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🔍 DEEP DIVES

4 Zero-Knowledge Rollups Released Last Week – Here’s Why They Are Important

Ethereum is crypto’s dominant layer-1 blockchain, and it’s not even close. It doesn’t matter whether you're talking about size, innovative protocols, longevity, security, or decentralization, Ethereum takes the crown.

However, Ethereum is not without its faults.

Although newer entrants into crypto have not yet seen it, Ethereum is prone to issues during periods of high congestion. These issues manifest themselves in the form of slow and expensive transactions. So expensive that people created other (less secure and decentralized) blockchains just so they can transact on-chain again.

If Ethereum had these issues when crypto has a few million users, imagine the problems when crypto has a few billion users.

Obviously, the network would be unable to handle it.

This is why the builders got building on scaling solutions. So far, the solutions have taken the form of the optimistic rollups Optimism and Arbitrum, which we covered in depth here and here.

Optimism and Arbitrum work well, and we think they have a bright future. However, many of crypto’s smartest developers (including Ethereum founder Vitalik) do not believe they are the final scaling solution. Instead, they are bullish on zero-knowledge rollups (ZKRs).

What’s A ZKR?
ZKRs are among the most technical topics in crypto, so we’ll only cover the extreme basics here. If you want to dive in further, this breakdown is a good place to start.

ZKRs are built with zero-knowledge proofs. ZK proofs use cryptography to prove that they know something without revealing what they know or how they know it. So, for example, you can use a ZK proof to certify that you own an NFT without revealing which NFT you own, when you purchased it, or how much you spent on it.

ZKRs make use of these ZK proofs to supercharge Ethereum scalability. ZKRs take a batch (by a batch, we mean hundreds of thousands to millions) of transactions, roll them up, and then use the ZK proof to show Ethereum that the transactions are legitimate without Ethereum having to do any work to verify it themselves.

The result is an ultimate level of scalability.

However, great rewards come with great difficulty, and ZKRs that can run Ethereum applications have proven notoriously difficult to build.

But, that’s now changing.

The ZKR Era Has Begun
In the last week, there has been a Cambrian explosion of ZKR releases:

So, that’s 4 major ZKR releases in a little over a week. For a vertical that saw basically no public movement for years, this is a major development.

Why Does This Matter For You?
You might be reading this article and asking yourself, “so what?” Why in the world should you care about these obscure rollups?

The most obvious answer is that ZKRs will make Ethereum massively more scalable. Congestion will become nonexistent, and high gas fees and slow transaction times will be a thing of the past. Ethereum will truly become a network capable of facilitating the decentralized alternative financial system.

But maybe you still don’t care about that. Maybe you’re just an investor looking for portfolio exposure to crypto’s most touted commodity. Or maybe you’re just holding ETH to rake in flashy long-term gains.

In either case, you should still care about ZKRs.

If ZKRs is as good at scaling Ethereum in practice as it is in theory, then Ethereum will become much more popular. This means that more and more people will be using Ethereum, which should raise demand for ETH, which in turn should make ETH more valuable. In other words, ZKRs are extremely bullish for ETH.

Ultimately, whether you’re a tech head, an Ethereum enthusiast, or an ETH investor, the recent ZKR surge is a very positive development.

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🏛️ REGULATORY FRONT

Regulators Continue to Wage War On Crypto

Any objective third party would come to the conclusion that the United States government isn’t a fan of crypto and seems to be doing everything it can to destroy it.

But, going through the pain of legislation is difficult.

When you are dealing with train derailments, laughable meetings, and, oh yeah, their own monetary and banking crises, going through the normal range of motions is just too time consuming.

Instead, it might be easier to kill crypto by just, well… cut off the industry’s banking access.

And, that is exactly what is happening. In what is now being dubbed “Operation Choke Point 2.0” in a callback to the last time regulators tried to shut down industries they didn’t like without having to go through the courts.

Unfortunately (and shortsightedly), the powers-to-be in the United States have moved from covert hatred of crypto to open warfare, putting multiple big names in their sights.

Coinbase’s Wells Notice
For all of their faults (which we discussed here), no crypto company works harder to follow the rules than Coinbase.

As the company notes, they have gone out of their way to cooperate with the SEC. Remember, they have:

And what is Coinbase’s reward for their efforts? Another Wells notice (an official way to tell a company that the SEC is going to sue them).

The Wells notice specifically takes issue with some (undefined) portion of Coinbase’s listed assets, the staking service Coinbase Earn (which was vetted by the SEC during the IPO process), Coinbase Prime (no reason given), and Coinbase Wallet (no reason given).

As you can see, the SEC and Gensler are grasping at straws here.

Thankfully, Brian Armstrong and the employees at Coinbase are ready for a fight.

Binance Sued By CFTC
On Monday, US regulators at the Commodity Futures Trading Commission (CFTC) sued Binance over allegations it had illegally served American clients. The commission also claims that the company “intentionally” hid their corporate headquarters in an “attempt to avoid regulation.”

The CTFC is specifically targeting Binance’s crypto derivatives product, failure to register as a futures commission merchant, and not implementing KYC/AML processes.

What you need to know is that Binance is split into two different entities. There is the regular Binance, the global exchange, and there is Binance US, the US version of Binance.

US customers are only allowed on Binance US, which does not offer the same crypto derivative products as the regular global Binance.

But, the CTFC claims that Binance instructed US customers to access the regular Binance through VPNs. And these aren’t just allegations as they apparently have internal chat logs and memos proving the case.

This is all occurring while Binance US is facing scrutiny in Washington for its $1 billion acquisition of Voyager’s bankrupt assets.

According to Nansen, the pressure caused customers to withdraw over $600 million in assets, which in all honesty is significantly less than they’ve seen in the past. Binance still holds more than $64 billion in crypto.

A settlement and hefty fine look likely. But, if the Financial Times is correct and Binance has hid its ties to China for years, expect to see much more fireworks.

The Hits Keep Coming
Besides the two big ones, the SEC has also recently made moves against SushiSwap and Justin Sun. How those cases ultimately end is anybody’s guess.

What is clear is that the US’s lack of regulatory clarity is making it increasingly difficult for crypto companies to operate in the country. How are you supposed to follow the rules if you don’t know what the rules are?

As VC and Coinbase Board member Katie Huan put it in the Wall Street Journal:

We need to stop regulating by enforcement and instead regulate by legislation.

If we don’t, we risk losing a burgeoning technology and thriving industry for good.

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