zkSync Ecosystem: The advent of L2 zkRollup Scaling Solution

zkSync Ecosystem: An L2 solution that raised a quarter billion dollars
At the moment, Ethereum is now incurring lots of challenges that need to be addressed. Layer-2 projects come as the scaling solutions for Ethereum, enabling the network with more intense scalability.

Many big projects have joined the scalability battle to be the dominant solution on Ethereum. If one can stand out, it will take over the cake. They create a complex matrix of scaling solutions based on various scaling techniques.

Besides the top-notch Polygon (MATIC) using State Channels, ZK-Rollups and Optimistic Rollups are the two key drivers that are on the same race to get widely adopted by the Ethereum ecosystem. 

A closer look in ZK-Rollups, there is also a battle between Starkware and Matter Labs to land the product to the community. zkSync by Matter Labs is now emerging to be a competent opponent to StarkEx & StarkNet by Starkware.

This article will have a quick overview of zkSync and dig deeper into the ecosystem. Let’s get started

zkSync Overview

What is zkSync?

zkSync is a Layer-2 scaling solution developed by Matter Labs to tackle the current challenges of the Ethereum Network. Its goal is to reduce transaction fees, increase verifying speed while maintaining the high level of security inherited from Ethereum by using the ZK-Rollup technology. 

Matter Labs’ Products

Matter Labs is a German-based company that was founded in 2018, focusing on Rollup technology. Its strategy is to build a series of interconnected products solving the trilemma of Ethereum. Its vision is to bring crypto into mass adoption.

Besides zkSync, Matter Labs also develops more technologies to enhance composability. Matter Labs’ products are examined in the following sections.

• zkEVM enables zkSync with Smart Contract execution.
• zkPorter fuels up  the transaction speed of zkSync
• zkSync 2.0 is the combination of zkSync, zkEVM and zkPorter.

zkEVM

zkEVM is a Zero-knowledge proof EVM built to execute Smart Contracts written in Solidity. This can be considered as a watershed milestone for ZK-Rollup solutions as Optimistic Rollups outpaced them to be the first EVM-compatible technology using Rollups. 

For more information, Rollup technology compresses data in one bundle and send it to the on-chain consensus layer of the blockchain to get verified. This will help speed up the blockchain as a bundle of transactions are verified at once.

zkPorter

For a quick brief, zkPorter fills the gap between zkSync and scalability when it comes to mainstream/mass adoption. There are two main interoperable sides of the state on zkSync: zkRollup for on-chain data and zkPorter for off-chain data.

Notably, users can adjust their security threshold by selecting the zkRollup side for more security level or the zkPorter side for cheaper TX fees. Akin to this, Starkware also builds the solution known as Volition. You can read more about Starkware ecosystem.

zkSync 2.0

In short, zkSync is mainly designed for token transfers and as a payment means while zkSync 2.0 is built for Dapp deployment with the EVM-compatible feature, which is a huge difference. As today talking about zkSync, most will refer to zkSync 2.0 instead of the older version. Its public Testnet went live in February 2022 on Ethereum’s testnet.

Via zkEVM, code written in Solidity is able to run on zkSync with only little modifications. Therefore, zkSync 2.0 is equipped with more advanced features than the previous versions. It has a list of projects creating a new ecosystem hub on top of zkSync with the following niches:

• Fiat On/Off Ramps
• Bridges
• Oracles
• Wallets
• Tools, Explorers, Voting, Search Engine.
• …

For more in-depth assessments, we will dive into the ecosystem in the later sections.

zkSync Highlights

• Fast L1 to L2 and mainnet withdrawal: It takes under 10 minutes to complete a transaction through the bridge and the TX fee is 30x-100x cheaper than on Ethereum. This is a herculean edge of zkSync since it can handle a massive flow of transactions with high durability.
• $258M raised capital: Matter Labs raised a quarter-billion dollars in various fundraising rounds led by high-profile backers in crypto as well as in traditional finance.
• ZK-Rollup technology: This means the bridging time between L1 and L2 will be reduced to minutes instead of a week like Optimistic Rollup.
• Extremely low fees: zkSync offers a very competitive fee structure while basic send ETH transaction only costs around $0.1. This makes TX on zkSync much cheaper than most optimistic rollups.

