Vitaly Yakovlev is CTO at DeFi platform ZKX.
This article will explain how ZK-Rollups technology has the potential to revolutionize decentralized finance (DeFi), address common problems in the landscape, and make a case for future derivatives trading.
The Merge is finally here
Last week, we saw a significant shift in crypto’s history, with Ethereum (ETH) completing their software update called The Merge. The update is expected to spur massive adoption and reduce energy usage, making it more environmentally friendly.
While Ethereum has come a long way over the past few years, scaling remains an obstacle for the network.
Where to start
Scaling the network is a top priority for DeFi. In blockchain technology, “scaling” refers to increasing the number of transactions that can be processed by the system in a given amount of time. As a blockchain gains popularity, the number of users increases and, along with them, the transaction volume. A blockchain protocol’s scalability refers to its capacity to sustain high transactional volume and future expansion.
During a recent speech at ETH Seoul, Vitalik Buterin mentioned that Layer 2 solutions ZK Rollups will be the foundation of Ethereum’s go-to strategy for the near and mid-term future. But what does that mean?
The foundational architecture of Ethereum’s main blockchain is Layer 1 (L1). It serves as the decentralized and secure base upon which the Layer 2 (L2) network is constructed. L2 offers scalability through quicker, cheaper transactions that utilize the primary security of the L1 chain. Protocols often use L2 to boost scalability by processing transactions off-chain and transmitting only essential information back to the mainnet. Smart contracts handle deposit and withdrawal processing entirely on the main blockchain protocol, which also monitors and enforces compliance with the rules for all off-chain transactions.
Layer 2 scaling solutions
Rollups come up in two distinct flavors – zero-knowledge (ZK) rollups and optimistic rollups. The method of verification is the key distinction between the two.
Zero-knowledge proof technology allows blockchains to validate transactions faster than other types of rollups while decreasing the cost of each. Since transaction fees are often an issue when working with smart contracts, this is a huge win for compatible ecosystems. They accomplish this by combining hundreds of transactions into a single one and transferring them off-chain. It creates a cryptographic validity proof and sends it back to the primary blockchain.
ZK-Rollups benefit from the same non-custodial security as Ethereum, but at a much faster transaction throughput, thanks to Ethereum’s verification of these proofs and storage of sufficient data to distinguish which off-chain account owns what.
Optimism on the other hand relays transaction data to a Layer 2 network via a smart contract. The sequencer bundles multiple transactions into batches, which it then submits back to the main chain as single transactions. Optimistic rollups assume that everyone will act in good faith, and there is a one-week period during which discrepancies can be challenged.
Protocols like zkSync and StarkWare employ Zero-Knowledge (ZK) proofs to scale the Ethereum network. Although there are differences between each solution—one difference being that they use different proofing protocols—future implementations of ZK-rollups will allow the ability to integrate privacy and efficiency into transactions without the constraints of certain limitations.
Empowering traders with technology
Using ZK-rollups enables global yields to be accessible to anyone, anywhere, paving the way for a greater impact of Web3. They group data-intensive transactions to save resources, making it possible to validate blocks quickly, and resulting in lower gas fees. To achieve a balance between technological superiority and improved per-unit profitability, we see this technology as a key.
When it comes to trading derivatives on L2, it provides leverage, deep liquidity, and cheaper transaction fee in comparison to an L1. In order to be efficient, it is important for users to have the ability to bridge back and forth from Ethereum without delays or reliance on liquidity providers.
In crypto, time is of the essence, and increased speed is important when it comes to derivatives trading.
The sole purpose here, alleviating risk associated with cryptocurrencies by reducing their volatility, allows for the proper execution of trading derivatives trickling all the way down to the trade. A trader can either profit by making the correct choice or lose money by making the wrong one.
We strongly believe that utilizing such a framework will equip users with a computing infrastructure for verified transactions, decentralizing and streamlining the entire process, and offering new financial instruments and products that were unavailable previously.