10,000-character long article discussion: How to capture the value of ZK Rollup and what kind of innovative applications will it produce?

How to capture the value of the ZK Rollup era, and what kind of innovative applications will it produce?

Introduction: Ethereum is about to usher in its Layer 2 era, and ZK Rollup is one of the best solutions among all L2 scaling technologies. What kind of sparks can zero-knowledge proof technology and Rollup expansion technology create? How is ZK Rollup better than other scaling technologies? How can it be adopted quickly? From the perspective of investment, how to capture the value of the ZK Rollup era, and what kind of innovative applications will it produce? I hope the discussion in this article can give you some inspiration.

Article directory

1. Why pay attention to Zero-Knowledge (ZK) Rollup?

Optimistic and ZK scheme comparison

2. What is the layout of the ZK Rollup expansion plan?

ZK Rollups main player comparison

Advantages of ZK Rollup

Pain points of ZK Rollup

3. What is the future of scaling?

technical problem

go-to-market issues

Towards Community Issues

4. How to invest in the expansion ecosystem

author

Lewis Liao

Senior Investment Manager

Zonff Partners

Why focus on Zero-Knowledge (ZK) Rollup?

Zero-Knowledge cryptography has been dubbed one of the most underrated technologies of our generation, and unlike news coverage that trumpets topics such as artificial intelligence and big data, there is little media attention to zero-knowledge technology. Nonetheless, the technology is still a great breakthrough, bringing valuable privacy guarantees to this era of big data where personal information has nowhere to hide.

Zero-knowledge cryptography is a broad topic, but in this article, we will only focus on one area most relevant to blockchains: zero-knowledge proofs. A zero-knowledge proof is a non-interactive, zero-knowledge proof of knowledge that assumes two parties: a prover and a verifier. The prover wants to prove to the verifier that they know some information without revealing what it is. At the same time, the validator will look at the proof and accept or reject it.

These schemes have three properties:

Completeness: any valid result can prove a given program

Robustness: No dishonest actor can create a valid proof

Zero knowledge: the verifier knows nothing about the input of the proof, only the result

In the realm of blockchains, which are publicly visible on all data chains, this proof of a statement without revealing its truth is a powerful primitive. Whether for individuals, businesses or governments, this technology can solve many real-world pain points, such as protecting user data, designing sensitive systems or contracts, proving fairness in the distribution of public goods, and enabling more efficient and economical government agencies .

In the field of blockchain, in addition to privacy protection, the most eye-catching application is ZK Rollup, the expansion scheme of Ethereum. Currently, Ethereum is embracing a Rollup-centric scaling solution, which represents an optimal trade-off between decentralization, security, and scalability. Essentially, the Ethereum upgrade will make the network more scalable, sustainable and secure.

The expansion plan of Ethereum is divided into on-chain expansion and off-chain expansion.

On-chain scaling technology is an upgrade to the base layer of the blockchain to improve scalability. Ethereum’s long-term on-chain scaling solution is called sharding, which actually splits the base layer into 64 chains with shared security secured by the beacon chain.

Off-chain scaling refers to scaling solutions that use an external execution layer instead of the base layer. These Layer 2 or “L2” are auxiliary layers that sit on top of the base layer and provide more transactional capabilities to the entire blockchain.

The L2s solution that Ethereum embraces is Rollup, which brings the following features:

With Rollup, Ethereum can grow from ~25 TPS to 3,000 TPS without sacrificing security;

With Rollup, user funds cannot be stolen or censored (as is the case on some sidechains);

Users can always access data on L1, and no one can prevent users’ funds from safely exiting Rollup at any time;

There are two (main) types of Rollup in the current solution:

ZK Rollup(ZKRU)和 Optimistic Rollup(OR)

Optimistic and ZK scheme comparison

Optimistic Rollup is a more mature solution than ZKRU. Products from Optimstic and Arbiturm are already available to Ethereum developers. However, due to the use of the fraud proof mechanism, its withdrawal time and security are currently debatable, and its cost optimization is slightly inferior to ZK. The weaknesses of ZK Rollup are basically technical problems. With a large number of excellent developers investing in related research, most people including Vitalik agree that ZK Rollup will be a better expansion solution in the future.