zkSync Highlight Numbers 

(updated: Mar 21st, 2022)

• Product: zkSync;
• Main Currency: ETH;
• Activation Fee: $2.75;
• Transaction Fee: $0.08;
• NFT Minting Fee: $0.23;
• Withdraw Fee: $5.56
• Total Transactions: 6,658,185;
• TVL: $141M (+85% in 7d change);

For more up-to-date on-chain data on zkSync, check out this explorer: https://zkscan.io

Products and Roadmap

Matter Labs was founded in 2019 in Berlin, Germany and it released the first product, zkSync, in Summer 2020. After almost 3 years of development, the company launched an EVM-compatible testnet of zkSync. Let’s clarify more about the growth of Matter Labs in time order.

• December 2019: ZK Sync v0.1 Testnet with ETH and ERC20 token transfers.
• June 2020: Matter Labs released the first mainnet version of zkSync on Ethereum, requiring a “trusted setup”.
• August 2020: zkSync 1.1 with basic functionalities such as transaction, paying fees, burning/minting tokens.
• May 2021: zkSync version 1.x with NFT minting and token swapping.
• June 2021: zkEVM Testnet.
• February 2022: zkSync 2.0 Public Testnet (expected in Summer 2021).

The very first versions of zkSync (0.1 to 1.x) represented the first roadmap segment of Matter Labs, Scalable Payments. We’re in the Smart Contracts stage of Matter Labs with zkSync 2.0 with the EVM-compatible feature. The next phase is Privacy, enabling innovative and privacy features (multi-sigs, account recovery, spending limits, etc.) of ZK-Rollups. The last phase is Censorship Resistance which means zkSync will become fully transparent and reliable with the Ethereum-like and Bitcoin-like Peer-to-Peer level.

Investors and Partners

Matter Labs is in the race with Starkware in terms of raising funds to develop a ZK-Rollup solution for Ethereum. The German-based company has raised a total of $258M from top-notch investors around the crypto space.

• Seed round in September 2019: The company raised $2M from 1kx, Dekrypt, Hashed, and Dragonfly Capital to build a Zero-Knowledge Proofs
• Series A in February 2021: It raised $6M from top crypto companies such as Binance, Coinbase Ventures, Balancer, Aave, Curve, etc.
• Series B in November 2021: Matter Labs raised a $50M Series B round led by a16z with the participation of Dragonfly, Placeholder, 1kx. There were also strategic partners such as Consensys, ByBit, OKEx, Alchemy, and other founders of DeFi projects.
• Fund Raising in January 2022: The company was backed with $200M from BitDAO to expand the use of zkSync and the ecosystem via zkDAO. 

There is a notable point that Matter Labs is backed by many CEXs and DeFi protocols via investment rounds to strengthen mutual benefits. Binance, Coinbase, Bybit, Curve, Aave, etc have a huge network effect to be able to leverage every project with sufficient funds and receive traction from the community.

This is a competitive moat of Mattler Labs’ products since they might be adopted by those partners and leaders’ protocols as soon as the stable versions are released. Binance and Coinbase are now the fastest crypto gateways for users to bridge their assets in a centralized way. If the scenario comes in reality, cash flow will flood into the zkSync ecosystem with convenience.

zkSync Ecosystem Overview

At the moment, there are 74+ projects inside the zkSync ecosystem, ranging from DeFi protocols to products that reach the user frontier such as Wallet and Payments. In this Smart Contract phase, zkSync welcomes developers/builders to the ecosystem to deploy their prominent ideas.

The number of projects on zkSync is constantly growing as the L2 solution is getting adopted by the community. On the other hand, over half of them is still under development, they need time to deploy their ideas.

zkSync ranks 7th in the L2 leaderboard by the TVL number, showing that the zkRollup solution is steadily taking steps to outpace other L2 solutions such as Boba Network, Loopring, Optimism, Metis,... The TVL of zkSync has astronomically increased by 85% in only 7 days of March 2022. The TVL hike has spurred lots of attention from the community.

