November 23, 2021
ZK-Rollups – the Next Big Narrative?
Since it’s critical to always be a step ahead and anticipate new trends, in today’s update, we want to shed the light on a sector that will likely become one of the hottest narratives of this winter: ZK-Rollups. Although they have been a topic of discussion for months and years now, the time to pay attention has come as the rollout of the first fully functional ZK-Rollups is imminent!
With Ethereum’s L1 being practically unusable in its current state, alternative L1s like Solana, Avalanche, Fantom, and BSC have been all the rage this year. Especially gaming projects need a highly scalable and cheap while still decentralized blockchain network to run on.
However, there are reasons to believe that most if not all L1s will not be scalable enough (and sufficiently decentralized) for mass adoption – especially for blockchain gaming that basically requires 0 fee transactions.
Many in the industry believe that the only solution for this problem are L2s. The L1 settlement layer – no matter from which blockchain – should focus on maximum security and decentralization while L2s can focus on specialized use cases such as gaming… This is the theory.
While we have already seen the rollout of optimistic rollups (Optimism and Arbitrum) recently, they are yet to gain significant traction. This is mainly because of two reasons: The 7-day withdrawal period and the lack of token incentives. All of this is going to change with ZK-Rollups…
It is here where StarkWare’s StarkNet and StarkEx (used by Immutable X, dYdX, and Sorare) and MatterLabs with zkSync 1.0 and 2.0, leading projects in the ZK-Rollup space, come into play!
Metaverse Projects Are Stealing the Show
Before we dive into today’s main focus ZK-Rollups, we can’t ignore what’s happening in the markets. Facebook’s “Meta” announcement really set the crypto metaverse space on fire! Metaverse projects – if newer or older, rolled out or only envisioned – have performed tremendously well in the last couple of weeks.
With the imminent launch of Sandbox’s alpha version and its metaverse having been in construction for years now (regardless of the recent metaverse hype), the Sandbox has deservedly been the best performer of the category this week.
But not just metaverse tokens are hot right now: We also see land prices in the biggest metaverse projects shoot through the roof.
On the back of the blistering hot metaverse trend, ETH might be gearing up for some strong outperformance after months of consolidation and FUD.
Immutable X Is Gaining Traction
Now, onto today’s main topic. One of the best-known ZK-Rollup-powered protocols that are already live is Immutable X. Although Immutable X only launched its protocol a short while ago, the NFT activity on the lightning-fast L2 has been growing nicely in the last few weeks. In the bigger scheme of things, the $30 million trading volume is of course still quite a bit lower than the volume traded on OpenSea, which averages between $50 and $100 million per DAY. There is still a LOT of room to grow for Immutable X…
If you are asking yourself if you should buy IMX now, there are several things to consider: Yes, IMX could benefit tremendously from the increased ZK-Rollup hype and the growing adoption of its protocol in the months to come. However, you also have to take into account IMX tokenomics:
The Fulminant Rise of dYdX
Another ZK-Rollup-powered protocol that has been gaining massive adoption is dYdX. With over $1 billion in TVL, the derivatives trading protocol built on StarkWare’s StarkEx (just like Immutable X), is one of the best early demonstrations of the power of ZK-Rollups.
ZK-Rollups Are Coming Sooner Than Expected…
While ZK-Rollups have been worked on for years now, only a handful of them (with limited functionality) is live today. Among them are Immutable X, dYdX, and Sorare which are restricted forms of ZK-Rollups with specific use cases, not allowing for complex smart contract transactions or EVM compatibility. StarkEx is by far the most used rollup overall when measured by total transaction volume – beating the likes of zkSync, Optimism, and Arbitrum by over 10x.
Besides StarkEx by StarkWare, there is also zkSync 1.0, a ZK-Rollup solution developed by Matter Labs. zkSync 1.0 in its current form is also not offering full smart contract functionality though.
However, all of this is going to change with the release of StarkNet and zkSync 2.0, both fully-fledged ZK-Rollup L2s that will offer full smart contract functionality. While StarkNet is live on testnet and set to be released next week (!) zkSync 2.0 will roll out sometime early next year.
StarkNet is StarkWare’s next iteration of a zkRollup, with a planned alpha mainnet launch this month. Doing so will make it the first zkRollup to feature general smart contracts on a fully composable network – a feat thought to be years away. (Source: Bankless)
Several projects – yes, also gaming projects – are already starting to build on StarkNet’s testnet… so, it’s time to pay attention!
With the launch of StarkNet this month, StarkWare will have produced a ZK-Rollup that features full composability with general smart contracts. (Source: Bankless)
For many observers, the rollout of the first fully functional ZK-Rollup L2 marks a watershed moment for the crypto space overall and the Ethereum ecosystem in particular! Will they steal the spotlight from the currently hyped L1s? Possibly, but ultimately user adoption will be the final verdict... (Don’t take this meme too seriously 😄)
How to Benefit From the ZK-Rollup Narrative
If you want to bet on the emerging ZK-Rollup trend (and you missed IMX and dYdX) you can either try to identify early adopters of these L2s and speculate on their success or you can use and try out the different L2s once they roll out (or even before on testnet!) The chances of you getting rewarded with a retrospective airdrop are high…
Another big player in the ZK-Rollup space will be Polygon, which is working hard towards transitioning Polygon from its current sidechain model (with certain security and decentralization trade-offs) to a fully-fledged ZK-Rollup L2.
While having launched a prototype, Polygon will need some more time than StarkWare for its ZK-Rollup rollout though. With the ZK-Rollup narrative poised to heat up in the weeks and months to come, it wouldn’t be surprising to see MATIC getting some attention…
Overall, there are not many tokens in the ZK-Rollup space just yet. The best thing you can do to spot opportunities early is to follow all the relevant projects and thought leaders to be as close to the alpha as possible!
Ellio I will share some Alpha with you, have a look at what @MetisDAO
ETH L2 rollup solution is doing. They have Vitaliks mother on the team just to give you an idea where this project is heading. $METIS
Still under $200m MarketCap.
Thank you Oliver! ZK-rollups are a huge step forward. I really hope that people start to recognize that L1s aren't scalable and will run into the same problems as Ethereum if they are lucky enough to start filling blockspace. L2s are a necessity at the transaction layer. Here's hoping that in a few years we've abstracted away enough complexity and inefficiency that we're not still having conversations about L1s. Once the infra is in place we can move on to a supreme focus on UX and mass adoption.