Layer 2: Scaling Solutions Pt.2

March 17, 2022

Zk Roll-Ups

The next big trend in crypto? 

ZK-Rollups seem like the most technologically promising scaling solution on Ethereum. We found researching the topic as being deeply informative and somewhat enlightening to what may be a key development within blockchain ecosystems in the coming years

In the PDF attached, we've highlighted some research, opinions and overall perspective on what we consider to be a very significant development in the blockchain space and potentially a high alpha trend over the next couple of years—something which we are actively researching, following and seeking to invest into further. Scaling solutions for Ethereum and in particular zk-rollups are highly innovative and I can see them becoming invaluable in the future.

Contents:

🔹Overview

🔹What are rollups

🔹 What are zk-rollups & benefits

🔹 Why are they important

🔹 Other options/competitors

🔹What this means for other Layer 1 protocols

🔹 What projects am I interested in

🔹 Potential Airdrop opportunities

🔹 Conclusion

🔹 Research Sources & Further Reading

ZK Rollups - Betting on Ethereum Scaling

Zk Roll Ups - The next big trend in crypto?

Ok so this is more of a longer research post, so if you've not had a morning coffee or aren't interested in fundamental analysis feel free to skip for now. However, I found researching the topic as being deeply informative and somewhat enlightening to what may be a key development within blockchain ecosystems in the coming years - hopefully, a trend which may make us all a lot of money if it plays out!

Overview of why I’m interested and what is the need?

Scalability issues surrounding Ethereum have been a topic for discussion more or less since the network's inception - with greater usage and more network congestion, fees have sky-rocketed to unusable levels for many network participants. Transaction speeds are not as fast as would be desired, all derived from the inability to scale further or fast enough. We have seen the rise of competing Layer 1 protocols such as: Solana, BSC, Avalanche, Polkadot, Fantom etc off the back of these exact issues. All better positioned to deal with scalability leading to cheaper transactions, faster processing times but without coming close to the decentralization and network security of Ethereum. A trade-off that ETH has not been willing to make.

ZK-Rollups look like they could be the next big narrative within Crypto. Note this is a highly complex topic and not something I claim to understand entirely on a technological level, but understanding the needs and solutions is something we can all interpret.

What are rollups?

Rollups are solutions that perform transaction execution outside of the mainnet Ethereum chain, batch transactions together and then post the data back to Layer 1. Therefore inheriting the security and decentralisation properties of Ethereum but outsourcing the transaction executions to process them much faster and cheaper than is possible on the main chain. There are two types of rollups with different security models: Optimistic rollups - Assumes transactions are valid & runs computation ‘fraud proof’ in the event of a challengeZero-knowledge rollups (zk) - runs computation and execution off chain and then submits validity proof to the chain I’m not an expert, and there are of course pros & cons to both rollup types - but from my research I see Zk-rollups as the more proficient of the two and is where my focus will be in this write up and going forward.

What are ZK-Rollups?

ZK-Rollups are smart contracts that scale the ETH network by processing multiple transfers off the main blockchain. Hundreds of transactions are ‘rolled up’ into a single transaction. Then submitting a SNARK (succinct non-interactive argument of knowledge) back to the blockchain as proof of validity. This removes a vast amount of data required for the main blockchain to process making transactions faster and cheaper with the same security.

It is well known that Ethereum has prioritised decentralisation and security over speed and transaction fees, with this being at the core of cryptos ethos. ZK-Rollups are able to leverage Ethereum's Mainet security and simply focus on the execution layer of transactions. This is the intention and hence why they are Layer 2’s - they complement Ethereum as the Layer 1.

Benefits of ZK rollups - Reduce transaction fees by 10-100x - Many more transactions per second (from 15 Tx/s to 1000s Tx/s)- Maintains the integrity, security and decentralisation of Ethereum blockchain

Other interesting features/benefits: - The more users transacting makes the gas cheaper- Escape Hatches - can withdraw funds from rollups back to mainent even if the network is offline- ZK rollups will be able to innovate without the inherent risks posed to L1s (look at bitcoin, no one dares touch it through risk of spoiling what it is) - as risk many competing Layer 1s face is they cannot iterate too quickly without becoming high risk for users if mistakes made

Why are they important?

