Nansen: Will zkSync be the recognized standard for hosted L3?

Original Title: “Nansen: Is zkSync the Answer to Ethereum Scaling?”
Author: Osgur Murphy O Kane, Nansen Researcher
Translated by: ChinaDeFi

zkSync can be considered the most exciting L2 at the moment. It has deployed the mainnet "Baby Alpha," with a full mainnet launch expected in early Q1 2023. This will be the first EVM-compatible Validity Rollup, with 150 projects already indicating they will deploy on zkSync, including most DeFi blue chips.

Additionally, zkSync will launch the first L3 proof of concept in 2023. So far, the prospects for L3 are purely hypothetical, and it will be very interesting to see how it operates in practice.

The focus of zkSync on EVM compatibility is a key design choice that may determine its success or failure. It has its pros and cons; the advantage lies in the infrastructure and ecosystem of EVM. Other projects are also focusing on developing new VMs, hoping these VMs can better build applications suitable for mass adoption. While the native account abstraction in zkSync will provide a good user experience, it remains to be seen whether it can stay aligned with EVM in the long run.

How customizable and performant L3 will be, and the extent of their autonomy in arbitrary design operations, remains to be seen. But one thing is certain: zkSync is worth keeping a close eye on as it approaches and deploys on the mainnet.

This report will outline zkSync and its main features. It will also include an assessment of its potential competitive advantages, an overview of account abstraction, and an analysis of the envisioned future of L3 for zkSync.

Introduction

What is zkSync?

zkSync is a general-purpose smart contract Validity Rollup platform. It focuses on staying aligned with the Ethereum community and is widely regarded as having the potential to become the first EVM-compatible Validity Rollup on the mainnet.

What stage is zkSync at today?

Source: zkSync

On October 28, zkSync released their "Baby Alpha," which is limited to teams using the mainnet. Following this, the "Fair Onboarding Alpha" will be limited to registered participating projects. This means they will be able to test their products for any bugs or issues before real users come in. At this stage, all code is open source. Finally, a complete Alpha version will be released (expected in early Q1 2023).

This gradual approach makes sense, as a poor release could have serious negative impacts not only on zkSync but also on Ethereum scaling projects.

Funding

Matter Labs has raised $458 million, with the recent Series C funding led by Blockchain Capital and Dragonfly, which raised $200 million. Previous funding includes a $200 million ecosystem fund, a $50 million Series B led by a16z, and $8 million from Series A and Seed rounds.

zkSync is well-capitalized, making it a force to be reckoned with in the L2 wars.

Starkware: Total funding of $273 million
Fuel: Total funding of $81.5 million

Funding does not guarantee success, but zkSync has raised substantial capital to continue realizing its vision. zkSync is expected to become the first real-time general-purpose Validity Rollup compatible with Ethereum, which could give it a significant advantage. Moreover, it has consistently aligned with the Ethereum community, which can help it build a strong ecosystem and a competitive moat, while other Rollups may face significant challenges when deploying to the mainnet.

So what are its main features?

Main Features

Culture

zkSync positions itself as a scaling solution focused on Ethereum. It strives to align itself with the Ethereum community. Of course, most Rollups align with Ethereum because it has many excellent developers and a huge amount of user activity. However, some remain open to the possibility of deploying on other chains and different configurations (this viewpoint makes sense; why limit oneself to one network?).

zkSync is fully focused on Ethereum and prides itself on five key qualities that demonstrate its alignment with the Ethereum community:

• General-purpose
• EVM compatibility
• Supports Solidity
• ETH pays gas
• Open source

Source: zkSync

This indicates zkSync's focus on aligning with Ethereum. The network effects of EVM are very strong, so this strategy makes sense at least in the short term. However, one argument against this approach is that EVM has many design limitations, and other virtual machines and programming languages may be better suited for future applications, which would help bring crypto technology into the mainstream. This is the approach that other scaling solutions like Starkware and Fuel are taking. However, the wealth of infrastructure surrounding EVM is not coincidental, as 9 out of the top 10 TVL chains are EVM-compatible.

EVM Compatibility

zkSync achieves EVM compatibility by having a VM that adapts EVM development tools and works well with validity proofs. It is not entirely equivalent to EVM, as Matter Labs has chosen a design that is easier to handle validity proofs.

This design alleviates the burden on Matter Labs to build a system compatible with all EVM opcodes, which are much more complex (e.g., Scroll).

