Author: CloudY
Editor: Vincero, YL
Review: Crystal
As an optimization solution for the Ethereum public chain, Layer2 has always been a hot topic of attention, discussion, and research and development. For example, Ronin, where Axie is located, Starknet, Arbitrum, Optimism, and ZKSync, used by DYDX, have been actively tried by many research and development teams on Layer2 technical solutions. So what is Layer2? The Ethereum public chain itself is called Layer1, the main network, or the main blockchain layer. Layer2 refers to moving transactions from the main blockchain layer to a separate layer that can communicate with the main chain to achieve faster transactions and lower Gas Fees. As shown in the figure below, Layer2 is similar to grafting a "highway" on the Ethereum main network, diverting the Ethereum main network transaction volume and alleviating the congestion of transactions on the Ethereum main blockchain layer. At present, there are multiple technical solutions for Layer2, including state channels, side chains, Plasma, Rollup, etc. Sidechain and Rollup are solutions that we often hear about nowadays, but the difference between sidechain and Rollup is that the sidechain needs its own independent node for verification, and its security mainly depends on the sidechain itself (Polygen is one of the sidechain examples); while Rollup is directly based on Layer1 to batch and centrally process transactions off-chain and publish updates to the main blockchain, while publishing transaction data on the chain, and its security still relies on Layer1.
Figure 1: Schematic diagram of Layer0, Layer1 and Layer2
Although Rollup is more secure and reliable than sidechains, its optimization effect on the Ethereum mainnet is still limited. However, it is undeniable that Rollup is a real optimization based on the Ethereum mainnet. Ethereum mainnet projects do not need to make any changes to enter the chain using the Rollup solution, and users do not need to take risks to use cross-chain bridges to transfer assets, that is, any possible transaction on Ethereum can be executed in Rollup. The principle is shown in the figure below. The chain based on the Rollup technology solution will establish a Rollup contract on the Ethereum mainnet to monitor the status of the Rollup chain, including the account balances of users trading on the chain and the smart contract code of the contracts therein. This information is recorded in a "state root" consisting of a key-value mapping, where the key is the address and the value is the account. Each account has up to 4 attributes: balance, random number, code (only for smart contracts) and storage (only for smart contracts). Since Rollup only publishes transaction data to the main chain instead of executing transactions on the chain, the transaction data and state roots published on the main chain are likely to be fraudulent. Therefore, in order to solve this key problem, Optimistic Rollup and Zero-Knowledge Rollup (ZK Rollup) solutions were proposed.
Figure 2: Schematic diagram of Rollup technology principle
Unlike Optimistic Rollup, which optimistically believes that all submitted state roots are credible and ensures security by submitting fraud proofs, ZK-Sync in ZK Rollup uses ZK-SNARK's cryptographic proof to publish state roots, and uses zero-knowledge proof technology (which allows one party to prove something to another party without revealing the information necessary to prove it) to verify the authenticity of the state root, thereby avoiding access to the data itself to ensure privacy. Compared to Optimistic Rollup, which takes a week to withdraw funds, ZK Rollup can withdraw assets in just 10 minutes. However, as a new technology, ZK-SNARK's mathematical principles are extremely complex, which means that ZK Rollup is still in the development stage, and therefore its adaptability is weaker than Optimistic Rollup. However, the advantages of ZK Rollup are also obvious. ZK-SNARK eliminates the need for witnesses for transactions, which greatly reduces the data stored on the chain and increases scalability. ZK-SNARK's ability to verify each transaction also makes it more secure.
Similarly, StarkWare also uses ZK Rollup, but it is based on ZK-STARK. Compared with ZK-SNARK, ZK-STARK technology has made scalability and skipped the initialization of trusted settings and improvements in anti-quantum computing, which makes it less mature at this stage, and the gas fee consumption is also higher. In addition, StarkWare uses the Cairo language, which is difficult to be compatible with EVM once Turing completeness is achieved. To solve this problem, the StarkWare team developed the code translator Warp to seamlessly convert Solidity smart contracts to Cairo. In addition, StarkWare has currently implemented dydx, Immutable, and Deversifi-specific ZK Rollup through StarEx.
The above article briefly introduces Layer2 and Rollup as one of the technical solutions. We believe that ZK Rollup, as one of the directions of Rollup, has more obvious advantages and better scalability. Chains based on ZK Rollup may be more widely used in the future. But can the ZK Rollup chain really break through the numerous side chains and the siege of Arbitrum and Optimism after the mainnet is launched, and occupy a position as high as its technical level? This article attempts to select and analyze the public chains with better performance in each dimension through four dimensions, and use this as a basis to speculate on the development potential of the ZK Rollup chain and give corresponding suggestions.