Comparing the two, the gas cost and TPS of each solution are as follows:

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The cost of each of the four programs

Source: Xiang|W3.Hitchhiker, the premise of the above calculation is that the current ETH price is 2500u, the block gas limit is 30000000, the gas fee is 30Gwei, and the average block time is 13 seconds. The limit TPS means that the corresponding operating environment occupies all Ethereum Block space (500,000 gas is spent on proof verification), ordinary TPS means that the corresponding operating environment occupies 1/3 of the block space of all Ethereum.

In terms of efficiency and cost, the ZK scheme is more efficient than the OR scheme, with higher TPS and lower costs.

In terms of time cost, due to the fraud proof mechanism, withdrawals on Optimtisc Rollup require a 7-14 day submission period for others to falsify potential malicious behavior. Although there are already liquidity pool mechanisms proposed by Optimstic Rollup solutions such as Boba Network to reduce the withdrawal period.

In terms of compatibility, both Optimsitic and ZK face the problem of needing to be compatible with complex EVM contract calling operations, but Optimstic is easier to implement. OR solutions including Arbiturm and Optimsim have EVM-compatible virtual machines, allowing It is capable of processing all transactions that occur on the Ethereum main chain.

One of the main problems that restrict the development of ZK Rollup is the compatibility of the Ethereum EVM. At the beginning of the EVM design, developers did not expect to use ZK technology in the future. It is almost impossible for EVM operations to generate available zero-knowledge proofs, which gave birth to the demand for ZK-EVM. In the past, many people thought that it would take at least a few years to realize ZKSync 2.0, but the ZKSync 2.0 public testnet was officially launched at the end of February. This is also the first EVM-compatible ZK Rollup on the Ethereum testnet. Perhaps the official large-scale practice of ZK Rollup It’s a little quicker to use than we thought.

Why is EVM compatibility so difficult for ZK?

Most of the existing ZK Rollup solutions can only support simple payment and swap scenarios. The reason is that in addition to the normal execution of the bytecode of the smart contract, ZKEVM also needs to generate a Proof to indicate that the state has been updated correctly after the transaction is completed. Due to the design of the EVM and the algorithm principle of the ZK proof, the two are very compatible. difficulty.

In terms of security, the security of OR comes from economics. A reasonable incentive mechanism must be designed to drive a group of validators on the main chain to monitor submitters at any time and prepare to submit fraud proofs. For submitters, pledges are also required. The method ensures that the node will pay the corresponding price for evil. The security of ZK comes from mathematics or cryptography, which can be de-trusted. The guarantee provided by mathematics and cryptography is far more reliable than the optimistic belief that human nature will not do evil.

Comparing the two, the advantages and disadvantages of ZK Rollups are as follows.

advantage

Less data is contained in each transaction, increasing Layer 2 throughput and scalability, with the benefits of greater scalability and lower transaction costs compared to Optimistic Rollups;

No need for anyone to monitor ZKR;

No need for fraud dispute windows like in Optimistic Rollups, reducing withdrawal time from about 2 weeks to a few minutes;

Privacy is enabled by default;

shortcoming

The difficulty of computing zero-knowledge proofs will require data optimization for maximum throughput;

Initially building and integrating into the Ethereum network is harder than Optimistic rollups;

Relatively speaking, the weaknesses of ZK Rollup are basically technical problems. With a large number of excellent developers investing in related research, I believe these problems will be solved, and most people including Vitalik agree that ZK Rollup will be a future Better expansion plan.

What is the layout of the ZK Rollup expansion plan?

ZK Rollups main player comparison

There are two main players in the ZK Rollup technology space: zkSync and StarkWare

The table below visualizes some of the major differences between the two in terms of team, technology, data availability, funding and backers, and current product and roadmap.

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From a team perspective, StarkWare is more academic. The team is composed of world-class cryptographers and scientists. Over the years, they have pioneered and innovated in the field of zero-knowledge, published many academic papers, and are transforming them into real products StarkWare; the zkSync team was not able to Find more information, but judging from its product release, it has the temperament of a cross-industry and is efficient.

