gm readers and welcome back to another edition of Decrypting DeFi.
A layer-2 airdrop and two mainnet launches has the market clamoring for more scaling action.
Last Thursday, Arbitrum finally distributed its highly-anticipated ARB token, decentralizing its inventory into the hands of its most dedicated users. The hype was so fierce, though, that it took down the project’s main website as well as that of Arbiscan— Arbitrum’s Etherscan equivalent—because eligible wallets could claim their airdrop via either site.
Two more scaling solutions have since joined the arena: zkSync and Polygon’s similar zkEVM product.
The latter “zero-knowledge” launch saw its first transaction executed by none other than Vitalik Buterin. He wrote into the transaction a message: “A few million constraints for man, unconstrained scalability for mankind.”
With so many solutions entering the market, which layer-2 will capture the lion’s share of users?
They’re all relatively speedy, compatible with Ethereum, and have relatively similar warnings on the label. Matter Labs’ zkSync is explicitly an “alpha” launch, and Polygon has called its offering “beta.”
When asked how a layperson is expected to know the difference. Anthony Rose, zkSync’s head of engineering and also formerly an engineer at Musk’s SpaceX, told Decrypt that “the systems will look somewhat similar early on, but once you project them out six months, four months, or five years, these will look very different.”
This is due to the various tradeoffs and design choices that each team has made.
That said, what exactly are they?
Rollups all the way down
All three projects mentioned above are a variety of rollup. StarkWare and Optimism are also using rollup technology.
In broad strokes, these operate as a separate layer atop the Ethereum network to lighten the mainnet’s load. Instead of executing work on Ethereum, all of the same activities like trading coins or taking out loans are done on this layer-2 rollup.
Every so often, evidence that these activities have happened—like which coins were swapped and who’s borrowing what—is compressed into a small bit of data. This small bit of data is then sent to Ethereum for execution. This helps scale Ethereum by essentially reducing the raw data clogging up the network.
But there are differences in how rollups are designed. These boil down to either zero-knowledge (or “zk”) rollups or so-called optimistic rollups.
StarkWare, zkSync, and Polygon’s offering have opted for the former, while Arbitrum and Optimism have opted for the latter.
The designs differ in how they verify compressed, layer-2 transactions. Rollups using zero-knowledge cryptography must harness a hefty amount of computation power to compress those above-mentioned bits of data into proofs. Optimistic rollups don’t do this, opting instead to assume every transaction made on layer-2 is legitimate and valid, but providing a seven-day window where users can challenge that validity.
These distinctions haven’t necessarily manifested themselves in any clear winners, but as zkSync’s Rose mentioned, in a few years the field will likely look a whole lot different.
For those curious, Arbitrum currently dominates the layer-2 rankings with $6 billion locked up and 66% of the market. It’s also been around the longest, officially launching in August 2021.
Still, users are clearly interested in zkSync’s new product. L2 Beat shows an uptick in new money flowing in at a whopping rise of 41,547%.
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Move over, DeFi—ReFi is coming? Gitcoin founder Kevin Owocki has stepped away from DeFi grant-giving machine Gitcoin as it fully decentralizes and is now focused on regenerative finance (huh?) and ReFi incubator Supermodular. He aims to “regenerate the regenerators.” He explains it all to Dan Roberts and Liam Kelly, and also talks DAO structure, crypto factions, NFT use cases, his book “Greenpilled,” and much more.
