Last week, the news that Ethereum’s long-awaited transition to proof-of-stake might finally come in September evoked as many “I’ll believe it when I see it” jeers as it did cheers.
Each team appears to be in the home stretch of launching a zkEVM (zero knowledge Ethereum Virtual Machine), a kind of technology – once thought to be years away – that will allow users to transact on Ethereum with lower fees and shorter delays.
It’s no secret that using Ethereum is expensive and slow relative to other blockchain networks. The chain can only handle around 15 transactions per second, which is orders of magnitude below alternative blockchains like Solana and Tezos. And at periods of high traffic, Ethereum transaction fees can make the network prohibitively expensive for most use-cases (think $40 for a simple token swap).
A year ago, so-called Optimistic rollups like Arbitrum and Optimism were heralded as the best way around Ethereum’s sluggish and expensive user experience. But Optimistic rollups were only a band-aid solution, and it appears their core technology may be eclipsed sooner than expected with the upcoming launch of zkEVMs.
Read more: Ethereum’s Rollups Aren’t All Built the Same
Zero knowledge of zero knowledge? Not a problem. In this week’s edition of Valid Points, we’ll do our best to walk you through what zkEVMs are and what they mean for the future of Ethereum.
Understanding Ethereum rollups
Understanding zkEVMs means understanding two core blockchain concepts: rollups and zero-knowledge proofs.
Those who have been reading this newsletter for a while will know that rollups are the main way that Ethereum developers are working to scale the network – meaning cheapening fees and increasing transaction speeds and throughput. Rollups typically achieve this by establishing a layer 2, or subsidiary, blockchain atop Ethereum’s layer 1, or base blockchain, mainnet.
These layer 2 networks process transactions, bundle them up and pass them back down to the layer 1 network in some sort of compressed format. Once on the layer 1 chain, the transactions can be confirmed using fancy computer science or other mechanics.
As Ethereum co-founder Vitalik Buterin explained in a blog post, “Rollups move computation (and state storage) off-chain, but keep some data per transaction on-chain. To improve efficiency, they use a whole host of fancy compression tricks to replace data with computation wherever possible.”
As a result of these efficiency improvements, rollup chains allow users to use smart contracts – the computer programs that run on blockchains like Ethereum – more quickly and inexpensively.
Since rollup transactions are “settled” on Ethereum’s base layer, they have an added bonus of borrowing the layer 1 chain’s security. (This differs from so-called sidechains, which execute transactions, bundle them up and pass them back down to a layer 1 network with little more than a pinky-promise that the transaction data has not been tampered with.)
Optimistic rollups and ZK rollups
There are generally two ways that rollups – which borrow Ethereum’s security – are constructed: Optimistic rollups and ZK rollups.
Optimistic rollups like Arbitrum and Optimism use a dispute period – usually around seven days – to ensure transaction truthfulness. In these systems, transactions happen on the layer 2 network, but when they are bundled up and passed back to the layer 1 chain, network actors on the base chain have time (the dispute period) to look things over and make sure the transaction data is what it purports to be.
While a seven-day dispute period can slow down withdrawals (since it takes longer for transactions to officially “settle”), Optimistic rollups are much easier to implement than zero-knowledge rollups, the primary Ethereum scaling alternative. As a result, Optimistic rollups were the first to come to market (Arbitrum and Optimism both launched in 2021).
Zero knowledge or “ZK” rollups use complex mathematics and computer science – rather than a dispute period – to guarantee that transactions that get bundled up and posted to a layer 1 network are “true.” They do this by constructing so-called “zk-SNARKs” – a kind of cryptographic message that “proves” a statement is true without requiring you to walk through it yourself.
Zero-knowledge technology holds a number of advantages over Optimistic technology. Proving that transactions are correct (as ZK rollups do) is more fool-proof than trusting people to reject malicious transactions within a certain time window (as is required with Optimistic rollups).