Technically, StarkWare is generally a better technology, providing blockchain finality, which means its capital efficiency is optimal. In addition, the main advantages of STARK are:

Invented and built his own ZK-STARK system, while the tech stack for zkSync was built by someone else (PLONK by Aztec). This also means that StarkWare’s ability to master technology and improve technology is stronger;

There are already multiple systems running in production using a Turing-complete programming language called Cairo, which is available off the shelf. Matter Labs has only a simple payment system in production, and no Turing-complete language is available;

Faster, more secure (in the cryptographic sense), transparent (no trusted setup required), and post-quantum secure, while the core technology used by Matter Labs (built by another team) is slower, requires trusted setup, and can be broken by quantum computers;

In terms of data availability, StarkWare pioneered the Volition system to solve the DA problem. Volition allows end users to choose between a rollup scheme (on-chain data availability) and a validium scheme (off-chain data availability) per transaction. zkSync uses the Volition-based zkPorter technology. The main difference is that in the Volition scheme, users can choose the data storage method based on each transaction, while in the zkPorter scheme, users can choose the transaction settlement method based on each account (the zkPorter account can only be The transaction is generated in the DA mode). In addition, zkPorter’s off-chain DA system is more decentralized because its DA is secured by the Guardian network incentivized by the zkSync native token, rather than a centralized “DAC”.

In terms of funding and backers, StarkWare is valued at $2 billion and is in the middle of a Series D round at a $6 billion valuation. This is a world-class level of financing with many prominent investors. Its backers include some tycoons and members of the Ethereum Foundation, and Vitalik himself has reviewed most of the articles published by StarkWare. Compared to StarkWare, zkSync has relatively few famous investors and looks like a large Defi/CEX crypto home financing. Each of these projects is well known, and together they can form a good ecology. This is important though, the success of ZK Rollup will depend heavily on the addition of DeFi protocols and direct integration with CEX.

In terms of current product and roadmap, in June 2020, StarkWare first launched StarEx, which corresponds to the “Planets” phase of their roadmap and allows the creation of permissioned, applications powered by Cairo and STARKs Specialized ZK Rollups, namely dydx, Immutable, Deversifi, Sorare, etc., are the 4 main applications supported by the in-production version of StarkEx. As of March 2022, StarkEx has processed 134 million transactions, with a cumulative transaction volume of $490 billion and a lock-up volume of $1.1 billion.

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StarkWare Roadmap    Source: StarkWare

On November 29, 2021, they released the Alpha version of StarkNet’s mainnet, rapidly moving towards the “Constellations” phase of the roadmap. StarkNet is what we’ve come to expect from a permissionless, multi-application general purpose ZK Rollup. As of March 2022, the StarkNet testnet Goerli has generated a total of 1.4 million transactions, and the mainnet has generated a total of 45,000 transactions. In terms of contract deployment, there are 26,000 contracts on the testnet Goerli and 1,600 contracts on the mainnet.

Initially StarkNet will be driven by a centralized prover, and applications will need to apply for a whitelist to deploy in order, like Optimism. Their plan is to grow the ecosystem and gradually decentralize StarkNet to achieve the “Universe” phase of the roadmap.

The roadmap of zkSync can be summarized as the following 4 steps. The first phase corresponds to zkSync 1.0, which was launched in June 2020, and is roughly equivalent to a ZK Rollup without smart contract integration. Users can send and receive tokens, but lack composability. Currently many promising projects have been deployed on version 1.0.

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zkSync Roadmap Source: Matter Lab

The second phase of the roadmap kicks off with the mainnet launch of zkSync 2.0, which includes everything we’ve come to expect: ZK Rollup that’s fully EVM-compatible with smart contract composability. ZkSync 2.0 was originally planned to launch on mainnet in August, but was delayed due to some technical difficulties. These issues are now being tested on the testnet and are gradually being resolved, with zkSync announcing in October some technical details of its recently completed and deployment of an AMM-like testnet (uniswap) to verify its EVM compatibility. Matter Labs’ delayed release to ensure LLVM/Solidity compatibility may be frustrating at first, but it will help every Ethereum tool and dependency integrate natively in zkSync 2.0.

