Author: Kernel Ventures Stanley
Editor(s): Kernel Ventures Rose, Kernel Ventures Mandy, Kernel Ventures Joshua
TLDR :
In just a few days, ZK Fair has achieved a Total Value Locked (TVL) of $120 million, currently stabilizing at $80 million, making it one of the fastest-growing Rollups. This "three-no" public chain, with no financing, no market makers, and no institutions, has managed such growth. This article will delve into the development of ZK Fair and provide a fundamental analysis of the momentum in the current Rollup market.
Rollup Background
Introduction
Rollup is one of the Layer 2 solutions that transfers computation and storage of transactions from the Ethereum mainnet (Layer 1) to Layer 2 for processing and compression. The compressed data is then uploaded back to the Ethereum mainnet to enhance the performance of Ethereum. The emergence of Rollup has significantly reduced Gas fees on Layer 2 compared to the mainnet, leading to savings in Gas consumption, faster Transactions Per Second (TPS), and smoother transaction interactions. Some mainstream Rollup chains that have already been launched include Arbitrum, Optimism, Base, and ZK Rollup solutions such as Starknet and zkSync, which are widely used in the market.
Data Overview
Rollup Chain Data Comparison, Image Source: Kernel Ventures
From the data, it is evident that currently, OP and ARB still dominate among the Rollup chains. However, newcomers such as Manta and ZK Fair have managed to accumulate a significant TVL in a short period. Nevertheless, in terms of the number of protocols, they may need some time to catch up. The protocols of mainstream Rollups are well-developed, and their infrastructure is robust. Meanwhile, emerging chains still have room for development in terms of protocol expansion and infrastructure enhancement.
Rollup Analysis
We will categorize and introduce some recently popular Rollup chains, as well as well-established Rollup chains.
Existing Rollup Chains
ARB
Arbitrum is an Ethereum Layer 2 scaling solution created by the Offchain Labs, based on Optimistic Rollup . While Arbitrum settlements still occur on the Ethereum mainnet, the execution and contract storage take place off-chain, with only the essential transaction data being submitted to Ethereum. As a result, Arbitrum incurs significantly lower gas fees compared to the mainnet.
OP
Optimism is built on the Optimistic Rollup, utilizing a single-round interactive fraud proof mechanism to ensure that the data synchronized to Layer 1 is valid.
Polygon zkEVM
Polygon zkEVM is an Ethereum Layer 2 scaling solution built on ZK Rollup. This zkEVM expansion solution utilizes ZK proofs to reduce transaction costs, increase throughput, and concurrently maintain the security of the Ethereum Layer 1.
Emerging Rollup Chains
ZK Fair
ZK Fair as a Rollup, has several key features:
Built on the Polygon CDK, with the Data Availability (DA) layer utilizing Celestia (currently maintained by a self-operated data committee), and EVM compatibility.
Uses USDC as Gas fees.
The Rollup token, ZKF, is 100% distributed to the community. 75% of the tokens are distributed in four phases, completing distribution to participants in gas consumption activities within 48 hours. Essentially, participants engage in the token's primary market sale by paying gas fees to the official sequencer. The corresponding primary market financing valuation is only $4 million.
ZK Fair TVL Growth Trends, Image Source: Kernel Ventures
ZK Fair has experienced rapid growth in TVL in the short term, partly owing to its decentralized nature. As per community insights, the listing on mainstream exchanges like Bitget, Kucoin, and Gate resulted from the community and users establishing contact with the exchanges. Subsequently, the official team was invited for technical integration, all initiated by the community. Projects like Izumi Finance on-chain also follow a community-driven approach, with the community taking the lead and the project team providing support, showcasing a strong community cohesion.
According to information from Lumoz, the development team behind ZK Fair (formerly Opside), they have plans to introduce different themed Rollup chains in the future. This includes Rollup chains based on current hot topics like Bitcoin, as well as those focused on social aspects and financial derivatives. The upcoming chains may be launched in collaboration with project teams, resembling the current trend of Layer 3 concepts, where each Dapp has its own chain. As revealed by the team, these upcoming chains will also adopt the Fair model, distributing a portion of the original tokens to participants on the chain.
Blast
Blast is a Layer2 network based on Optimistic Rollups and is compatible with Ethereum. In just 6 days, the TVL on the chain has surpassed $500 million, approaching $600 million. This surge has notably doubled the price of the $Blur token.
Blast originated from the founder Pacman's observation that over a billion dollars in funds within the Blur bid pool were essentially dormant, not generating any returns. This situation is prevalent across applications on almost every chain, indicating that these funds are subjected to passive depreciation caused by inflation. Specifically, when users deposit funds into Blast, the corresponding ETH locked on the Layer 1 network is utilized for native network staking. The earned ETH staking rewards are then automatically returned to users on the Blast platform. In essence, if a user holds 1 ETH in their Blast account, it may grow automatically over time.