This means that dApps ported to zkSync may require some adjustments rather than using the same design as EVM.

zkSync compiles code written in Solidity into Yul. Yul is an intermediate language that compiles Solidity into bytecode within LLVM (the compiler framework). This enables zkSync to achieve EVM compatibility. There have already been discussions within the community about plans to support languages like Rust and Javascript in the future. This could increase the number of projects that can deploy to zkSync with minimal changes, such as those already written in Rust for other blockchains. If successful, it could greatly expand the tools available to builders while maintaining composability between applications.

Different Validity Rollup Designs

zkSync's EVM compatibility occurs at the language level, while Hermez and Scroll go further by building a VM that can interpret EVM bytecode (this approach is clearly more complex and has long been considered unfeasible).

By deploying at the language level, zkSync does not require validity proofs for all steps of EVM execution, which should make the proof process easier to decentralize. Proponents of a complete zkEVM argue that bytecode-level zkEVM is the gold standard in terms of security.

Deploying on zkSync

Since EVM is not implemented at the bytecode level, zkSync also introduces additional risks (due to differences between the two environments). Will this be a problem? If so, how significant will it be? These remain to be seen. zkSync claims that 99% of the code can be deployed directly to zkSync 2.0 without any changes. zkSync promises to open source everything this year, and we can describe zkSync as being EVM-compatible at the language level. This means zkVM will compile EVM languages (like Solidity) into a SNARK-friendly VM. This adds some compiler risk to the protocol.

Token Economics

Token utility is a contentious topic. There is no consensus on how to incorporate a satisfactory value appreciation mechanism into tokens to give them intrinsic value. This is due to the desire for projects to avoid falling under securities regulations.

For example, protocols like Uniswap (arguably the golden child of DeFi) have a token with uncertain intrinsic value. While it is used for governance and rewards, it lacks actual appreciation attributes that confer long-term intrinsic value (aside from governance, which itself is of questionable value).

Layer 2 tokenomics has an additional consideration, as they are built on top of another tokenomics protocol (like ETH). Adding an additional token on top introduces extra risks and friction points. However, it is also necessary to take incentives to grow and maintain the ecosystem.

zkSync chooses to pay gas fees with ETH, which is a strong signal of loyalty to Ethereum and the Ethereum community. Some Rollups take certain actions to appease the Ethereum community but do not demonstrate true loyalty; paying gas with ETH is a genuine strong statement.

Doing so also helps avoid additional friction (considering that transactions need to settle in ETH on the base layer anyway). Using a native token as a fee token may detract from user experience. Ultimately, user experience will prevail in the increasingly competitive Rollup space.

Aside from that, Matter Labs remains silent on the utility of the token. Governance of Rollups also has potential issues, as it brings additional risks of governance capture. In terms of ownership, most tokens are actually centralized, with only a few participants able to influence governance decisions. This increases risk.

Adopting a typical PoS token approach will bring additional scrutiny risks to Layer 2, so it is also considered undesirable.

The team claims that two-thirds of the tokens will be allocated to the community/ecosystem, while one-third will be used to incentivize the team and investors. This is a healthy split, as many tokens are designed to benefit insiders; one-third of the tokens should provide sufficient incentives for contributors. For example, Starkware allocates 50% of its token supply to insiders, and zkSync CPO Steve Newcomb has mentioned that Arbitrum also allocates 50% of its token supply to insiders.

Moat

How strong is the first-mover advantage?

While being first to market undoubtedly gives zkSync a first-mover advantage, how strong is this advantage, and how sustainable is it? To explore this, it is necessary to examine EVM-compatible chains.

During the 2020/21 bull market, EVM-compatible chains rapidly emerged as they provided alternatives for users of the Ethereum mainnet, while the Ethereum mainnet was very expensive.

This brought forth the following players:

• BNB Chain
• Polygon
• Avalanche
• Fantom

All of these chains have developed very quickly. However, the ease of deployment across EVM chains makes developers and users very profit-driven, allowing them to quickly move from one chain to the next, arguably with little loyalty. Take BNB Chain as an example; while it has a first-mover advantage, few projects are considered to have lasting value.

Will zkSync be attacked by profit-driven developers/users?

zkSync may be different because it is closely connected to the Ethereum community. It is widely believed that Validity Rollup is one of the most promising scaling technologies, and zkSync's collaboration with Ethereum, particularly using ETH as the gas token, may lead developers to prefer building on it. In fact, 150 Ethereum projects have already indicated they plan to deploy on zkSync, including Aave, Uniswap, Chainlink, Curve, and others.

However, zkSync's long-term success will depend on the design and user experience of other EVM-compatible Validity Rollups being built, such as Scroll. If these companies can launch objectively better products, then the first-mover advantage will become meaningless. However, if zkSync and its L3 ecosystem can generate strong appeal before competitive products are launched, then its first-mover position may provide it with a significant competitive advantage.