Four dimensions:
1. Crypto Native
2. On-Chain Asset
3. Ecosystem
4. Community
1. Crypto Native
Crypto-native refers to the core degree of blockchain technology, such as groundbreaking progress in concepts and technological innovations. For example, Ethereum pioneered a Turing-complete virtual machine, which expanded blockchain from Bitcoin's payment network to various complex interactions, making concepts such as DeFi possible. There are many other public chains that have unique technologies, put forward novel concepts, and make different attempts. We have selected Cosmos, Polkdaot, and Solana as representatives of the crypto-native dimension to illustrate how public chains can gain a place in the crypto-native field through their own innovation or performance improvement.
（1）Cosmos
Cosmos believes that the future is a multi-chain universe consisting of blockchains focusing on different functional applications. Based on this concept, Cosmos has developed three basic components: 1) Tendermint consensus protocol, 2) Cosmos SDK, and 3) IBC (Inter Blockchain Communication) cross-chain communication protocol, which solves the cross-chain problem and makes the multi-chain universe possible. Cosmos streamlines the development process of blockchain applications, allowing developers to focus on the application itself through rich SDKs and Tendermint engines without paying too much attention to the underlying protocols. More importantly, Cosmos has achieved native cross-chain. Each chain can conduct atomic transactions through Cosmos's hub "Hub", realizing true cross-chain, rather than achieving the so-called "cross-chain" by establishing a capital pool on different chains like other mainstream cross-chain bridges.
（2）Polkdot
Polkadot uses the main chain "relay chain" and shard "parallel chain" to achieve cross-chain. Each parachain communicates with other parachains by connecting to the relay chain, and each relay chain can support about 100 parachains. Polkadot uses Wasm as a meta-protocol, which allows parachains to define the logic and language of their own chains. They only need to provide their own state transition functions to the relay chain validators for execution to connect to the relay chain. Polkdot applications can exist in a parachain or be deployed across parachains. Although the relay chain can connect to each parachain, the interface of the relay chain is limited, so parachains need to bid for slots through auctions, which is what everyone often refers to as "slot auctions."
（3）Solana
Solana aims to keep costs low while expanding throughput. To achieve this, Solana uses an innovative hybrid consensus model that combines a unique Proof-of-History (PoH) algorithm with a lightning-fast synchronization engine (which is another version of Proof-of-Stake, PoS). Proof-of-history is a core component of the Solana protocol, which provides a timestamp for each transaction on the network to confirm transactions that occurred at any point in time on the network. PoH relies on PoS using the Base Byzantine Fault Tolerance (BFT) algorithm, which is an optimized version of the Practical Byzantine Fault Tolerance (pBFT) protocol. In addition, Solana uses the unique Rust language to write smart contracts, using BPF bytecode to achieve higher execution efficiency, i.e. TPS.
2. On-Chain Asset
On-chain funds refer to the collection of mainstream tokens with relatively stable purchasing power issued on the blockchain, such as BTC, ETH, BNB, USDT, USDC, DAI, etc. The number of high-quality assets on a public chain determines the space for the expansion of its on-chain funds. Because there is no universal credit mortgage method in the blockchain at present, only asset mortgage can be used to increase leverage, and the mortgaged assets usually need to be high-quality assets to ensure security, so we have selected three public chains with more high-quality assets on the chain as representatives: BSC, Solana and Terra. As shown in the table below, the mainstream assets on the chains of these three public chains are all at the level of tens of billions of US dollars, and are mainly the public chain tokens, BTC, ETH and stablecoins such as USDT, USDC, UST, etc. of the public chain. The strong on-chain funds have made the development of the on-chain ecology even more powerful.
Figure 3: Funding on BSC, Solana, and Terra chains
As of 2022.04.17
Data sources: BSCScan, SolanaExplorer, Terrascop
3. Ecosystem
The number and quality of ecological projects on the public chain are another important factor in determining the development of the public chain in addition to funds. High-quality projects can attract a large number of active users, derive considerable assets, and bring in a large amount of external funds. At the same time, the establishment of a complete ecology requires a certain number of high-quality projects as support, so as to bring users and developers a good interactive experience, and be able to resist external risks to a greater extent and expand the utilization rate of funds. Based on this, we selected BSC, Solana and Cosmos as representatives, and judged their ecological development status by on-chain TVL, number of projects and number of transfers. As can be seen from the table below, BSC has the largest number of projects, Solana has the largest number of transfers, and Cosmos has the highest TVL. This phenomenon reflects the advantages of the ecology of these three public chains: (1) BSC, as an Ethereum side chain, is compatible with all projects running on EVM; (2) Solana can maximize transfer efficiency and optimize project interaction experience through high TPS; (3) Cosmos connects all IBC chains through the IBC protocol and includes the TVL of all IBC chains.
