Jul 28
ZK-Rollups and The Race to Becoming The Premier L2 Execution Layer
If you’ve been paying attention in the crypto space you have more than likely seen zero-knowledge rollups (ZK) and the scaling solutions that it solves.
One of the major discussion points in crypto is scalability and a chain’s ability to operate effectively to scale as adoption increases. This was largely one of the main drivers in the Layer 1 narrative that we saw back in ‘21. The scalability trilemma.
This is a term popularized by Vitalik Buterin. It explains how only two of the three properties are achievable for a blockchain and his approach to solve this dilemma is to implement sharding.
Scalability: the chain can process more transactions than a single regular node (think: a consumer laptop) can verify.
Decentralization: the chain can run without any trust dependencies on a small group of large centralized actors. This is typically interpreted to mean that there should not be any trust (or even honest-majority assumption) of a set of nodes that you cannot join with just a consumer laptop.
Security: the chain can resist a large percentage of participating nodes trying to attack it (ideally 50%; anything above 25% is fine, 5% is definitely not fine).
The idea is that a properly sharded base layer system will allow layer 2s to build on top and utilize those strong foundations of security and decentralization that are made possible.
Layer 2 is used to describe solutions that help with scaling by handling transactions off the Ethereum mainnet (Layer 1) without sacrificing security or decentralization. These solutions are critical for Ethereum and its adoption.
At present, users are willing to sacrifice decentralization to operate on other chains to accommodate for the expenses they would otherwise incur using Ethereum. Network congestion is the issue as it leads to surging gas prices, (gwei, not real gas) which causes these expenses, making it difficult to move capital around as freely.
Zero-knowledge rollups bundle hundreds of these transactions off-chain and generate cryptographic proofs known as SNARKs (succinct non-interactive argument of knowledge) or STARKs (scalable transparent argument of knowledge). Then this transaction batch is posted to the layer 1 with validity proof and determined to be valid or invalid.
This is where the race begins.
The race to implement EVM-compatibility and capture liquidity. zkEVM helps to prevent developers from writing in esoteric programming languages. Essentially, zkEVMs allow the support of all of the same smart contracts that exist on Ethereum’s mainnet. This has been one of the major challenges for zk-rollups, and within the past week alone, three separate zkEVM announcements have been made.
These include Scroll, Polygon, and zkSync.
This race is going to come down to one thing and one thing alone. A project’s ability to capture liquidity. With so many different Layer 2 solutions competing against one another, liquidity will be king. There isn’t enough capital in the space for all of these solutions to co-exist efficiently as of now.
This competition is going to spur on the next big narrative in crypto. You are going to want to pay attention. There will be vampire attacks. Yes, you heard correctly, vampire attacks. Not as cool as it sounds though. A vampire attack in crypto is when a project offers an attractive incentive mechanism to lure users from other protocols. As we have seen, it isn’t always about where the best technological advantaged project is, as much as who can offer more incentives, and build off the acquisition of those new users, liquidity, and volume. It gets the name vampire attack because of that liquidity they are draining.
Being early to narratives and capital flow in crypto creates huge opportunities.
Be sure to drop a follow if you are interested in learning about some of these opportunities offered by zkEVMs going forward and how you can capitalize.
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