After getting some quick introduction, let’s take a closer look at every lego part making up the ecosystem in the following sections.

DEX

• 1Inch has a good relationship with zkSync since the platform often retweets and mentions the scaling solution on Twitter. Even though no official announcement has not been published yet, 1Inch’s future on zkSync is predictable.
• Mute.io is an AMM, farming and IDO platform built on zkSync. It released the Testnet version in February 2022 with basic features such as AMM Swap, Pool, Farming on Testnet. 
• Zigzag, a non-custodial order-book exchange, is one of the first movers on zkSync (not 2.0) to go mainnet. As shown in the following picture, Zigzag generated a 7-figure number ($3.9M) 24h trading volume with the ETH/USDC pair. Without a doubt, Zigzag is the Uniswap of zkSync.

⇒ In every emerging ecosystem, DEX is always the first lego part to be built for swapping tokens and increasing liquidity in the ecosystem. Mute.io and Zigzag are the go-to DEXs for native swaps on zkSync while 1Inch plays as an aggregator to offer the best swapping rate for users.

To reiterate, zkSync 2.0 with zkEVM is running Testnet. Hence at the writing time, there is no AMM DEX in operation. However, we can expect more non-native and native protocols to join the ecosystem.

Lending/Borrowing

• Yearn Finance acknowledges that the L2 migration is happening. The yield platform is expanding to many L2s. Users can connect to Yearn via Argent on zkSync.
• Taker Protocol allows users to collateralize various asset classes such as NFT and lend liquidity to other protocols.

⇒ Lending/Borrowing is an integral part of DeFi since it can leverage the capital for a higher level of capital efficiency. Yearn Finance and Taker Protocol adopts zkSync to provide DeFi lending/borrowing services.

On the other hand, on zkSync, there is still a dearth of native lending/borrowing protocols. This is understandable that big DeFi protocols via zkEVM come to the ecosystem faster than crypto builders work on native protocols.

DAO

DAOs are being developed on zkSync: OlympusDAO, Aragon, zkDAO, Trustless, etc. They are officially listed on the ecosystem website of zkSync, but the information about the integration is limited. This is understandable since DAO is hard to thrive when there is still no actual DEX on zkSync.

Crypto protocols on zkSync are building the DAO feature quite soon as the zkSync ecosystem still lacks many integral DeFi components. Developing DAO can ensure that the community will ultimately be granted control of the protocols on zkSync. At the writing time, no DAOs are in operation, but big protocols have rolled in and been building the DAOs. Therefore, DAO is an executable reality on zkSync.

Bridge

A layer-2 solution always needs bridges to connect to the Layer-1 and other compatible Layer-2s. zkSync prioritizes integrating widely-used bridges to facilitate users to the ecosystem. Connext, cBridge (Celer), Multichain, Nomad, deBridge, etc are used not only by zkRollup solutions but also other Rollups.

In terms of bridge performance, zkSync bridge with $52M TVL ranks 12th in the top Ethererum bridges. It’s still a humble number of TVL when compared to products built on StarkEx by Starkware. Despite the success of StarkEx with DeFi protocols (dYdX, Immutable,...), zkSync should be compared to StarkEx’s bigger version, StarkNet. 

EVM compatibility has already landed on zkSync but not on StarkNet. Furthermore, the number of bridges on StarkNet (4+ bridges) is far smaller than bridges on zkSync (12 bridges). Therefore, zkSync is able to receive the cash flow earlier from L1 to the ecosystem than StarkNet.

Stablecoin

As bridges are in operation on zkSync, many types of stablecoins come to the ecosystem, namely, centralized stablecoins: USDT and USDC and decentralized ones: UST, DAI, FRAX, etc. Despite the presence of those stablecoins, it’s hard for users like us to track the circulating supply in the zkSync ecosystem.

Payment and Wallet

Since the advent of the first version of zkSync, Matter Labs acknowledged that the solution must be able to conduct payment transactions and token transfers. As a result, zkSync is integrated into many up-to-date wallets such as Argent, Mathwallet, Zerion, imToken, zkSync Wallet, Numio, etc.

