Hollow Victory: How Malicious Proposers Exploit Validator Incentives in Optimistic Rollup Dispute Games
Suhyeon Lee
TL;DR
The paper identifies a structural incentive vulnerability in Optimistic Rollup dispute games where validators may not reap sufficient profits after winning a fraud-proof challenge, potentially weakening deterrence against malicious proposers. It develops a formal game-theoretic model of the dispute game, analyzes scenarios including proposer-controlled validators and secondary auctions, and shows that higher validator competition can paradoxically reduce net rewards for challengers and enable the proposer to lower losses through auction dynamics, quantified by results such as $E[\Delta] = \frac{\mu}{n+1}$ and the condition $\mu > c\,(n+1)$ for participation. To counter this, the paper proposes two mechanisms: an Escrowed Reward Mechanism that delays reward distribution until dispute resolution, and a Commit-Reveal Protocol that hides validators’ challenge intentions, each with trade-offs like MEV risk and increased transaction overhead. These insights and proposed countermeasures aim to restore robust economic incentives and improve the security of layer-2 scaling solutions like Optimistic Rollups.
Abstract
Blockchain systems, such as Ethereum, are increasingly adopting layer-2 scaling solutions to improve transaction throughput and reduce fees. One popular layer-2 approach is the Optimistic Rollup, which relies on a mechanism known as a dispute game for block proposals. In these systems, validators can challenge blocks that they believe contain errors, and a successful challenge results in the transfer of a portion of the proposer's deposit as a reward. In this paper, we reveal a structural vulnerability in the mechanism: validators may not be awarded a proper profit despite winning a dispute challenge. We develop a formal game-theoretic model of the dispute game and analyze several scenarios, including cases where the proposer controls some validators and cases where a secondary auction mechanism is deployed to induce additional participation. Our analysis demonstrates that under current designs, the competitive pressure from validators may be insufficient to deter malicious behavior. We find that increased validator competition, paradoxically driven by higher rewards or participation, can allow a malicious proposer to significantly lower their net loss by capturing value through mechanisms like auctions. To address this, we propose countermeasures such as an escrowed reward mechanism and a commit-reveal protocol. Our findings provide critical insights into enhancing the economic security of layer-2 scaling solutions in blockchain networks.