Advantages of ZK Rollup

The ZK Rollup solution can bring some unique advantages such as privacy protection, preservation of scalability and the realization of cross-chain applications.

Privacy is one of the advantages and features of ZK Rollup

Permissionless blockchains can achieve computational integrity without trusting third parties, but they come at a cost in scalability and privacy. Beginning in the 1980s, theoretical work on proof systems such as zero-knowledge proofs, interactive proofs, and probabilistic checkable proofs have clarified ways to address these two problems and are embodied in practical applications;

Preserving scalability gives developers theoretically virtually unlimited computing power

This makes it possible to transplant the ecology on the Internet. Games such as battles were previously difficult to achieve on Ethereum, but ZK Rollup can change this. In addition, the super computing power coupled with the characteristics of the blockchain can also derive many new applications;

The other is cross-chain applications, one of the representatives of ZK Rollup, StarkNet has very diverse bridging functions

Developers can send any load (not transfers) from L1 to L2, that is, deploy the head of the dApp in L2, where they can perform low-cost governance or game operations, and send instructions to L1’s liquidity. Like L2 as brain and L1 as muscle;

Pain points of ZK Rollup

Although ZK Rollup is a very good scaling solution for Ethereum, its application is still accompanied by some risks, such as liquidity fragmentation, communication difficulties and technical barriers to reduce composability and centralization risks.

The problem of liquidity fragmentation has become increasingly prominent in the current multi-chain landscape. This is not a unique problem faced by ZK Rollup applications.

Due to the existence of various technical solutions, there will be more rollup networks in the future, which will bring about more serious liquidity fragmentation. The good news is that there are many cross-chain communication technology solutions to solve this problem, such as StarGate, which will be launched by LayerZero in March 2022 (note that StarGate does not currently support ZK Rollup). Under the premise of ensuring security, LayerZero is bringing us a “full-chain future”, including state sharing, liquidity of unified bridges, cross-chain lending, Swap and multi-chain revenue aggregators;

The composability problem is mainly reflected in the interaction between the main chain dapp and the sub-chain dapp

Every new protocol built on Ethereum is like a Lego block that other protocols can easily build on top of, which is one of the reasons why DeFi is growing so fast. If the communication and contract standard problems cannot be solved, the dapps on the sub-chain need to re-establish their own ecology, which results in a greater waste of resources. Not only between the sub-chain and the main chain, but also between the sub-chain and the sub-chain, a communication mechanism and corresponding contract standards need to be built;

The centralization risk is mainly due to the

The sequencer responsible for executing, sorting, compressing and packaging transactions is currently a relatively centralized role. If Rollup wants to further improve its security, it must solve the centralization problem of course;

What does the future hold for scaling

In the expansion roadmap of Ethereum, a short-term Ethereum based on Optimistic Rollup is described, while the medium and long-term expansion scenario of “sharding + ZK Rollup” will be adopted.

On the whole, Rollup is undoubtedly the best choice for the expansion of Ethereum. Its biggest features are security and scalability. Although it takes time to carry out technical research on programmability, in the medium and long term, this is a very The ideal expansion technology, the combination of Ethereum sharding and ZK Rollup, will crack the so-called impossible triangle. At the same time, the launch of zkEVM can take into account programmability and help developers to transfer to the second layer more easily.

In the medium to long term, as ZK-SNARK technology improves, ZK rollups will win in all use cases. — Vitalik Buterin

Nonetheless, for ZK Rollup to be truly applied on a large scale, many problems need to be overcome, including technical, GTM (Go to Market) and GTC (Go to Community) issues.

technical problem

The technical problems of ZK Rollup have been briefly explained above, and some details are added here.

Regarding compatibility issues, the technical problem of ZK Rollup is mainly that it is not friendly to developers, resulting in limited functions. Before, it was difficult to build a general DApp mainly due to the following two reasons.

