How Is the ‘Staked Collateral’ in an Optimistic Rollup Used?

Staked collateral is deposited by the sequencer or other parties responsible for submitting transaction batches to the Layer 1 chain. This collateral serves as a financial guarantee of their honest behavior.

If a party is proven to have submitted a fraudulent state transition via a successful fraud proof, their staked collateral is 'slashed' or taken away as a penalty. A portion of the slashed funds may be awarded to the party who successfully submitted the fraud proof.