Manta
Manta Network serves as the gateway for modular ZK applications, establishing a new paradigm for L2 smart contract platforms by leveraging modular blockchain and zkEVM. It aims to build a modular ecosystem for the next generation of decentralized applications (dApps). Currently, Manta Network provides two networks.
The focus here is on Manta Pacific, a modular L2 ecosystem built on Ethereum. It addresses usability concerns through modular infrastructure design, enabling seamless integration of modular Data Availability (DA) and zkEVM. Since becoming the first platform integrated into Celestia on Ethereum L2, Manta Pacific has assisted users in saving over $750,000 in gas fees.
Metis
Metis has been operational for over 2 years, but its recent introduction of a decentralized sequencer has brought it back into the spotlight. Metis is a Layer 2 solution built on the Ethereum blockchain. It is the first to innovate by using a decentralized sequencing pool (PoS Sequencer Pool) and a hybrid of Optimistic Rollup (OP) and Zero-Knowledge Rollup (ZK) to enhance network security, sustainability, and decentralization.
In Metis' design, the initial sequencer nodes are created by whitelisted users, complemented by a parallel staking mechanism. Users can become new sequencer nodes by staking the native token $METIS, enabling network participants to supervise the sequencer nodes. This enhances the transparency and credibility of the entire system.
Tech Stack Analysis
Polygon CDK
Polygon Chain Development Kit (CDK) is a modular open-source software toolkit designed for blockchain developers to launch new Layer 2 (L2) chains on Ethereum.
Polygon CDK utilizes zero-knowledge proofs to compress transactions and enhance scalability. It prioritizes modularity, facilitating the flexible design of application-specific chains. This enables developers to choose the virtual machine, sequencer type, Gas token, and data availability solution based on their specific needs. It features:
High Modularity
Polygon CDK allows developers to customize L2 chains according to specific requirements, catering to the unique needs of various applications.
Data Availability
Chains built using CDK will have a dedicated Data Availability Committee (DAC) to ensure reliable off-chain data access.
Celestia DA
Celestia pioneered the concept of modular blockchains by decoupling blockchain into three layers: data, consensus, and execution. In a monolithic blockchain, these three layers are typically handled by a single network. Celestia focuses on the data and consensus layers, allowing L2 to delegate the data availability layer (DA) to reduce transaction gas fees. For instance, Manta Pacific has already adopted Celestia as its data availability layer, and according to official statements from Manta Pacific, after migrating DA from Ethereum to Celestia, costs have decreased by 99.81%.
For specific technical details, you can refer to a previous article by Kernel Ventures: Exploring Data Availability — In Relation to Historical Data Layer Design (details may be provided in the mentioned article).
Comparison between OP and ARB
Optimism is not the sole existing rollup solution. Arbitrum also provides a similar solution, and in terms of functionality and popularity, Arbitrum is the closest alternative to Optimism. Arbitrum allows developers to run unmodified EVM contracts and Ethereum transactions on Layer 2 protocols while still benefiting from the security of Ethereum's Layer 1 network. In these aspects, it offers features very similar to Optimism.
The main difference between Optimism and Arbitrum lies in the type of fraud proof they use, with Optimism utilizing single-round fraud proofs, while Arbitrum uses multi-round fraud proofs. Optimism's single-round fraud proofs rely on Layer 1 to execute all Layer 2 transactions, ensuring that fraud proof verification is instant.
Since its launch, Arbitrum has consistently shown better performance in various data on Layer 2 compared to Optimism. However, this trend began to change gradually after Optimism started promoting the OP stack. OP stack is an open-source Layer 2 technology stack, meaning that other projects wishing to run Layer 2 can use it for free to quickly deploy their own Layer 2, significantly reducing development and testing costs. L2 projects adopting the OP stack can achieve security and efficiency due to technical consistency in architecture. After the launch of the OP stack, it gained initial adoption by Coinbase, and with the demonstration effect of Coinbase, OP stack has been adopted by more projects, including Binance's opBNB, NFT project Zora, and others.
Future Prospects
Fair Launch
The Fair launch model of the current Inscription vertical has a broad audience, allowing retail investors to directly acquire original tokens. This is also the reason why Inscription remains popular to this day. ZK Fair follows the essence of this model, namely, a public launch. In the future, more chains may adopt this model, leading to a rapid increase in TVL.