Figure 4: BSC, Solana, and Cosmos ecosystem data
As of 2022.04.17
Data sources: DeFiLama, Nansen, DappRadar, BSCScan, SolanaExplorer, Atomscan, Terrascop
These three public chains also have developer incentive plans or receive support from the exchange's tokens to encourage developers to develop projects on their own public chains and give early-stage high-quality projects resources. For example, BSC has the Most Valuable Developer (MVB) acceleration plan to help high-quality entrepreneurial projects make more innovative changes, gain mature industry experience and financial support, and accelerate the coordinated development of the community and projects. In addition, high-quality projects on BSC will naturally be given priority by users to be listed on the Binance exchange. Similarly, Solana has a Hackathon and the support of FTX. Therefore, high-quality projects on Solana will also receive funding and development support from the Solana Ecosystem Fund and the expectation of listing on the FTX exchange. Cosmos uses SDK to reduce the difficulty of development, and relies on the resource exchange between chains and the pledge airdrops in the ecosystem to stimulate project development. For example, new chains can obtain capital from the Terra chain by introducing LUNA and UST, and projects on the Terra chain, such as Anchor, can also cooperate with other chains to include the chain's tokens as pledgeable assets to increase the use scenarios of the tokens.
4. Community
The community dimension refers to the activity of the public chain community and the support of investment institutions. A public chain needs to receive enough attention and funds to develop sustainably in the long term. For community activity, we mainly observe the total number of people on each social media, the number of speeches, and the content of messages. Investment institutions mainly observe the early investors of the public chain and the resources they invest in the public chain, such as funds, publicity and cooperation. After comprehensive investigation, we selected three public chains: BSC, Solana and Avalanche. As shown in the figure below, the three public chain communities are large and active, and the content of attention is also focused on the interaction and ecology of the public chain, not just the increase in token prices. Specifically, BSC has a rich ecology due to its early advantages and has accumulated a large number of high-quality active users, which is also reflected in its far-leading Twitter followers and Discord weekly speeches. Solana and Avalanche have won many telegram and Discord users based on emerging markets. The message content is mainly about popular science on-chain information, questions about on-chain operations, fraud prevention, ecological project consultation, etc.
Unlike Binance, which is driven by pure capital and resources, the prosperity of the Solana and Avalanche communities also benefits from the strong publicity of well-known institutional investors, especially SBF for Solana and Suzhu for Avalanche. They frequently introduce and recommend related public chain ecological projects on their social media. At the same time, because they have certain decision-making power, they often promise some incentive activities, thus attracting a large number of new users and increasing user participation. Therefore, in addition to financial support, celebrity effects and well-known investment institutions also help the popularity of public chains.
The main investment institutions of the above three public chains are shown in the following table:
The Future of ZK Rollup
OP Research measures the future of ZK Rollup based on our four major criteria for judging the sustainable development of public chains:
1. Crypto Native
From the perspective of crypto-native, the importance of ZK Rollup is self-evident. Rollup plays an important role in Ethereum's move towards modular blockchain and thus achieves expansion, that is, it transfers consensus to the Ethereum layer and transfers execution and data availability to Rollup. Among them, zero-knowledge proof, as a highly recognized crypto-native solution, essentially compresses the amount of calculation while ensuring the correctness of the data. We have described the principles of the technical solution in detail above, and the highly recognized results can be seen from the fundraising situation of the current two major ZK Rollups (StarkWare/zkSync) (see below for details).
What’s more, even Ethereum’s founder Vitalik mentioned in his article that in the medium and long term, as ZK-SNARK technology matures, ZK Rollup will play an advantage in all use cases. From this perspective, the crypto-native properties of ZK Rollup are self-evident.
2. On-Chain Asset
The second part about ZK Rollup's on-chain funds can be judged from the stock of funds on Ethereum. There is no doubt that the mainstream coins with relatively stable purchasing power on Ethereum are the most among all public chains with smart contracts. Not only is ETH's market value always stable, it ranks second among all cryptocurrencies. Secondly, mainstream US dollar stablecoins such as USDT issued by Tether, USDC issued by Circle, US dollar stablecoins Dai and MIM based on digital currency collateral, and various algorithmic stablecoins such as Frax and Fei, and BTC anchor coins such as WBTC, HBTC, and renBTC. The above mainstream coins with absolute purchasing power on the chain are currently mainly circulated in Ethereum. Based on this, ZK Rollup is a highly anticipated Ethereum expansion solution, and the natural advantages of Rollup allow the above-mentioned on-chain funds that stay in the first layer of Ethereum to come to the second layer without bearing the risks of the current mainstream cross-chain bridge, and naturally can undertake a lot of spillover funds from the first layer of Ethereum.
