The Ethereum Layer-2 (L2) wars are getting heated alongside the modular chain thesis spearheaded by Celestia, with new chains being announced almost every month as now the transaction cost can be significantly reduced by having an L2 with Celestia as the Data Availability (DA) layer.

A lot of projects are thinking of whether to launch their own L2 as it may help to reposition themselves as a chain that may fetch higher Fully Diluted Valuation (FDV) during the bull market. Decentralized Finance (DeFi) projects were some of the first ones to ride on this train with the idea of internalizing Maximal Extractable Value (MEV) for themselves and reducing transaction costs. Among those are Aevo (rebranded from Ribbon Finance), Lyra Finance, and Fraxtal by Frax Finance. One thing to notice is that all the projects above are choosing Optimistic Rollups (ORUs), specifically OP Stack by OP Labs as their chain as opposed to a ZK Rollup. 

The trend of favoring ORUs persists even among new chains within other sectors such as Base by Coinbase, Blast by Blur, and Mantle by Bybit. Other than OP Stacks, the fellow ORU powerhouse, Arbitrum is also gaining traction by having Xai and ApeCoin under its Arbitrum Orbit ecosystem. The dominance of ORUs is clear when looking at the Total Value Locked (TVL) of Arbitrum and Optimism mainnet, capturing 75% of the market share of all other rollups.

Does this mean ZK Rollup will never catch up?

As a recap, a rollup is an Ethereum L2 solution that bundles several transactions together outside of the Ethereum mainnet and submits it as a single transaction to Ethereum, helping to reduce the transaction cost while inheriting the security of Ethereum. There are two main types of rollups which are ZK Rollups (ZKRs) and Optimistic Rollups (ORUs) that use validity proof and fraud proof separately.

The pros and cons of ZKRs against ORUs are as follows:

Pros

• Almost instant transaction finality by using validity proof as opposed to fraud-proof by ORUs that require a 7-day challenge period. Enabling short fund withdrawal period.

• Only transactions required for computing state differences have to be settled on Ethereum as compared to all transactions for ORUs.

Cons

• More computationally intensive and requires specialized hardware to generate the validity proof.

• Less EVM friendly and thus migrating existing EVM-based projects requires extra effort as opposed to ORUs that are EVM equivalent. 

Essentially, ORUs are easier to build with the benefits of being friendly for the existing EVM-based projects to migrate. The main caveat is the 7-day challenge period for transaction finality which affects the withdrawal of funds from L2. This is why many perceive the ZKRs as a better solution for Ethereum scaling as it offers instant transaction finality with validity proof, also known as Zero Knowledge Proof (ZKP). However, ZKP is still a relatively nascent technology with ongoing research on how to optimize the production of ZKP and make ZKRs more EVM-friendly. 

ZKRs are commonly categorized into 4 types of zkEVMs with trade-offs made between EVM equivalence and proving requirements. zkEVMs refers to a Virtual Machine (VM) that is both EVM compatible and ZKP friendly.

Source: The different types of ZK-EVMs

EVM is not designed to be compatible with ZKPs, so having all parts of Ethereum transactions being proved by a ZKP is long and costly. To have faster and cheaper proving, the workaround is to create a custom virtual machine (VM) that is optimized for ZKP, and then create a compiler to translate EVM languages. 

In short, projects have to decide between optimizing the portability of existing EVM-based applications or transaction costs.

• Type 1: Full Ethereum equivalence, able to scale Ethereum L1 but super long proving time.

• Type 2: Full EVM equivalence, existing EVM-based applications can migrate without modifications but long proving time.

• Type 3: Almost EVM equivalence, existing EVM-based applications can migrate with some modifications but fast proving time.

• Type 4: High-level language equivalence, requires a compiler to translate EVM languages to a custom zk-friendly VM but super fast proving time. 

Type 1 ZKR is the hardest to produce but holds the biggest potential to scale Ethereum itself. Due to its complexity, it may take years before one is operational. As such, the current operational ZKRs are mainly Type 3 (Polygon zkEVM and Scroll) and Type 4 (Starknet and zkSync Era). What's worth mentioning is that projects that are in Type 3 are aiming to become Type 2, so it's more of a transitional period for them to be more EVM compatible.