Account Abstraction

Account abstraction refers to the goal of reducing the two types of accounts on the blockchain to one, which will lower complexity for users, as they will no longer need to distinguish between different account types.

Ethereum has been working towards this since 2017; however, it is a very challenging task and has been shelved in favor of supporting scaling roadmaps. Now, zkSync (along with other L2s like Starkware and Fuel) will merge account abstraction by default. Essentially, accounts can implement arbitrary logic.

While this may not seem exciting at first glance, it actually brings some very interesting UX improvements.

Approving Multiple Transactions at Once

Using dApps on Ethereum is frustrating because each interaction on-chain requires a transaction (and gas fees). This is a poor user experience. With account abstraction, multiple transactions can be bundled together. The following diagram shows how it will greatly improve the user experience:

Social Recovery

One of the biggest user experience issues in crypto is the mnemonic phrase and the full consequences of forgetting it.

Social recovery allows users who lose their private keys to authorize a new wallet as the legitimate owner.

This can be:

• Hardware wallets
• Trusted friends/relatives
• Third-party services
• A combination of the above two.

Through social recovery, users can still safeguard their funds and control their assets. Vitalik is an advocate for social recovery wallets, stating that it is his "preferred method" for securing wallets.

Multi-Factor Authentication

Account abstraction allows users to set their accounts to: 1. Require signatures from multiple keys; 2. Execute transactions only when specified conditions are met. While this sounds similar to using multi-signatures like Gnosis Safe, account abstraction can provide better customization and usability for wallets than typical multi-signatures.

Account abstraction can offer users some customization features to improve user experience. Security levels can be adjusted according to user needs.

Any Token Can Pay Gas Fees

Account abstraction can use any token to pay gas. While it is still uncertain whether zkSync will enable this feature, assuming it can run in the background, fees can be exchanged for ETH.

Session Keys

This allows wallets to pre-approve certain rules for interacting with dApps, enabling users to use them frequently without needing to sign transactions. This is particularly useful for blockchain games.

dApps can operate freely within specified boundaries, allowing users to maximize usability while maintaining boundaries (and effectively reducing risk). Currently, users need to trust an entity to sign on their behalf (or sign themselves).

Plugins

Account abstraction enables plugins, meaning users can add and remove functionalities after creating an account.

Time-Limited Transactions

Another potential feature of account abstraction is time-limited transactions—users can create transactions that execute within a specified future time.

Volition

zkSync also aims to operate as a Volition, known as zkPorter. zkPorter allows users to choose between Validity Rollup (on-chain data availability) and Validium (off-chain data availability). This allows users/developers to select the desired security for their specific applications. For example, gaming applications may choose Validium, as the extra cost of Validity Rollup security is unnecessary for them, while DeFi applications may choose Validity Rollup for its enhanced security and on-chain data availability.

zkPorter off-chain data will be sent to the Guardian Network—this will be a PoS network secured by zkSync (yet to be released) tokens. This increases the trust assumption of two-thirds honest validators and demonstrates the trade-offs between Validium and Validity Rollup. Validium is much cheaper but has lower security.

L3

What is L3?

To understand the meaning of "Layer-3," it is necessary to first understand L2 Rollup. L2 Rollup refers to blockchain scaling solutions that handle transactions on Ethereum L1, with settlement and data availability on L1. L3 is to L2 what L2 is to L1.

L3 enables custom scaling for specific applications that require computation outside of EVM. The general consensus is that L3 supports custom functionality for applications and leverages L2 for scalability, such as privacy.

L3 is applicable to Validium, which may suit specific application use cases (like gaming and enterprise applications).

L3 will place state and execution on multiple servers, which is necessary for compute-intensive applications. Expected benefits include:

• Solutions to prevent MEV may lead to little or no MEV.
• Can be optimized for applications: fee markets, hardware requirements, etc.

Fractal Hyperchain

Fractal Hyperchain is the term Matter Labs uses to describe their vision for L3 on zkSync. All Fractal Hyperchains will be constrained by the same circuit technology and verified by the same prover. The significance lies in:

By having the same prover, there is a native bridge between Hyperchains. Bridges have historically been a key factor in ecosystem failures, and a native, trustless bridge will be crucial for achieving scalability, secure composability, and interoperability. Matter Labs states that in the future, there will be no bridges between Hyperchains. However, this is purely hypothetical. Despite claims of "infinite" performance, no single solution can scale infinitely, so it will be interesting to observe how much scalability L3 can provide when it launches.

L3 will be highly customizable, envisioning many specific application chains.