Figure 6: ZK Rollup potential on-chain funds (USD)
3. Ecosystem
The birth of Ethereum, due to its first-mover advantage in web3.0, has already produced the most mature blockchain ecosystem in the world. Whether it is from the developer ecosystem, infrastructure and project ecosystem, or even the user ecosystem in Ethereum, it is far ahead of the public blockchain. For ZK Rollup, in addition to on-chain funds, whether it can attract high-quality web3.0 projects currently on the first layer of Ethereum to migrate their main activities, locked funds, and users to its second-layer network will become the top priority. Secondly, whether the user's usage fee Gas Fee can be reduced to the level of BSC/Avalanche or even Solana will determine whether ZK Rollup can attract back the funds and traffic that overflowed from Ethereum in mid-2021. Finally, from the history of public chain development, whether the public chain can have exponential on-chain transaction growth depends largely on new forms of narrative stories, such as DeFi in 2020, NFT and GameFi in 2021. Therefore, as ZK Rollup will bring exponential growth to Ethereum, whether new forms of web3.0 products can be implemented will also be a key factor in whether ZK Rollup can lead Ethereum to new highs. Below we describe the current ecology of zkSnyc/Starkware separately.
As for zkSync, judging from the fundraising information disclosed so far, there are a large number of excellent web3.0 projects investing in it, and multiple CEXs have also announced the opening of withdrawal channels based on zkSync; more importantly, any token can be used to pay for its fees in zkSync, without the need to purchase ETH or custom tokens like MATIC. This feature will make the use threshold of zkSync much lower than other Layer2s and even other public chains. In addition, in order to reduce the development difficulty for developers, zkSync2.0 has emphasized since its inception that developers can use Solidity to combine its zkEVM and compiler to achieve 99% EVM compatibility, which makes the prospect of DeFi being able to be widely used in zkSync2.0 seem more likely.
As for Starkware, StarkEx was launched in June 2020 as its Layer2 scalability engine, allowing the creation of application-specific ZK Rollups powered by Cairo and STARKs. Currently, projects running on StarkEx include dydx, Immutable, Deversifi, and Sorare. The current amount locked on the chain has reached $1.16B, and more than 140 million transactions have been processed, with a cumulative transaction amount of more than $518 billion. According to its official development path, their next step will be to run multiple applications on the same global Layer2 on the same StarkNet, so as to achieve interoperability between different applications, and reduce their Gas Fee costs due to increased economies of scale, and finally achieve the third phase of decentralized operations.
Figure 7: StarkNet development path
Image source: https://medium.com/starkware/on-the-road-to-starknet-a-permissionless-stark-powered-l2-zk-rollup-83be53640880
ZK Sync: TVL $122 M; total transactions 7,264,107; ecosystem projects 85
Starkware：TVL$1.16B； 145M Tx
Data sources: https://ecosystem.zkSync.io/, https://l2beat.com/, https://zkScan.io/, https://starkware.co/starkex/
4. Community
In terms of community, the two major ZK Rollup projects are close to BSC, Solana, and Avalanche in terms of community activity indicators such as the total number of people on social media, the number of speeches, and the content of messages. Even in terms of the number of speeches on Discord, zkSnyc is ahead of other public chains, and all this is based on the fact that the mainnet has not yet been launched. From the perspective of investment institutions, in March 2022, StarkWare is conducting the latest round of fundraising with a scale of US$6 billion. Looking back at its past investors, this is definitely a super-high-level financing level. In addition to Ethereum founder Vitalik, there are also well-known top investment institutions in the currency circle such as Paradigm, and Sequoia Capital, which has been famous in the web2.0 era. On the other hand, zkSnyc's fundraising process seems to be closer to developers and users. In addition to VCs such as Union Square Ventures and A16Z, there are also a series of DeFi projects and exchanges invested, and these projects are expected to bring corresponding rapid integration after the launch of the zkSync2.0 mainnet.
ZK Rollup investment institutions and fundraising status are shown in the following table:
Because ZK Rollup's technical advantages have attracted much attention, it can be seen from the above chart that ZK Rollup's two major projects are also sought after by a large number of investment institutions. The special thing is that zkSync has a lot of investment from exchanges and web3.0 project parties. It is not difficult to see that many well-known centralized exchanges and web3.0 projects are quite optimistic about ZK Rollup.
Finally, ZK Rollup has proved to us that it is feasible to exponentially reduce the Gas Fee used in Ethereum and significantly improve scalability. Op Research is very much looking forward to ZK Rollup bringing a brand new look to the Ethereum community and users in the foreseeable future. If everything goes well, we can boldly imagine that large-scale web3.0 products are just around the corner.
Reference
https://www.pcmag.com/encyclopedia/term/layer-2-blockchain
https://www.preethikasireddy.com/post/a-normies-guide-to-rollups
Binance (BNB) Blockchain Explorer
https://explorer.solana.com/
https://terrasco.pe/