Due to the technical difficulties of releasing production-ready ZKRs, ORUs have the first-mover advantage with the launch of Arbitrum and Optimism mainnet in 2021 while Starknet only launched in late 2022. zkSync 2.0 and Polygon zkEVM in the meantime only launched in 2023. This allows ORUs to have a significant head start and are able to attract capital and projects. The launch of ARB and OP tokens also helps to retain users with ongoing yield farming programs and grants. 

But the tide might turn in the upcoming months.

Out of all the ZKRs, Polygon may have the best potential for dethroning the ORUs. Let's take a look at what are the advantages that they possess. 

The Polygon team was gaining attention mainly for their Business Development (BD) efforts with traditional companies in the last cycle (2021-2022) such as Nike, Starbucks, Mastercard, Adobe, Disney, Adidas, Mercedes, etc. What is often overlooked is Polygon’s foresight to bet heavily on ZK technology by acquiring Hermez ($250MM) and Mir ($400MM) in 2021.

Hermez has contributed to the current version of Polygon zkEVM, offering high EVM compatibility with the goal of becoming a Type 2 zkEVM. Mir has since become Polygon Zero, working exclusively on bettering ZK Proof.

Polygon has been releasing various groundbreaking research on ZK, with the recent one being Circle STARK, a fast-proving system in collaboration with Starkware. The whitepaper was released on Feb 22nd, 2024 and Circle STARK will be incorporated into the Plonky3 proving system, which is expected to be a 10x improvement against the current Plonky2 proving system by Polygon. 

“I think this will lead to the most efficient proving systems for a while,” 

Eli Ben-Sasson, co-founder of StarkWare, said in an interview with CoinDesk.

With the modular chain narrative, the choice of Data Availability (DA) solution has become an important differentiation factor. Hosting DA off-chain will have cheaper transactions and higher throughput but come with the tradeoff of sacrificing security. Instead of choosing one specific arrangement, Polygon has decided to launch 3 chains that cover the whole spectrum. 

1. Polygon PoS will be transitioning into a zkEVM Validium

• EVM equivalent

• transaction data is made available off-chain (Validium) 

• The cheapest variant, suitable for high-frequency and low-value transactions such as gaming and social projects.

1. Polygon Miden, STARK based

• Miden VM that is optimized for ZK, support Rust and Typescript

• Offer non-EVM features such as native Account Abstraction (AA) and allow users to have control over what information they want to keep private

• Suitable for novel applications such as order-book exchange

1. Polygon zkEVM

• EVM equivalent

• DA using Ethereum

• The most secure variant with the highest fees, suitable for low-frequency high-value transactions such as DeFi.

At first glance, it might seem that Polygon’s strategy is all over the place without a specific focus. But with the nascency of ZK technology, it may prove to be the right strategy to bet on all potential possibilities. No matter how ZK technology ends up in Ethereum, Polygon will be involved. 

As rollups introduce isolated states and liquidity, Polygon has introduced a solution through the Aggregation Layer (AggLayer). The Aggregation Layer offers unified liquidity and a shared state for ZKRs. It does so by aggregating the proofs of several ZKRs and then creating an aggregated proof that will be settled on Ethereum. This enables cross-chain atomic transactions among ZKRs. For example, users on OKX’s X1 chain can buy NFT directly from Immutable zkEVM. Polygon also released Type1 Prover, allowing any EVM chains to connect with AggLayer.

As mentioned at the beginning, applications are considering becoming an appchain themselves, with the current leader being OP Stacks and then Arbitrum Orbit. Polygon CDK is Polygon’s answer for applications to create a customized zkEVM chain. So far Polygon has showcased that its BD prowess does not just lie in traditional companies but in web3 as well. Notable lineups include Immutable, OKX’s X1, Astar, and Manta Network. 

Scoring Immutable from Starknet was one of Polygon’s biggest wins as Immutable is currently the highest-valued gaming blockchain at around $7B FDV. Manta Network, the third largest L2 in terms of TVL, also decided to switch from OP Stack to Polygon CDK. OKX as the top 5 CEX choosing Polygon CDK to launch its L2 is also a testament to Polygon's ZK technology. 

