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Crypto Terms:  Letter F
Jun 19, 2023 |
updated Apr 03, 2024

What is Fraud Proof?

Fraud Proof Meaning:
Fraud Proof - is a technique that operates as a bond in a decentralized environment where Optimistic Rollups (ORs) are used.
3 minutes

Let's find out Fraud Proof meaning, definition in crypto, what is Fraud Proof, and all other detailed facts.

Fraud can be explained as unlawful actions where the perpetrator benefits themselves by stripping the victim’s rights. It includes tax fraud, credit card fraud, wire fraud, and many more different types of fraud. 

Anyone can commit fraud. Whether it’s one person, a group, or an entire company.

When it comes to fraud in blockchain, there is a specific term called fraud proof. It stands for a technical method of enabling on-chain scalability of blockchains, whether it’s through sharding or larger blocks. At the same time, this technical method confirms that all available on-chain data is correct.

A key fragment of any fraud proof is Optimistic Rollups (ORs). They minimize costs and maintain low latency levels for decentralized applications on a blockchain network.

ORs are processed by sequencers. These employees receive a monetary penalty if they break the consensus rules by forfeiting their fraud proof. On the flip side, they receive monetary compensation for executing rollups without breaking the said rules.

Often, not all of the block data is available, therefore state transition fraud proofs are rendered useless. That’s because they depend on the assumption that all information is accessible.

It’s crucial to know that it’s not possible to confirm whether a block miner is incorrect just by publishing the block header without the correct contents.

Block validation is extremely thorough since 100% of the data must be available to establish the validity of a block. 

Data can be made unavailable not just due to malicious nodes, but because of a lot of different reasons. So the most appropriate solution is to make the data unavailability difficult for a rogue node. 

In order to scale public blockchains, fraud proofs and erasure codes are required. With these elements in place, light nodes will be able to choose which blocks to reject on their own (without trustworthy full nodes).

Zero-knowledge proofs can’t be used to confirm the correctness. Yet even if they could be, a huge issue remains - the scammers are still able to make inaccessible blocks public and include them in the chain. Therefore, legitimate validators are not able to fully compute the state. They are also prevented from making blocks that communicate with the part of the state that is not accessible anymore. 

Essentially, fraud proofs confirm that an error was made during a state transition. 

Fraud Proof Pros and Cons:

  • The main advantage of fraud proofs is that they’re not necessary for each state transition which means fewer computing resources. Additionally, they’re great for scalability-constrained settings.
  • The main disadvantage is that fraud proofs cause interactions between different parties. Thus creating a space for these parties to commit fraud or other illegal activities.