There are 4 out of 10 wallets supporting zkSync that went live. Based on that information, we can expect a more extensive adoption of zkSync among crypto wallets, esp. Metamask. They are multi-chain crypto wallets, there is no single-chain wallet being built on zkSync,

Investment Opportunities with zkSync Ecosystem

Token investments

zkSync is one of the L2 pioneers to announce the plan of a native token release. The utility of the token is yet to announce but we can reckon it will be used for gas fee payment instead of ETH. MATIC on Polygon is a notable example of a token release of an L2. 

L2 solutions can capture value for ETH while scaling the Ethereum network by solving current challenges. The L2 development teams might want to monetize their scaling solutions by releasing the native token for gas fee payment.

Besides the highly-anticipated token release of zkSync, more project tokens on the L2 solution are on the go since many Dapps released sneak peeks of their products as well as some are running mainnet.

Trading

At the writing time, users can only trade on DEXs like Zigzag, Mute.io, 1Inch,... and there are only a few projects on zkSync. As a result, besides investing in tokens, users now can’t leverage the capital to start trading. The lending and derivatives lego parts are under development. 

However, trading might cause capital loss due to over-leveraged funds. Users should be aware of risks and be responsible for every trade.

Retroactive Airdrops

zkSync is a new emerging ecosystem that contains numerous underlying opportunities for every crypto player. Crypto veterans get at least one token airdrop which might be valuable or useless. The point here is to look for it and it requires tremendous effort. Hunting airdrop is like a long journey across mountains. We recommend the following read to get prepared on the long journey looking for a potential holy grail.

See Also: List Of Potential Retroactive Airdrop Projects.

NFT & NFT Marketplace

NFT is an indispensable part of any smart contract-based ecosystem. It’s like a viral “hook” to attract newcomers to the land. There are some NFT marketplaces such as tofuNFT, Tile Labs, Taker Protocol, etc. and also play-to-earn NFT-based games such as OpenStars.org.

NFT on zkSync needs strong narratives to start moving. Currently, as we observe, NFT is strongly flourishing only on Immutable built by StarkEx while other L2 chains are focusing on solving Ethereum challenges instead of igniting any NFT mania.

zkSync Predictions

To reiterate, zkSync, as an L2 scaling solution, has been getting traction and collective support from the community in crypto. Furthermore, after about 3 years of development, zkSync is now leaping into the smart contract phase with many new challenges. 

As mentioned, Coin98 Insights will put forward some predictions and insights that hopefully express the future landscape of everyone who is a veteran or a newcomer to crypto.

• Stronger adoption from other big protocols and projects: zkSync has partnered with many top-tier companies as well as protocols since the early days. At the moment, it is integrated into a few on-ramp applications. In the next phase, zkSync is expected to make a further step to be adopted by its partners (for example Coinbase and Binance).
• The bloom of the zkSync ecosystem: At the writing time, we can conclude that zkSync has an ecosystem under construction, which takes more time to complete Dapps by categories. Dapps on zkSynch will go mainnet in verticals from the most fundamental legos to more complex ones such as Derivatives, Options, and so on. The advent of DeFi 2.0 on zkSync is also a noteworthy point to be mentioned. 2021 was an epic year for DeFi 2.0 since it put capital efficiency to the next level. For example, Olympus DAO and Alchemix are being built on zkSync. The vision can only be achieved when the mainnet of zkSync is launched.
• zkEVM is a strong moat of zkSync: In our perspective, the migration of DeFi protocols on Ethereum to L2 is occurring via zkEVM on zkSync. With EVM compatibility, zkSync will have more space to grow when being the first mover when bein
• Decentralized within next years: StarkEx only allows projects with permission from zkSync to build on. Alternatively, StarkNet is the permissionless version of StarkEx, enabling the ZK-Rollup ecosystem to be fully decentralized within a few years, noted by the founder of zkSync - Ben-Sasson.
• (zkSync vs. StarkNet) vs. Optimistic Rollups: Scaling solutions using Rollups are proving to be viable and receiving lots of collective support from the community. zkSync has a more direct competitor on the same frontier, which is StarkNet by Starkware. The race is extremely hot since Matter Labs raised a quarter billion while Starkware has raised 150M+ after many funding rounds.