Another interesting development is that two prominent Bitcoin L2 projects have already decided to use Polygon CDK. Both of them have gained significant deposits for their mainnet rollout in anticipation of airdrop. Merlin Chain has about $3.8 billion in deposits while B² Network has about $660MM in deposits. Even though what is being considered as a true Bitcoin L2 is still being heavily debated, it is still impressive to see the adoption of Polygon CDK outside of the Ethereum ecosystem. 

Now the question is how all these innovations accrue value to Polygon’s native token. Using a playbook similar to the 2021 rebranding of Matic (MATIC) to Polygon (MATIC), the token is now undergoing rebranding to Polygon Ecosystem Token (POL), this time with a 1:1 migration and a new price chart. Migration done right will help to attract renewed attention to the project and is helpful for price discovery. A recent successful example will be the rebranding of Merit Circle to Beam. 

Under the token rebranding, POL’s positioning has strengthened to become the staking token for AggLayer and sequencers for Polygon CDK chains. Validators will need to stake POL to start validating the network, generating ZKP, and participating in the Data Availability Committee (DAC) in exchange for protocol rewards and transaction fees.

POL is already minted on the Ethereum mainnet but the staking function is not live yet and there is no immediate deadline to swap MATIC to POL. Polygon is probably gearing up a massive migration campaign down the road alongside the mainnet launch of its Polygon CDK chains.

Out of all the ZK Rollups, POL/ MATIC is the only token that does not have an aggressive unlock schedule anymore as its last unlock happened on Feb 22nd, 2024. Nonetheless, POL has a new tokenomics where there will be a max of 2% annual inflation moving forward, with half of those going to community treasury, and the other half for validator rewards. This is significantly less supply shock than other L2 tokens such as ARB, OP, and STRK that have an aggressive unlock schedule. 

Lastly, Polygon has spun off its DA solution named Avail. With the high valuation of Celestia, it will not be hard to assume that Avail may debut with a similar range in valuation, with the potential of airdropping its native token to the Polygon ecosystem. Even though many of the existing Polygon CDK chains already have their own token, it is reasonable to speculate that future Polygon CDK projects may choose to airdrop their tokens to POL stakers as well. If that's the case, POL will be able to hop on the “stake for airdrops'' narrative, significantly increasing its value. Celestia and Dymension in particular have been benefiting a lot from the same narrative. 

Data as of Mar 13, 2024. Source: DefiLlama

Data as of Mar 13, 2024, Source: Artemis

Starkware used to be hailed as the leader in ZKRs after it had attracted dYdX, ImmutableX, and Sorare to launch their StarkEx chain. StarkEx is an Ethereum L2 that supports a specific type of Ethereum transaction such as trading and NFT minting. 

They took a long time to launch its general purpose ZKR known as Starknet, causing key projects such as dYdX and Immutable migrated to other ecosystems like Cosmos and Polygon. Plus, as a Type 4 ZKR, their decision of not being compatible with standard Ethereum wallets like MetaMask may have introduced a lot of friction for user onboarding. This was obvious with Starknet before the launch of STRK on Feb 20th, 2024, where it had only ~$50MM TVL and less than 200k DAA, both stagnating behind zkSync Era and Linea. But now its TVL and DAA are on par with zkSync Era, mainly thanks to the high valuation of STRK and its new DeFi campaign. 

Starknet’s recent distribution of its initial STRK token sparked frustration within its community due to stringent airdrop requirements, aimed to curb “airdrop sybil attacks”. Tension escalated when one of Starknet’s core team members called those upset users e-beggars. The feud also grew larger when users realized the STRK vesting schedule started 2 years ago in 2022 instead of at initial distribution in February 2024, effectively reducing the cliff of the team and investors to only 2 months. In response to the backlash, the team has adjusted the token unlock amount to be more gradual. 

Starknet has its own L2 SDK with a plan to also introduce L3 (appchain). But so far nothing notable has been announced publicly with only Paradex (an orderbook perpetual protocol) went live. 

As a Type 4 ZKR, zkSync Era has the second highest amount of TVL among the ZKRs with $185MM TVL and the highest DAA at 237k. However, the high usage is likely due to anticipation of its native token airdrop. But compared to Starknet, it's easier for users to use zkSync Era as it is compatible with standard EVM-based wallets like MetaMask. The team also emphasized that projects can be deployed on zkSync Era just by using popular EVM languages like Solidity, Vyper, and Yul through its LLVM-based compiler.