First, if you want to develop DApps in ZK Rollup, you need to write all your smart contract logic in a special language (i.e. R1CS). Not only is the syntax of the required language complex, but doing so requires extremely strong zero-knowledge proof expertise;

Second, ZK Rollup does not support composability. This means that different ZK Rollup applications cannot interact with each other within Layer 2. This quality greatly undermines the composability of DeFi applications;

There are two ways to build general-purpose DApps in ZK Rollup. One is to build a dedicated circuit “ASIC” for different DApps. This is the path adopted by the early ZK Rollup. Corresponding to the planetary stage of StarkWare, there is no interaction between applications. . Another is to build a general “EVM” circuit for smart contract execution, something StarkWare and zkSync are making great progress on.

Judging from the current situation, the development of StarkWare is in the “constellations” (Constellations) stage. In September 2021, StarkWare announced a permissionless, multi-application general-purpose ZK Rollup with smart contract support through the Cairo language. The development of zkSync is also in the second stage. In February 2022, the zkSync 2.0 test network will be launched, and continuous testing will ensure LLVM/Solidity compatibility, so as to be fully compatible with EVM and ensure the composability of smart contracts.

Note that in terms of solutions, StarkWare and zkSync use two completely different technical solutions.

StarkWare has adopted the new Turing-complete programming language Cairo and has partnered with OpenZeppelin to develop standardized contracts, just as they did with Ethereum, which means they are adopting new contract standards for composability. This is undoubtedly a bold decision, as it will greatly increase the cost of entry for developers, and the Warp team at Nethermind is currently helping developers convert ERC-20 contracts from EVM bytecode to StarkNet contracts and deploy on StarkNet. This work is progressing rapidly, and its next goal is to transfer arbitrary smart contracts from Yul to Cairo.

zkSync uses the zkEVM scheme to achieve EVM compatibility. For zkEVM, there are currently two main implementation strategies:

Directly supports the existing instruction set of EVM and is fully compatible with the solidity instruction set. Those using this scheme include Hermez and the Ethereum Foundation zkEVM;

Redesign a virtual machine that is friendly to zero-knowledge proofs, and at the same time adapts the EVM development tools to maintain compatibility with solidity. The main use of this solution is zkSync;

In general, the first strategy has better compatibility and higher security, but requires more work, which is what Hermez uses; the second strategy is more flexible, with less workload, but requires extra effort In terms of adaptation, zkSync adopts this scheme. zkSync has also developed two compiler front-ends for zkEVM: Yul and Zinc. When building its own compiler, zkSync chose LLVM. The compatibility issue of LLVM/Solidity led to the main reason why zkSync 2.0 was not launched as scheduled in August 2021. This is also the focus of overcoming problems during the current zkSync 2.0 testnet launch.

StarWare seems to be less compatible with Cairo, is this a disadvantage of StarkWare? Not really.

StarWare uses Cairo language to transplant smart contract logic into Rollup. Although the new language increases the entry cost of developers to some extent, many features of Cairo can make ZK more elegantly integrated into the blockchain ecosystem, such as The Cario language has a supporting AIR (Algebraic Intermediate Code Representation) visualization tool to view the details in the proof, and can also generate zk-STARK proofs safely and reliably to ensure computational integrity, and the language design feels more in line with mathematical proofs. Logic, more polished, also has a complete toolchain.

Also, it improves security. Cairo’s AIR is relatively simple, which makes both on-chain validators and off-chain attestation services less efficient and amortized, and auditing a single simple AIR is safer than auditing multiple complex application-specific AIRs. With Cairo, we can rely on a single Verifier smart contract; it is no longer necessary to deploy a verifier for every application we use.

Note the implication of this security property: a set of audits against this contract protects any application from proving system risk, letting them audit only business logic. As for business logic, it’s much easier to understand and review code for correctness than to understand application-specific AIR. Cairo does not solve the problem of possible loopholes in the contracts currently facing the EVM, and some people are trying to solve this problem.

go-to-market issues

The model of ZK Rollup winning the market is almost the same as the so-called “Ethereum killer” public chain. StarkWare is currently centralized, they are pushing for decentralization, zkSync is open source and decentralized (but not to a great degree), and neither of them has a token. Similarly, Optimism and Arbitrum, the two major players in the other lineup of Rollup technology, also have no tokens.

zkSync will issue tokens, which can be confirmed from their source code, while Starkware and Arbitrum have not publicly stated that Optimism has recently hinted at releasing tokens.