If ZK rollups sound complicated, that’s because they are. Teams have worked for years to figure out how to distill complex transactions into easy-to-verify proofs – a problem that was expected to take at least a couple more years to crack.
In the interim, it has generally been thought that ZK technology would only be practically useful for more simple use cases, like sending tokens between blockchain addresses. Companies like StarkWare and Matter Labs launched tools allowing projects to leverage ZK technology for a small set of applications, but they have yet to translate more complex operations – those used by most smart-contract based applications – into zero-knowledge proofs.
In his 2021 rollup primer, Buterin wrote, “In general, my own view is that in the short term, Optimistic rollups are likely to win out for general-purpose EVM computation and ZK rollups are likely to win out for simple payments, exchange and other application-specific use cases, but in the medium to long term ZK rollups will win out in all use cases as ZK-SNARK technology improves.”
The “medium to long term” time frame seems to have moved up significantly with the advent of the zkEVM.
The rollup Holy Grail – the so-called zkEVM – allows developers to port any Ethereum smart contract over to a ZK rollup chain without needing to alter their underlying code.
There are some differences between different kinds of zkEVMs being worked on by Polygon, Matter Labs and Scroll, but in general they promise to dramatically reduce fees and transaction speeds for virtually any use-case – even relative to Optimistic rollup solutions like Arbitrum and Optimism.
State of Optimistic rollups
Optimistic rollups came about at a time when they seemed like the only realistic solution for Ethereum to scale.
Though they work well at slicing fees, Optimistic rollups haven’t seen enough adoption to signal that they’ve truly “scaled” Ethereum.
Though rollups have been around for several months, Ethereum maintains a sizable lead in daily transactions: There were 1.2 million Ethereum transactions on July 18 compared to fewer than 250,000 across Arbitrum and Optimism.
A look at the value of cryptocurrency committed to Optimistic rollups, often referred to as total value locked (TVL), is an important indicator of a rollup’s health. Arbitrum and Optimism have around $1 billion in combined total value locked, according to DeFi Llama. This might seem like a lot, but it pales in comparison to the $55 billion locked on Ethereum.
What happens to Optimistic rollups?
On top of this lagging adoption, we’re now seeing the rise of the zkEVM – a technology which aims to improve upon Optimistic rollups across almost every metric. So what now for the Optimistic rollup?
One potential future pathway forward for Optimistic chains is to transition over to zero-knowledge technology.
As Buterin put it on a primer on YouTube: “I personally would much rather trust $10 million of my own money to an EVM Optimistic rollup than to an EVM ZK rollup for at least the next couple of years. But in the long term ZK rollups are, I think, going to be everything. And so, my advice to teams like Optimism and Arbitrum is that I think they should start ZK-ifying themselves fairly soon.”
Another path forward for these chains is to work on serving other use-cases, even if this means sacrificing some security.
Last week on July 11, Arbitrum introduced a chain called Arbitrum Nova, intended for gaming and social applications, leaving its original mainnet to service non-fungible token (NFT) and decentralized finance (DeFi) projects. Nova – which is built using Arbitrum’s AnyTrust technology – offers transactions almost for free, albeit with some compromises to its security model (not unlike most other low-fee blockchains).
And finally, Justin Drake – a researcher at the Ethereum Foundation who has partnered with teams like Scroll and Matter Labs on their zero-knowledge protocols – points to community as a potential saving grace for protocols like Optimism and Arbitrum.
“It turns out that in this space, oftentimes it is not just about technology. Sometimes, it’s the network effects – the culture of the community – that is actually the most important thing. I think a team like Optimism really got a lot of things right from that perspective,” Drake told CoinDesk.
In May, Optimism formed a decentralized autonomous organization (DAO), dubbed Optimism Collective and airdropped their OP token, which grants token holders the capability to determine protocol incentives and vote on protocol upgrades. Though the token drop was not without hiccups, Optimism’s unique governance model earned widespread praise throughout the Ethereum community – including from Buterin.
