Crypto Glossary

Fraud Proof

A fraud proof is a technological method that functions as a bond in a decentralized environment that uses Optimistic Rollups (ORs), which are sidechains that aim to reduce the costs and latency that dApps might encounter on a blockchain platform.

What Is a Fraud Proof?

The term 'fraud' is defined as wrong conduct committed with the goal of gaining an illegal advantage by depriving the victim of a right. Tax fraud, credit card fraud, wire fraud, and many others are all examples. Fraudulent conduct can be perpetrated by a single person, a group of people, or a company as a whole.

In the world of blockchain, the term fraud proofs represent a technical method that is critical to enabling on-chain scalability of blockchains (for example, through sharding or larger blocks) while ensuring that on-chain data is available and correct. Fraud proofs use Optimistic Rollups (ORs) that serve two functions: reduce costs and lower latency levels for decentralized applications on a blockchain network.

To reward good performance, a sequencer required to process ORs must provide a fraud-proof with their work. Sequencers are compensated financially for executing rollups per the consensus rules, and they are penalized monetarily for breaking them by forfeiting their fraud proof.

State transition fraud proofs work well, but they rely on a crucial assumption that all of the block data is available. It is impossible to establish that a block miner is incorrect if it merely publishes the block header without the correct contents.

Furthermore, even if 99% of the data is accessible, the remaining 1% may be required to establish the validity of a block as we require complete data availability. This is a rigorous need for block validation because data might be inaccessible for a variety of reasons, not only malevolent nodes. Making data unavailability difficult for a rogue node is the proper solution.

Scaling public blockchains requires the use of fraud proofs and erasure codes. They allow light nodes to make their own decisions about which blocks to reject without having to rely on a plurality of trustworthy full-nodes.

Even if brief zero-knowledge proofs could be used to confirm the correctness, an intruder/scammer getting away with publicizing inaccessible blocks and having them included in the chain is still a big problem, because it prevents all other validators from fully computing the state or making blocks that communicate with the part of the state that is no longer available.

Fraud proofs show that a state transition was made incorrectly. The fundamental benefit of fraud proofs is that they aren't required for every state transition, but only when things go wrong. As a result, they use less computing resources and are more suited to a scalability-constrained setting. The interaction of these protocols is their biggest disadvantage: they establish a 'dialogue' between numerous participants. A dialogue/interaction/communication necessitates the presence of the parties, particularly the party alleging fraud and permits other parties to disrupt the conversation in various ways.

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