However, for L2s to promote decentralization and win the market, issuing coins is a necessary means. Tokens are not only a good incentive tool, but also help better governance of the community. At present, the main obstacles to issuing coins are the immaturity of the L2s cross-chain bridge, and the EVM compatibility has not been well resolved.

According to the organizational structure and economic incentive model of Web3, A16Z defines its GTM matrix as follows:

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Web3 Go-to-Market Matrix Source: a16z

They believe that Web3’s Go to Market (GTM) model is very different from Web2, and the most innovative part is the introduction of tokens and the emergence of a new organizational form, DAO. Each quadrant goes to market differently and can cover everything from traditional web2-style strategies to emerging and experimental strategies.

The factors that measure whether Layer1/Layer2 wins the market include the number of collections on Github, the number of protocol developers, the number of project integrations, the number of protocol forks, and TVL.

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L1 public chain to market matrix Source: a16z

At this point, since StarkWare is not open source, there is no comparison. From the data of March 2022, the three situations of zkSync, Optimism and Arbitrum are as follows:

From the number of collections on Github, zkSync has the most. zkSync is 1.3K, slightly higher than Optimism’s 0.9K and Arbitrum’s 0.7K;

In terms of the number of protocol developers on Github, Optimism has the most. 43 people for zkSync, 66 people for Optimism, and 36 people for Arbitrum;

Judging by the number of protocol forks on Github, Arbitrum is slightly higher at 355. zkSync and Optimism are comparable, 292 and 303 times respectively;

In terms of TVL, Arbitrum is now far ahead at $3.41b, while zkSync and Optimism are at $148m and $562m respectively;

Compared with the more successful Ethereum “alternative chain” Solana, Solana’s Github collection number is 7.7K, the number of forks is 1.8K, the number of contributors is 305, and the TVL is $7.46b.

It can be seen that Rollup is far from reaching the time when it is called winning the market, and they still have a lot of work to do. The most important thing is to get more project integration, and more adoption will attract more developers, so as to build better ecological projects, gain more user adoption, and flow in more funds. These require the project party to go to the community (Go to Community, GTC) to do it.

Towards Community Issues

It has been argued that the main difference between the incentives in entering a market and entering a community strategy can be summed up as the difference between value capture and value creation. For a product, it is its users who make up the community, and for a public chain or protocol, it is the applications that make up the community. Therefore, it may be more accurate to replace Community with Ecosystem here.

Currently, with the launch of the StarkNet Alpha and zkSync 2.0 testnets, ZK Rollup technology is rapidly being adopted, and the ecosystems of both are expanding. Some people have organized the ecology of the two major technologies as shown below.

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StarkWare Landscape

Source: ZK_Daily

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StarkWare Landscape Source: ZK_Daily

The ecological prosperity of the two is similar. It can be seen that zkSync has gained more cross-chain, DeFi and wallet application support, while StarkWare has a more prosperous Games&NFTs ecosystem.

For an L1s/L2s ecosystem, liquidity is equivalent to bandwidth, connecting different application scenarios to form a larger network, the Internet of Value. The definition of liquidity here is the exchange of value between different applications. When the liquidity is good, the value loss is small, and when the liquidity is poor, there is a higher value loss. Another situation is that there is no value exchange between different applications, which means that there is no liquidity. In an ecosystem, if liquidity can run through the entire ecosystem, like the Ethereum ecosystem, any application based on Ethereum can be priced and exchanged through Ethereum, and this ecosystem is a functioning ecosystem.

Mobility in ecology I divide it into horizontal mobility and vertical mobility. The role of bridges in L2s is to open up the liquidity between different Rollups horizontally. Recently, an innovative way to open up is called LayerZero, which innovates the liquidity bridging method of traditional bridges and brings better security. and trustless. Vertical liquidity mainly lies in different applications. Users (End Users) are connected to the entire ecosystem through Wallet, and sometimes they will recharge and purchase cryptocurrencies to obtain value by means of payment, and exchange value in different applications. There is also an intermediate exchange through the Marketplace application.

