Battle for ZK rollups supremacy: who will win?

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Quick brief: We have heard of Polygon (MATIC). We have observed (even profited from) the airdrops of Optimism (OP) and Arbitrum (ARB). We are preparing for an upcoming airdrop from zkSync. Now we are wondering which Layer 2 solution on Ethereum will eventually win the race? Rather what differentiates them and which ones we can invest in for the next bull run? 

Refresher: why we need Layer 2?

The transaction processing power of layer 1 blockchains are currently limited. Layer 2 (L2) solutions are ideally a scaling solution built on top of layer 1 blockchains (like Ethereum) to improve the base layer performance. The layer 1 blockchain will remain the settlement layer, while scaling solutions (L2) will continue to manifest their place as execution layers for the growing ecosystem.

Within L2, rollups have been the most successful scalability approach and has aided the growth of Ethereum. Rollups can be classified as Optimistic and ZK based. Without going into the technicalities, zero-knowledge (ZK) is an upcoming field that is driving new developer resources into it whereas Optimistic rollups are a standard implementation of transactions and integration onto Ethereum.

While ZK can be faster, they can be computationally complex. Among the ones we are tracking today, Optimism and Arbitrum are optimistic rollups while zkSync and Polygon have a ZK play.

A brief comparison is below:

Source: Galaxy Digital
Note: EVM is Ethereum Virtual Machine

Knowing the above, let us identify some trends on ZK-rollups in the market currently.

1. Adoption for ZK rollup is growing

Polygon and zkSync launched their ZK Rollups in late March (named Polygon zkEVM and zkSync Era) and have shown promising growth. The networks have garnered a total value locked (TVL) of $4.2M and $246M respectively in a short span of 3 weeks. dYdX and Loopring are the other major contributors to zkRollup TVL.

Source:  L2Beat

Do note that the high buzz surrounding zkSync in comparison to Polygon might be attributed towards surrounding news about an impending airdrop for the zkSync early users. However, according to Dune analytics, 85% of the users in zkSync have only done one deposit - hoping for airdrop rewards.

Source: Dune

2. Polygon may migrate to ZKrollup from PoS chain in the future

Polygon’s proof-of-stake chain has had issues over the years. In December 2021, a $24B bug was discovered in PoS chain smart contracts which was patched later. The network also seems to be suffering from “reorgs” or rollbacks of previously finalized transactions frequently. 

As zkEVM solutions mature, we may see Polygon look to transition to validity proofs or hybrid solutions, leveraging their existing user bases to attract dApp development and maintain their market dominance.

3. Uniswap to launch on Polygon, 1inch to launch on zkSync

Polygon zkEVM may get a much-needed boost from Uniswap, Ethereum’s leading decentralized exchange by volume. A vote to launch Uniswap on Polygon zkEVM was passed last Friday, with 42 million voting in favour of the move.

On similar lines, 1inch, Ethereum decentralized protocol, has deployed its aggregation and limit order protocols on zkSync to tap into faster and cheaper transactions.

4. Vitalik Buterin, Ethereum co-founder, observes that ZK rollups may win eventually

In his 2021 rollup primer, Vitalik Buterin of Ethereum 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.”

What should you, the investor, do now?

• • Outside of BTC and ETH, invest in MATIC: Polygon (MATIC) has been a solid performer of the last 3 years even during 2022, the bear market year. While Optimism (OP) and Arbitrum (ARB) have taken some sheen away recently with their spectacular launches (both tokens are in top 75 by market capitalization), MATIC has potential to do well in the next few years as its ZK play solidifies. 
• • Prepare of zkSync airdrop: Who doesn’t love free tokens? Given that users have already been transacting with zkSync in hopes of being rewarded, it is prudent to do at least one transaction on zkSync Era. Once the token is announced and launched, wait for the eventual drop in price to pick up a bag for the medium term. 
• • L2 are overall a good investment: Along with MATIC and ZkSync token (eventual), OP and ARB have good potential to do well. As Ethereum grows in adoption, all these tokens will be useful in their own right. If the protocols figure a way to make their transactions interoperable in the future, the L2 play will not be a zero-sum game and will grow the ecosystem even further. The key risks in all of this is the performance of ETH and the regulatory concerns in the US around it being a security if any.

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Disclaimer: This article was authored by Giottus Crypto Exchange as a part of a paid partnership with The News Minute. Crypto-asset or cryptocurrency investments are subject to market risks such as volatility and have no guaranteed returns. Please do your own research before investing and seek independent legal/financial advice if you are unsure about the investments.