1. Reflecting on the Direction of L2 Ecosystem in 2023
Consensus indicates that the primary focal point of the cryptocurrency market throughout 2023 was the innovation revolving around the L2 ecosystem. In the midst of intense competition, the L2 ecosystem has experienced remarkable growth, boasting a Total Value Locked (TVL) of approximately $21.16 billion as of January 3. The prominent drivers behind this expansion were undeniably the rollup projects. As of January 2024, the top five rollup projects, as measured by TVL, commanded over 80% of the L2 market share, solidifying rollups as synonymous with L2 technology at this juncture.
The rollup ecosystem has consistently evolved, showcasing technological advancements aimed at constructing the appchain layer, denoted as L3. Overcoming the challenge of achieving widespread adoption stands as a pivotal objective for the crypto industry's next phase, with the anticipation that appchains will play a crucial role in "establishing an efficient development environment" and "innovating user experience (UX)."
Recent market discussions have frequently referenced concepts like AppChain or L3, elucidated through the lens of Rollups-as-a-Service (RaaS). RaaS introduces the idea of a blockchain project offering a comprehensive development environment, including a rollup software development kit (SDK). This facilitates users in seamlessly deploying, maintaining, and constructing their personalized application-specific rollups (AppRollups). By embracing RaaS, developers can streamline their focus on the application layer, transforming what was once a labor-intensive process involving numerous engineers into a swift 10-minute no-code deployment.
The Rollup SDK, functioning as a key instrument for constructing L3 or AppChain environments, empowers developers to create customized AppChains, liberating them from the conventional trade-offs inherent in project development. This newfound flexibility allows developers to construct their own chains with greater efficiency, furnishing them with the essential tools to boost productivity and foster innovation in user experience (UX). Blockchain developers can now seamlessly construct diverse infrastructure and decentralized applications (dApps) essential for their ecosystem, marking a significant advancement in the ease and speed of development within the blockchain space.
2. Facilitating Ecosystem Growth: L2 Contributions to L3 Development
In the past year, L2 rollup companies have dedicated their efforts to constructing Layer 3 (L3) development environments. These environments serve as ecosystems fostering interoperability among appchains, leveraging the described technology stacks. Anticipating the year 2024, we expect a flourishing landscape with numerous projects launching based on L3 or appchain ecosystems.
Currently, the prominent players in the Optimistic Rollup domain, with a significant share of the L2 market, are Arbitrum and Optimism. These projects contribute to ecosystem expansion through their Rollup SDKs, namely Arbitrum Orbit and OP Stack, respectively.
Furthermore, among the zkRollup projects aiming to surpass the inherent limitations of Optimistic Rollup, which still holds a modest L2 share, zkSync is striving to lead the L3 ecosystem. zkSync adopts a network of app chains known as hyperchains, emphasizing the importance of closely monitoring this ecosystem for its diverse possibilities, including technical aspects.
Let's delve into how each chain is actively supporting the development environment to drive mass adoption.
Arbitrum stands as a prominent Ethereum scaling rollup solution and shares the spotlight with Optimism as a flagship Optimistic rollup project. Since its inception, Arbitrum has consistently maintained a leading position in network activity and Total Value Locked (TVL). As of January 3rd, Arbitrum boasts a robust TVL of approximately $10 billion ($13.95 trillion), representing approximately 48% of the L2 ecosystem.
Devoted to supporting developers within its ecosystem, Arbitrum provides an SDK named Arbitrum Orbit. This tool enables developers to construct their custom chains atop any of the four existing Arbitrum L2 chains: Arbitrum One, Arbitrum Nova, Arbitrum Goerli, or Arbitrum Sepolia.
Arbitrum Orbit distinguishes itself by limiting the choice of public chains to those within the Arbitrum ecosystem. This approach allows developers to leverage the existing infrastructure and extensive ecosystem base of the Arbitrum chain. Particularly suited for teams aspiring to establish an L3 network atop Arbitrum, Arbitrum Orbit offers an ideal solution for those aiming to harness the potential of the Arbitrum chain.
Arbitrum Orbit Chain / Source: Arbitrum Orbit docs
Similar to Arbitrum, Optimism serves as a Layer 2 solution aimed at mitigating Ethereum's scalability issues, such as slow transaction speeds and high fees. While sharing a comparable architecture with Arbitrum, Optimism introduces some technical distinctions, notably adopting the fraud proof approach detailed earlier. Key differentiators include the implementation of Proof of Fraud and variances in virtual machine structures.