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L2 Ecological Value Flow Map

At present, at each liquidity node, StarkWare and zkSync have corresponding application deployments, most of which are in the testing stage. The ecological comparison is as follows.

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Ecological comparison between zkSync and StarkWare Source: ZK_Daily

Going to the community (ecology), first of all, it needs to be able to open up vertical liquidity internally, which requires support for composability, so that there is a unified standard in the ecology, which enables permissionless integration between different application protocols, like Lego Like building blocks. It’s easy to do this on Ethereum, but due to the zero-knowledge proof problem, which both StarkWare and zkSync have put a lot of effort into, it’s being addressed.

The premise for the vitality of the community (ecology) is to have good lateral liquidity, which requires the support of useful bridges, which can connect the liquidity of Ethereum at a low cost, and more importantly, it can facilitate to communicate with other L2 solutions or even L1 solutions. For both applications and users, a fast (high TPS) low-cost (low handling fee) secure blockchain is naturally attractive. The lower the migration cost, the more attractive the ecology to applications and users. the stronger.

The necessary condition for the community (ecological) to take off is the emergence of killer applications, attracting a large number of users and capital to enter. This is not only achieved through high APY, token airdrops or subsidies, and a closed “play and earn” ecosystem.

How to Invest in the Expansion Ecosystem

The blockchain is the Internet of Value, and the traditional Internet is the Internet of Information. Information data is transmitted by bandwidth, and value exchange is undertaken by liquidity. The first thing the public chain ecology needs to achieve is the flow of value, the second is the efficient flow of value, and then the application that meets the needs of users is built on top of the efficient flow of value. An open and transparent blockchain world that is censored, democratized, anti-evil, open and inclusive.

Thanks to smart contracts, the application of blockchain is not limited to being a decentralized ledger, it also derives non-fungible tokens for ownership definition in the digital world and homogeneous tokens as the cornerstone of governance The DAO as a new governance organization structure and other novelties. These innovations combine with existing Internet applications to further derive more application scenarios. However, the current blockchain infrastructure cannot well undertake the implementation of these application scenarios.

The first is the issue of expansion. Whether it is TPS or data availability, capacity expansion is required. This has been fruitfully explored by ZK Rollup and Validium, along with other Layer 2/Layer 1 solutions such as Optimistic Rollup, Plasma, Solana, Celestia, and many more. Expansion technology itself is the best investment target. At this stage, we can pay more attention to on-chain storage technology. After the expansion, high TPS and reliable data availability will greatly improve the performance of the blockchain, which will allow more complex applications to be built on the blockchain. These applications can be divided into Internet chain reform and blockchain. Two original categories.

Internet chain reform: The most obvious is in the GameFi field, such as real-time battle settlement on the GameFi chain, real-time communication on the chain, and large-scale payments can be realized;

Original blockchain: High-performance blockchain infrastructure allows for more frequent and intensive value exchange behavior than before, which will greatly promote the cost reduction of value flow, and innovative applications should be able to truly improve capital utilization efficiency, Applications that increase productivity. In addition, the high-performance blockchain makes it possible to realize the liquidity of the data capital market, which is a disruptive innovation. As a production factor in the information age, data can be fully flowed and applied, and benefits can be distributed reasonably and fairly;

The second is the liquidity issue, which is divided into horizontal liquidity and vertical liquidity.

Horizontal liquidity refers to the transfer of value between different public chains/L2 ecosystems. When a new public chain/L2 ecosystem is formed, if users want to migrate from the original ecosystem, they need a useful value exchange tool, which is sometimes called a bridge. At present, traditional bridge tools have some security problems, which may lead to the loss of users’ funds, and sometimes even cause chain effects. Fortunately, there are some new bridge technologies emerging, such as LayerZero. It is believed that there will be more and better technologies, such as zk bridges under research, which can solve many problems existing in bridges. As the liquidity entrance of ecological value, the bridge can derive more DeFi applications, thereby capturing more value;