In their roadmap, they plan to introduce zkPorter, an off-chain DA solution to increase the transaction throughput. zkSync Era also has its own L2 SDK called Hyperchain with upcoming launches including Cronos zkEVM by Crypto.com, GRVT (hybrid crypto exchange), and Tradable (Private Credit).

Developed by Consensys, Linea is the default Ethereum L2 network on MetaMask. As the largest web3 wallet in the space, being integrated natively on MetaMask has a significant boost on its user counts. Frequent campaigns on Galxe also help to boost its on-chain statistics in anticipation of airdrop. 

Linea has not announced any public plan for L2 SDK or L3. 

Scroll is being co-built with Ethereum’s Foundation Privacy and Scaling Explorations (PSE) group that focuses on zkEVM research. It is the same as others above where there is high usage due to airdrop expectations. 

Scroll has not announced any public plan for L2 SDK or L3. 

Taiko is the first project outside of the Ethereum Foundation that is specifically aiming to become a Type1 zkEVM. It also calls itself a based rollup, where the sequencer's role falls directly under Ethereum L1 validators, making it having decentralized sequencers since the first day. 

Currently, it is still on testnet with mainnet anticipated to be in H1 2024. Taiko has not announced any public plan for L2 SDK or L3. 

Currently, zkSync Era, Starknet and Linea stand out with the highest TVL and DAA among all other ZKRs but the dynamic may soon change when Polygon PoS upgrades to a zkEVM Validium in H1 2024, absorbing its existing $1.1 billion TVL and 1 million DAA. 

The upcoming catalyst of Polygon zkEVM revolves around its diverse project lineup, which would compete across various subsectors. For instance, in the Centralized Exchange (CEX)’s L2 sector, OKX’s X1 will compete against Base by Coinbase and Mantle by Bybit, both utilizing ORUs. In the gaming L2 sector, Immutable, the current highest-valued gaming chain, will vie against Xai from Arbitrum Orbit and Redstone from OP Stack. Last but not least, in general-purpose L2, Manta Network has already amassed the third largest TVL ($650MM) among L2 solutions. These projects collectively contribute to a robust Polygon ecosystem, ultimately driving value back to the POL token.

Regarding technical advantage, ZKRs are more secure, efficient, and cost-effective than ORUs. But ORUs can still choose to implement validity proof down the road, with a hybrid proving system. So whether it's the right strategic choice for ZKRs to delay their launch and opt for better tech has remained to be seen. Polygon is a rare case here as it has started to garner significant users due to its early involvement with Ethereum as its side-chain and now is able to direct those users to its ZKRs ecosystem once it's ready. 

The key for an L2 to win the adoption is to have exclusive applications in its ecosystem. Arbitrum is currently having a headstart in the DeFi sector with GMX, Hyperliquid, and various perpetual Dexes being launched there. Optimism has also garnered notable adoption with Frax launching Fraxtal and Synthetix being on the Optimism mainnet. In terms of gaming, Arbitrum is also taking the lead with Xai, ApeCoin, and TreasureDAO. Social applications are also appearing on ORUs first with FriendTech on Base and Farcaster on Optimism. 

Nonetheless, there are hopes for ZKRs, especially with Polygon. It is teasing the launch of the DeFi season soon on Polygon zkEVM. Plus, several heavyweight Polygon CDK chains like OKX’s X1, Immutable zkEVM, and Astar zkEVM are launching mainnet soon in H1 2024. Coupled with the transition of Polygon PoS to Polygon zkEVM Validium and the migration of POL, Polygon has many upcoming catalysts to regain the attention of the market. In addition, the majority of the ZKRs have yet to launch their token, so there are plenty of chances for ZKRs to still make their cases. Similar to the last cycle, these ZKRs may be able to raise large ecosystem funds to help boost their usage. 

Ultimately, part of Ethereum’s endgame is to upgrade the L1 itself with zkEVM. Therefore ZKRs hold a lot of promise in pushing the scaling boundary of Ethereum. One of the best bets for the actualization of zkEVM is through Polygon because it possesses strong BD capability, is on the frontier of ZK research, and has plans to drive strong value accrual back to POL.

Note: This post is intended for informational purpose only and not financial advice.