With approximately 30% of the Layer 2 market share, Optimism has witnessed remarkable growth following the June Bedrock update and the introduction of the OP Stack Superchain. This momentum translated into notable projects like Base, Zora, opBNB, and WorldCoin gaining prominence in the market, all of which are constructed on the OP Stack.
In contrast to Arbitrum Orbit, which establishes a roll-up network known as L3 atop the Arbitrum public chain, the OP Stack takes a different approach by facilitating the construction of a horizontal Layer 2 chain network on the Optimism mainnet. In simpler terms, while Arbitrum Orbit enables the creation of a customized rollup chain on top of the Arbitrum chain, the OP Stack Superchain consists of Layer 2s sharing common layers of security, bridging capabilities, decentralized governance, and more. This distinction underscores the versatility of Optimism in supporting diverse approaches to Layer 2 development.
OP Stack Superchain / Source: Optimism docs
While Arbitrum and Optimism currently dominate the L2 landscape, the year 2024 is expected to highlight the growing significance of zkSync. Presently, zk-based chains account for a modest 10% of the L2 market share, reflecting the relatively recent emergence of this ecosystem, primarily due to challenging technical implementation conditions.
Within this landscape, zkSync emerges as a standout project, securing the largest share of zk solutions at around 3%. Its emphasis on safety and user-friendly features sets it apart from existing L2 scaling solutions. These attributes are materialized through zkSync's innovative zk rollup known as zkSync Era. Contrasting with optimal rollups, the primary distinctions between zkRollups lie in the proof method and the transaction finality period.
- ZK rollups inherently prioritize security through automated validation, employing a validity proof system. In contrast, optimistic rollups introduce a fraud proof system that entails some risk.
- Optimistic rollups necessitate a challenge period, extending up to 7 days, for transaction finality, while zkRollups provide instantaneous finality.
zkSync Era leverages cryptographic validity proof, specifically zero-knowledge proofs, to facilitate highly scalable and cost-effective transactions on the Ethereum network. Computation is conducted off-chain, and the majority of data is stored off-chain. Users benefit from Ethereum-level security, as all transactions undergo verification on the Ethereum mainchain.
Designed to mimic the look and feel of Ethereum, zkSync Era offers lower fees and high EVM compatibility, allowing invocation using the same client as other EVM-compatible chains. By combining state-of-the-art cryptography with on-chain data availability, zkRollup distinguishes itself as the sole L2 scaling solution that requires no operational activity to maintain the security of funds.
ZK Stack stands as a modular open-source framework, driven by zkSync Era, designed to provide a comprehensive solution for both L2 and L3 chain customization. While Arbitrum Orbit focuses on the L3 network market based on the Arbitrum public chain, and OP Stack supports L2 network formation, ZK Stack uniquely caters to both realms, offering developers a versatile platform for chain design.
ZK Hyperchain diagram / Source: zkSync
Central to ZK Stack is the appchain network concept called Hyperchain, which introduces pivotal features for sovereignty and seamless connectivity. This framework empowers developers to shape and customize their chains, providing a foundation for innovation and adaptability.
Appchains constructed with Hyperchain exhibit the following key characteristics:
1) Independent Operation: Appchains operate autonomously, eliminating the need for state and consensus maintenance.
2) Direct Ethereum Connection: These appchains connect directly to Ethereum, ensuring a high level of security and interoperability.
3) Efficient ZK Proofs: Hyperchain leverages ZK proofs to directly verify state changes without transmitting lengthy fraud proofs to the mainnet, enhancing interaction efficiency.
4) Hyperbridge for Unified Liquidity: Hyperbridge addresses liquidity fragmentation across networks, establishing Hyperchain as a highly scalable and unified liquidity network.
These distinctive features position ZK Stack-based appchains as superior in terms of security, speed, and data availability, particularly in the realms of interoperability and data verification, when compared to chains built with other existing SDKs.
ZK Stack goes further by offering developers a high degree of customization options, notably including the ability to choose different sequencer modes.
Modular framework category(ZK Stack) / Source: zkSync
3. zkSync Appchain Use Case: Introducing GRVT
Overview of the zkSync Ecosystem
zkSync stands out as a project poised for significant future growth, boasting robust technical specifications and a well-established infrastructure for continuous development. Although the current TVL is relatively modest, hovering around $640 million, the potential for zero-knowledge proof technology and forthcoming token issuance indicates a promising trajectory for the zkSync ecosystem.