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Vertical liquidity refers to the transfer of value within the same public chain/L2 ecosystem. The optimization of vertical liquidity contributes more to the efficient flow of value, thanks to various innovative DeFi applications, such as AMM, Yield Farm, Lending, etc. Efficient applications result in less loss of value during this exchange. The value captured in this link is undoubtedly huge. However, the current solutions are not good enough. Most solutions provide liquidity by locking liquidity, and the utilization efficiency of funds is not high. Novel solutions in this regard include Tokemak and dAMM, etc. In this regard, we can pay attention to more L2 applications;

Then there’s the issue of data privacy. No company wants all its financial data to be made public, so that the entire network can review every financial statement. The data on the blockchain is in the HTTP era of the Internet, and all information is “transmitted” in plain text, and the emergence of ZK technology can bring the blockchain to the HTTPS era. It is believed that almost every transaction on the blockchain in the future can be protected by zero-knowledge technology. At that time, blockchain technology can penetrate into every corner of society and bring privacy of transactions while ensuring de-trust, tamper-proof, openness, security and transparency of transactions. The best way to open privacy protection should be in the form of a protocol. As a plug-in, it is built together with other protocols like Lego blocks, so that it can be configured, owned and censorship resistant. In the foreseeable future, privacy protocols will be called protocols that every application must integrate.

Finally, let’s talk about wallets. As the entrance to the blockchain world, wallets play a pivotal role. If we want to use the Internet analogy, wallets are like browsers in the Internet era. Information interacts with people through browsers, and value interacts with people through wallets. It is said that now is the Netscape era of blockchain, and the little fox may be the Netscape that flourished in the past. Although their endings may be different, I think the current wallet is far from easy to use. One of the most important is that value does not flow efficiently between different wallets. Although there may be some compatibility issues that affect interoperability, there is no doubt that we need a common standard to define this value interface.

The above is the infrastructure, which is the field of value generation and capture. Only when these problems are improved (may not be exhaustive) can blockchain technology usher in a real explosion, and the Internet of Value can connect everyone.

In the previous public chain ecology, the value was mainly captured by the protocol, the first is the public chain itself, and the second is the DeFi field, especially exchanges and exchange platforms. Here you can refer to the famous fat protocol theory. There has always been controversy about the fat protocol theory, but for now, the fat protocol theory is generally correct. In my opinion, this is due to the fact that the era of blockchain infrastructure is far from over.

Infrastructure construction is long, difficult and labor-intensive, but it is the field with the most moat effect. On top of infrastructure, applications that can bring huge benefits are called kinetic energy applications, and kinetic energy applications must create the most value effects. Infrastructure is still kinetic energy, it is not a constant layer, just like Taobao used to be the kinetic energy of the Internet, and now Taobao as a platform is gradually becoming the infrastructure of Ant Financial. The core purpose of infrastructure is to pave the way for kinetic energy applications and reduce the adoption cost of kinetic energy applications.

The kinetic energy era of blockchain has not yet arrived, and with the arrival of the kinetic energy era, there is no doubt that the fat protocol theory will fail (although some problems have arisen). At this point in time, it is wise to bet on an infrastructure track that will reduce the cost of application adoption. Regarding the adoption cost of the application, it includes not only the economic cost, but also the efficiency, technical threshold and even the belief cost (reflected in the blockchain fundamentalism of decentralization, trustlessness, and resistance to censorship).

With the gradual application of ZK Rollup in the L2 era, and even the arrival of the L3 and L4 eras, the kinetic energy era of the blockchain will undoubtedly become predictable. So who is the protagonist of the kinetic energy era? That must come from areas that could be killer applications, such as gaming, entertainment, social networking, and virtual reality, to name a few. Early betting in these fields is also a desirable investment method, but considering its difficulty and rate of return, it is not cost-effective at the current stage. When investing in these areas, you can fully consider whether they make full use of the new infrastructure, or retain the full scalability of the new infrastructure, which can keep them fast and high enough in the era of rapidly developing blockchain infrastructure. Value cost control and efficiency improvement, thereby greatly improving their competitiveness.

The projects involved in this article do not constitute any investment advice.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/10000-character-long-article-discussion-how-to-capture-the-value-of-zk-rollup-and-what-kind-of-innovative-applications-will-it-produce/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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