Sage D. Young contributed reporting
The following is an overview of network activity on the Ethereum Beacon Chain over the past week. For more information about the metrics featured in this section, check out our 101 explainer on Eth 2.0 metrics.
Disclaimer: All profits made from CoinDesk’s Eth 2.0 staking venture will be donated to a charity of the company’s choosing once transfers are enabled on the network.
Lido Finance plans to offer stETH on layer 2 network and proposes to sell LDO for DAI.
- WHY IT MATTERS: The liquid staking giant plans to offer staked ether (stETH) on layer 2 platforms, leading to “staking with lower fees and access to a new suite of DeFi applications to amplify yields,” Lido said in an explainer blog. On July 19, Lido also introduced a community proposal to liquidate 20 million of its LDO tokens, 2% of the total supply, in return for stablecoin DAI. Read more here.
Genesis Global Trading filed a $1.2 billion claim against now insolvent Three Arrows Capital.
- WHY IT MATTERS: According to a 1,157-page court filing uploaded by bankruptcy trustee Teneo, crypto broker Genesis has filed a $1.2 billion claim against Three Arrows Capital. Digital Currency Group, the parent company of Genesis and CoinDesk, has assumed the entire $1.2 billion claim. As a result, Genesis is left without any outstanding liabilities tied to Three Arrows Capital. Read more here.
Nellie Liang, the U.S. Treasury Department’s undersecretary for domestic finance, says the U.S. Treasury is open to nonbanks issuing stablecoins.
- WHY IT MATTERS: According to Liang, nonbanks deserve a path to become government-approved stablecoin issuers. While the U.S. Treasury Department and the regulators in the President’s Working Group on Financial Markets want all stablecoin issuers to be regulated for safety and soundness, just as regular banks are, she said they shouldn’t have to have depository insurance and could be subsidiaries or affiliates of bank holding companies. Read more here.
Celsius Network bankruptcy filings hint retail customers will bear the brunt of its failure.
- WHY IT MATTERS: Court filings revealed that Celsius has a $1.2 billion hole (at minimum) in its balance sheet. Despite paying off its loans to Aave, Compound and Maker, the troubled crypto lender has left retail investors in the dark as they will likely bear the brunt of Celsius’ failing. David Silver, a founding partner of the Florida-based law firm Silver Millar, said, “For the moment, the bankruptcy process will not be the average investor’s friend.” Read more here.
Dubai unveiled its metaverse strategy that aims to attract more than 1,000 blockchain firms and support more than 40,000 virtual jobs by 2030.
- WHY IT MATTERS: Leaders of Dubai want the most populous city in the United Arab Emirates to become one of the world’s top metaverse economies. According to Omar bin Sultan Al Olama, UAE minister of state for artificial intelligence and digital economy, the metaverse is expected to drive the UAE’s efforts to “provide innovative solutions, positively impact people’s lives and transform the city into one of the smartest hubs worldwide offering new economic opportunities.” Read more here.
Factoid of the week
Valid Points incorporates information and data about CoinDesk’s own Ethereum validator in weekly analysis. All profits made from this staking venture will be donated to a charity of our choosing once transfers are enabled on the network. For a full overview of the project, check out our announcement post.
You can verify the activity of the CoinDesk Eth 2.0 validator in real time through our public validator key, which is:
Search for it on any Eth 2.0 block explorer site!
CoinDesk is an award-winning media outlet that covers the cryptocurrency industry. Its journalists abide by a strict set of editorial policies. In November 2023, CoinDesk was acquired by the Bullish group, owner of Bullish, a regulated, digital assets exchange. The Bullish group is majority-owned by Block.one; both companies have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary with an editorial committee to protect journalistic independence. CoinDesk offers all employees above a certain salary threshold, including journalists, stock options in the Bullish group as part of their compensation.