L3 users can choose from three data availability options based on their needs:

• Validity Rollup (highest security, highest cost)
• Validium (off-chain data availability, fastest, cheapest)
• Volition (applications/users can choose between Validity Rollup and Validium for transactions).

zkSync expects to launch the L3 proof of concept in Q1 2023 and claims that some major brands are looking to deploy on zkSync's L3.

Matter Labs also states that their LLVM compiler can support any modern programming language, such as Solidity, Rust, C++, etc., which will open up the landscape.

Source: zkSync

Scalability and the Importance of L3

While zkSync aims to scale Ethereum, it is somewhat ironic that there is currently a lot of unused block space on many existing blockchains. This is because there are currently no applications capable of attracting a large number of users. The potential scalability and customizability brought by L3 paves the way for the mass adoption of Web3 technologies. Ultimately, the success of these scaling platforms will depend on whether applications suitable for mass adoption can be developed.

The Main Battleground of the Validity Rollup War May Be the Prover

While many Validity Rollup solutions are racing to launch their mainnet products and trying to build the best ecosystems, Matter Labs' Chief Product Officer believes the focus should be on which project can build the best prover.

To realize the vision of L3 Hyperchain, zkSync's prover needs to be recognized as the best in the industry. If this happens, it could facilitate a large number of builders seeking to deploy L3 in a composable and interoperable network enabled by a shared prover.

If projects/networks use the same prover, they will be able to interoperate with each other (protected by cryptography (theoretically)). Our vision is that most on-chain activities will utilize the same prover, which will significantly advance the potential of Web3 technologies.

On the Bankless podcast, Matter Labs' Chief Product Officer used the analogy of SSL to describe zkSync's potential. SSL stands for Secure Sockets Layer, a protocol for authenticating, encrypting, and decrypting communications between browsers and servers on the internet. Before the adoption of SSL, e-commerce was niche, and many people were hesitant to put their credit card details online. However, with the widespread adoption of SSL and confidence in the technology, e-commerce was able to grow and thrive.

If zkSync's prover can be accepted as a secure and reliable universal standard, then the vision of a vast network composed of secure and interoperable Fractal Hyperchains may become a reality. This certainly also depends on whether L3 and blockchain technology itself can achieve product-market fit at a global scale.

Decentralization

By implementing proto-danksharding and danksharding, Ethereum will transition from a bandwidth-constrained environment to a bandwidth-abundant one. Nansen's report explains Ethereum's scaling roadmap.

There is a viewpoint that today's Rollups are overly focused on data optimization rather than bandwidth optimization, leading to issues surrounding state growth. This also brings challenges for future decentralized provers/sequencers.

L3 / Fractal Hyperchain may provide a satisfactory solution for reducing state growth. However, it remains to be seen whether they can realize their potential to host a large amount of on-chain activity, as issues may arise at the L2 layer in the future.

Decentralization is at the end of many Rollup roadmaps, but it is currently unclear how to achieve this and how quickly it can be done.

Composability

Validity Rollups can be composed with settlement layers, such as Ethereum L1. To achieve this, validity proofs need to be generated for each block. Of course, Validity Rollup technology has not yet reached this level; nevertheless, its pace of development has even surprised Vitalik Buterin. This will enable L3 to synthesize with the underlying L2.

However, this requires waiting for the next block to come back. For most applications, this should not be an issue. One way to address this is for L2 to provide pre-confirmation of L3 transactions, which should make L3 and L2 transactions atomically composable. Ultimately, it is possible to have n L3s composing the same unified state, with a single validity proof verifying all L3s. This would lead to complete composability.

Polynya believes this is a viable way forward in maximizing security, decentralization, and scalability.

This is exciting; however, how these Rollups / L3s operate in practice remains to be seen. zkSync is in a leading position in this regard and is likely to provide the first instance of L3.

Conclusion

zkSync's latest funding round raised $200 million, bringing its total ecosystem funding to $485 million, making it one of the best-capitalized L1/L2s with a solid scaling roadmap.

Its consistency with Ethereum is noteworthy, as paying gas fees with ETH demonstrates this. While this will attract Ethereum builders, it remains unclear how powerful their first-mover advantage as a general-purpose EVM-compatible Validity Rollup will be.

Native account abstraction can significantly improve user experience and has the potential to push crypto technology into mainstream use.

L3 will be a key battleground for ZK-Rollups, and zkSync is seeking to become the recognized standard for hosting L3. Their L3 PoC will launch in Q1 2023, which is worth keeping a close eye on.

A key challenge (with no clear solution yet) will be the decentralized prover.