ConsenSys provides a breakdown of Layer 2 rollups, specifically ZK rollups, and where the space is going in the third build section of the 2023 CMC Crypto Playbook
An overview of Layer 2 Rollups
In recent years, Layer 2 (L2) rollup solutions have come to the fore as activity on the Ethereum network has increased. Activity and engagement with non-fungible tokens (NFTs) and Decentralized Finance (DeFi) has led to a surge in Layer 1 (L1) blockchain activity. Conversely, demand for blockspace, represented by gas costs, has increased. And transaction finality time has increased due to increased network load. While the Ethereum merge laid the groundwork for future gas fee optimizations; it did not directly reduce transaction gas fees.
In the year between summer 2020 and peak demand in summer 2021, gas costs in Gwei on the Ethereum network increased by up to 1300%. The need to make transactions fast and affordable has driven the creation of two main forms of rollup: Optimistic and Zero-Knowledge (ZK).
Rollups help remove the computational demands on the Ethereum network by moving transaction processing off-chain, converting it into a single piece of data, and then sending it back to Ethereum as a batch, reducing the cost and time involved. The big difference between the two is that optimistic rollups use fraud evidence while ZK rollups rely on zero-knowledge evidence to verify changes to the main chain.
Optimistic and ZK Rollups: Evidence of Fraud vs. Evidence of Validity
Fraud evidence bundles transactions off-chain and then sends them on to L1. After a bundle is submitted on the L1, there is a dispute period during which anyone can dispute the result of the roll-up by calculating a proof of fraud. Similarly, Zero-Knowledge examines batch transactions off-chain and submits them as a single transaction. Instead of assuming transactions are correct to begin with, they use validation to immediately prove that transactions are valid. Once the transactions have been confirmed as valid, they are then transmitted to L1. This is how they derive their respective names – fraud proofs have transactions checked retrospectively for fraudulent transactions, while validations are performed before transactions are sent to L1.
While there are standout projects for both, they each have their own pros and cons. Optimistic rollups have the benefit of requiring proof of fraud only when there is a problem. This means they require less computing resources and scale well. The problem lies in the challenge period. A longer challenge period increases the chances of identifying fraudulent transactions, but it also means users will have to wait longer to withdraw their funds. For leading optimistic rollup solutions like Arbitrum and Optimism, this wait can take up to a week. Alternatively, ZK rollups have the advantage that they always reflect a correct L2 state. Their disadvantage is that proofs are required for all state transitions and not just when they are contested, which limits scalability. Add to that the complex nature and early stage of the technology.
Despite their respective challenges, ZK Rollups are heralded as the future of Rollups. This is mainly due to the fact that the automatic generation of proofs of validity increases the security of the protocol, the cancellation period is significantly shorter due to the elimination of the challenge period and the better data compression of ZK rollups. For these reasons, we will be covering the current state of the ZK Rollup area, the latest innovations and the future.
Source: Galaxy Digital
The ZK Rollup Space
As we’ve discussed, ZK rollups are overwhelmingly the focus, with players like zkSync, Starknet, Polygon zkEVM and Scroll all raising large amounts of capital to develop their solutions, although only StarkNet has launched on mainnet ($780 million total). . . Each of these projects has taken its own angle, differing mainly in its roll-up data availability strategy and checking algorithm. The data availability strategy determines where the state data of a roll-up is stored, on-chain storage has increased security but consumes block space on the Ethereum network, which reduces transaction throughput.
The proof algorithm is the means of generating a proof of validity, which can be either STARK or SNARK. These two algorithms help developers move computation and storage off-chain, which in turn increases scalability. You can also verify that a user has sufficient funds and the correct private key without having to access the information itself, improving security. You can read more about the technical differences here. STARKs have the advantage of offering more scalability, security, and transparency compared to SNARKs. However, the downside of STARKS is a larger proof size that takes longer to verify, and that SNARKs use only 24% of the gas by comparison. Therein we have the trade-off between speed and cost vs. scalability, security and transparency for both SNARKS and STARKS. While many different methods are being explored, there is still no definitive answer as to the best way to set up a ZK rollup. Each configuration has its benefits, and many designers are still searching for the optimal choice or combination for their roll-up designs.
The hurdles to overcome
As we have already discussed, ZK rollups are still in development and various challenges need to be overcome before blockchain users can take full advantage of it. Language compatibility is one such challenge; Translating Ethereum Virtual Machine (EVM)-friendly programming languages like Solidity into a custom language optimized specifically for ZKP can help increase their efficiency, but brings with it challenges for developers to adopt. For example, StarkNet tries to solve this with Warp, a compiler for the Solidity to Cairo language (the language of StarkNet’s ZKP), which tries to convert Solidity to Cairo automatically. Using Warp eliminates the need for developers to rewrite their code in Cairo, making the process much smoother.
Other challenges include the mysterious nature of projects, many of which violate crypto’s open-source ethos because of concerns about first-mover advantage and capturing a sticky user base. Most of the ZK rollups were introduced for the first time this year, which highlights the amount of work that still needs to be done in this area.
While rollups (both optimistic and zero-knowledge) have the benefits of improved speed and cost, they tend to come at the expense of decentralization. This is due to the inherent need for sequencers, the actors that pool transactions and pass evidence to the L1. All rollups currently require a centralized sequencer and use extensible smart contracts managed by a single entity. Since space is so early, a one-stop shop for quick fixes of bugs in code is usually required. In addition, the projects are not open source, which is another hurdle for community members to act as a sequencer. Many projects have indicated that they plan to decentralize their sequencer functions in the future, but this will no doubt require additional resources and time.
decentralization plans
Tokenization and open-source code will be the next steps for many of the projects looking to decentralize. Tokenizing these services to generate activity and decentralize the product is another area where we expect a variety of different solutions to emerge as projects aim to create the most scalable, decentralized, and active L2 on the market. StarkWare and zkSync both plan to launch a token, and Polygon could potentially use MATIC to support Polygon’s zkEVM initiative. Token engineering on ZK rollups is an even more emerging area than the optimistic rollup technology, and finding an effective and sustainable model can differentiate and foster adoption.
The future
zkEVMs are still in a very early stage and the race to mainnet launch is on. StarkNet has the first mover advantage but still has challenges in terms of solidity feature support due to its use of Cairo, leaving room for competitors to make improvements. The projects capable of amassing significant user bases will attract decentralized application (dapps) developers, which in turn will bring more dapps to their platform and expand the functionality. ConsenSys’ zkEVM is currently moving to Testnet and as such is specifically focused on DAPP developers leveraging tools like MetaMask, Infura and Truffle to enable them to deploy and manage applications as if they were using Ethereum directly.
And while we’ve discussed the current players in the zkEVM market, other prevailing rollup solutions like Polygon, Optimism, and Arbitrum still hold significant market share. As zkEVM solutions mature, we may see these projects attempt to move to validation or hybrid solutions and leverage their existing user bases to attract DApp development and maintain their market dominance. Ultimately, the many rollup solutions (and increasing competition between them) will continue to improve the Web3 user experience and introduce platforms for applications to onboard the next generation of users.
Given these threats, the secrecy of projects in this space doesn’t surprise us, but we believe the true winner will be able to leverage the efficiency of ZK Rollups and combine it with a seamless developer and user experience to own enforce .
This is a guest post by CoinMarketCap using Consensys and has been edited for style. The original article was published here and was also included in the third build section of the 2023 CMC Crypto Playbook.
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