee Proposers receive for proposing blocks. The Prover fee is an off-chain or on-chain agreement that is more commercial in nature, and can be zero, or in any tokens including NFTs. The money Provers stand to make depends on how much they choose to charge.

L1 Validators collect transactions, order them and create a block from them. L2 block Proposers will propose the block as an L1 smart contract transaction. The L2 block Proposers will pay the fee on L1 that will be burned plus a tip, which goes to the L1 Validators that added the block to Ethereum.

L1 Validators determine the order of Taiko blocks on L1 independently, while Taiko L2 nodes monitor their state to understand which transactions have been added. There is no separate consensus on L2, but nodes synchronize and maintain a structured order of L2 transactions based on the block and transaction ordering on L1.

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, which depends on how much the Proposer values the block, almost like a bribe.

It is worth noting that instead of burning a part of the fee, as is done with Ethereum transactions, a portion of each Taiko transaction fee is sent to the Taiko DAO treasury. This allows the funds to be used for monetary policy, like risk management. It is also a way for us to control the price and market demand of the Taiko token.

How much percentage of the L2 fee goes to the DAO? It depends. People can choose to pay 0% in tip and the DAO gets 100%. Some people may have high-value transactions for which they’d pay a higher tip to make sure the transaction is included, incurring a higher portion for the DAO. The formula for deciding what percentage of fees we get is determined by EIP-1559, which is dependent on the current level of congestion on L2.

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