Rollup Absorbing L1 Market Share
From a user experience perspective, Rollup and L1 have little substantive difference. Efficient transactions and low fees often attract users, as most users make decisions based on experience rather than technical details. Some rapidly growing Rollup networks offer an excellent user experience with fast transaction speeds, providing substantial incentives for both users and developers. With the precedent set by ZK Fair, future chains may continue to adopt this approach, further absorbing market share from L1.
Clear Plans & Healthy Ecosystem
In this narrative of the current Rollup wave, projects like ZK Fair and Blast provide significant incentives, contributing to a healthier ecosystem. This has reduced much of the unnecessary TVL and meaningless activities. For example, zkSync has been live for years without token distribution. Although it boasts a high TVL due to substantial fundraising and continuous engagement of technical enthusiasts, there are few new projects, especially those with new narratives and themes, running on the chain.
Public Goods
In the latest Rollup wave, many chains have introduced the concept of fee sharing. In the case of ZK Fair, 75% of the fees are distributed to all ZKF token stakers, and 25% is allocated to dApp deployers. Blast also allocates fees to Dapp deployers. This allows many developers to go beyond project income and ecosystem fund grants, leveraging gas revenue to develop more free public goods.
Decentralized Sequencers
The cost collection on Layer 2 (L2) and cost payment on Layer 1 (L1) are both executed by the L2 sequencer. The profits are also attributed to the sequencer. Currently, both OP and ARB sequencers are operated by the respective official entities, with profits going to the official treasuries.
The mechanism for decentralized sequencers is likely to operate on a Proof-of-Stake (POS) basis. In this system, decentralized sequencers need to stake the native tokens of L2, such as ARB or OP, as collateral. If they fail to fulfill their duties, the collateral may be slashed. Regular users can either stake themselves as sequencers or use services similar to Lido's staking service. In the latter case, users provide staking tokens, and professional, decentralized sequencer operators execute sequencing and uploading services. Stakers receive a significant portion of the sequencers' L2 fees and MEV rewards (in Lido's mechanism, this is 90%). This model aims to make Rollup more transparent, decentralized, and trustworthy.
Disruptive Business Model
Almost all Layer2 solutions profit from a "subletting" model. In this context, "subletting" refers to directly renting a property from the landlord and then subleasing it to other tenants. Similarly, in the blockchain world, Layer2 chains generate revenue by collecting Gas fees from users (tenants) and subsequently paying fees to Layer1 (landlords). In theory, economies of scale are crucial, as long as a sufficient number of users adopt Layer2, the costs paid to Layer1 do not change significantly (unless the volume is enormous, such as in the case of OP and ARB). Therefore, if a chain's transaction volume cannot meet expectations within a certain period, it may be in a long-term loss-making state. This is also why chains like zkSync, as mentioned earlier, prefer to attract and engage users actively; with a substantial TVL, they don't worry about a lack of user transactions.
However, this business model is not sustainable in the long run. While the focus has been on chains like zkSync, which has excellent financing conditions, for smaller chains, relying solely on actively engaging and retaining users might not be as effective. Therefore, the rise of "grassroots" projects like ZK Fair, as mentioned earlier, provides valuable lessons for other chains. In the pursuit of TVL, it is essential to consider the long-term sustainability of TVL, not just blindly focus on acquiring it.
Summary
The article starts with ZK Fair achieving a TVL of $120 million in a short period, using it as a focal point to explore the Rollup landscape. It covers established players like Arbitrum and Optimism, as well as newer entrants such as ZK Fair, Blast, Manta, and Metis.
On the technical front, it delves into the modular toolkit of Polygon CDK and the modular concept of Celestia DA. It compares the differences between Optimism and Arbitrum, highlights the potential adoption of a POS mechanism for decentralized sequencers, aiming to make Rollup more transparent and decentralized.
In the future outlook, the article emphasizes the widespread appeal of the fair launch model and the potential for Rollup to absorb market share from L1. It points out the negligible difference in user experience between Rollup and L1, with efficient transactions and low fees attracting users. The significance of public goods and the fee-sharing concept introduced by chains in the latest Rollup wave is emphasized. The article concludes by addressing the need to focus not only on acquiring TVL but also on its long-term sustainability.
In essence, this new wave of Rollup is characterized by new projects with tokens, modular design, generous incentives, accelerating the initial business and token price dynamics.
Kernel Ventures is a research & dev community driven crypto VC fund with more than 70 early stage investments, focusing on infrastructure, middleware, dApps, especially ZK, Rollup, DEX, Modular Blockchain, and verticals that will onboard the next billion of users in crypto such as Account Abstraction, Data Availability, Scalability and etc. For the past seven years, we have committed ourselves to supporting the growth of core dev communities and University Blockchain Associations across the world.
Reference
Rollup Summer Reflection：https://www.chaincatcher.com/article/2110635
ZK Fair Official Docs：https://docs.zkfair.io/