Ethereum moving towards solving scaling is huge as we have already mentioned. The role they will play will be integral to this in the short term, and is even discussed and legitimised by Ethereum themselves as an integral part of infrastructure. If Ethereum can become significantly more competitive than it already is, with significant and lasting improvements then I want to know - and I also want to be at the forefront of it.Even with Ethereum 2.0 which will have ‘sharding’ to help mitigate the scaling issues discussed - for Ethereum to be able to process hundreds of thousands or even millions of transactions per second one day, rollups and scaling solutions will still be needed even then.

Other Options / Competitors to rollups

Side Chains - These are separate blockchains which run parallel to Ethereum Mainnet and operates independently with its own consensus algorithm (MATIC)Optimistic Roll Ups (Optimistic & Arbitrum) - see youtube video at the bottom for differences Other Layer 1s - Current direct Ethereum competitors which have been developed and are currently better equipped for scaling etc (Solana, BSc, Polkadot, Fantom etc)

What does this mean for current Layer 1 Protocols?

Now I am not saying that every other Layer 1 protocol is or will become redundant and useless. That would be stupid, and contradictory to my own beliefs. I own multiple other Layer 1 assets and their value and ecosystems are undeniable - especially in the short-medium term and more or less all have outperformed Ethereum for a prolonged period of time, and most likely will continue to for some time to come. But the question of ‘where would we be if Ethereum didn’t have the scalability issues, and did have faster transactions and cheap usable gas fees?’ will forever be the million, if not billion or trillion-dollar question. Ethereum still accounts for over 62% of all TVL locked in chains, is still over 5x the market cap of the closest Layer 1 protocol in terms of market cap (BNB currently), still dominates NFTs and by far has the largest ecosystem. Even with the frankly ridiculous transaction fees and slower throughput, it maintains this value - it seems short-sighted to not consider the possibilities of what the market could look like with an optimal Ethereum. I would like bets on something that may bring us closer to this, hence the reason for this write-up - in the same way that betting on competing Layer 1s was the play to make in the last few years.

No, I’m not dumping my other assets and turning full ETH Maxi. These are just observations which could potentially reap dividends if such a scenario begins to play out.

What Projects are ZK Rollups / What am I interested in?

🔹No token launched yet (wen moon opportunities?)StarkWare zkSync

🔹Launched Loopring ($2.3b MC)

🔹Smaller Interesting Plays (need more research):MUTE (on radar)

There will be many others which I will be researching further to see what has the best value propositions in the future. If anyone knows of others which they like then please share!

🔹Examples of applications applying ZK-Rollups already:Immutable X (IMX) - Gas free NFT transactions made possible by zk-rollupsDYDX - Decentralised exchange on Layer 2 (spot, margin and perp)Both are IMX and DYDX are powered by StarkWare - so yes, if we ever see a StarkWare token [moon]

🔹Potential Airdrop Opportunities

zkSyncOptimism

Arbitrum

I have been infrequently using zkSync for the past few months (as well as Optimism and Arbitrum) in the blind hope that I get some tokens airdropped for my effort. If you’re interested in some resources to help you do so as well then let me know - or I can make some tutorial videos to the same effect to help you also. Could be a waste of time, gas & money but I’ll take the chances.

Conclusion

I have high conviction that ZK-Rollups will have a big part to play in the future for Ethereum and in the future of crypto ecosystems over the next few years. If we zoom out and see what has already been achieved without true scaling, the perception of how early we are seems to become more apparent in the blockchains of the internet. It is not short term - it is medium to long and there is still much to be figured out. The future is bright and exciting, and I’d implore you to look deeper and develop as much understanding as possible. I certainly will be. Disclaimer: This is a highly complex subject matter, with a lot of technological components that I am not claiming to understand. This write up should serve as an overview discussing: the needs, the benefits and the opportunities I believe ZK-Rollups could bring to the ecosystem & potential areas where we as investors/traders/interested parties may be able to benefit. I am not an ETH Solidity Dev so I haven’t written as if I am one. We just have to connect the dots which we can understand. DYOR but I find it exciting.

Research Sources (definitely read if interested):

https://hackmd.io/@canti/rkUT0BD8K - Incredible Article imo - ETH maxi perspective to a degree but if correct the impressively important to understand