Presently, Syncswap, Mute, and Maverick Protocol emerge as the primary activation protocols within zkSync. Syncswap, with a TVL of approximately $48 million, leads the zkSync Era as a decentralized exchange, serving as the flagship platform with user-friendly services and a simple interface. Following closely is Mute, another decentralized exchange, with the second-highest TVL at around $15 million. Mute distinguishes itself through services that enhance asset management, including the innovative Bond service. Among the noteworthy dApps in the ecosystem, Maverick Protocol, a decentralized exchange, commands substantial volume (about $8 billion) and boasts the highest fees (approximately $350,000) as of December in the zkSync era. Leveraging a distinctive AMM mechanism, Maverick's innovative AMM model enables strategic liquidity provision, allowing users to select liquidity-focused positions based on price movements. This feature addresses impermanent losses commonly encountered by liquidity pools in traditional DeFi protocols.
While the mentioned projects align closely with existing dApps on other Layer 2 solutions, it's crucial to highlight zkSync's emphasis on Layer 3, specifically the introduction of GRVT, which functions as an optimized appchain on top of Hyperchain.
GRVT: Pioneering a ZK Stack Hybrid Exchange(HEX)
GRVT marks the first private appchain on ZK Stack and represents a groundbreaking Hybrid Exchange (HEX) supported by Matterlabs, the creators of zkSync. Positioned atop the ZK Stack Hyperchain, GRVT stands as a pivotal example of the real-world application Vitalik Buterin has envisioned for ZK Stack. Let's delve into the distinctive features of GRVT and the value it brings to the table.
Why App Chain?
The decision to build App Chain is underscored by the notable success of dYdX, a prominent derivatives exchange within the DeFi market. Leveraging App Chain to establish a superior trading infrastructure has positioned dYdX as a leader in the DeFi space.
Derivatives DeFi Protocol TVL Rankings for January / Source: DeFiLlama
The AppChain environment offers unparalleled benefits, allowing projects like GRVT to tailor their elements according to their strategic vision. The ability to construct an appchain and issue a custom token enhances the versatility of the token, as demonstrated by dYdX's implementation, which introduced governance features, fee reductions, staking, and the security of a Proof of Stake network through its token launch.
Significantly, to achieve a highly scalable derivatives trading user experience akin to traditional centralized exchanges, both dYdX and GRVT opted for off-chain processing of order book data within the appchain-based protocol. This approach, made feasible by the inherent flexibility of the appchain model, distinguishes their protocols.
In contrast to Maverick, which focuses on capital efficiency improvements within AMMs, GRVT sets its sights on overcoming the limitations of trading efficiency. By providing CEX-level order books within a hyper-chain infrastructure environment capable of handling 600,000 TPS, GRVT aims to deliver a groundbreaking solution to the challenges of contemporary trading.
The primary objective of GRVT is to establish a self-custodial CEX that effectively addresses counterparty risk," stated Hong Yea, CEO of GRVT. "Considering that 90% of global crypto trading still occurs on CEXs, and a significant portion of users in Korea prefer CEXs, it is pivotal that GRVT is developing a self-custodial exchange that mirrors the UX of traditional CEXs."
DEXs have historically struggled to create high-performance trading environments, grappling with challenges related to UX, TPS, and liquidity. Incidents like the Mt. Gox and FTX scandals have heightened user awareness regarding the counterparty risk associated with CEXs. As a solution, GRVT aims to tackle the performance and UX deficiencies inherent in existing DEXs by incorporating zk encryption technology and a high-performance trading system. Simultaneously, GRVT aims to address the security concerns associated with user assets on centralized exchanges.
GRVT Offerings in a ZK Stack Environment
The GRVT team tackles challenges prevalent in the short yet complex history of DeFi by addressing multiple facets of existing protocols.
To enhance scalability, the team decided to use zkSync's Hyperchain, recognizing the imperative for advanced throughput and low latency. Leveraging GRVT's private app chain for custom sequential logic ensures unambiguous transactions, leading to heightened TPS and sub-millisecond latency, with the capacity to process up to 600,000 transactions per second. An additional noteworthy enhancement involves the introduction of multiple interoperable hyperchains, allowing market makers to horizontally scale their infrastructure, mirroring the practices on CEXs. This approach not only fosters scalability but also facilitates a superior user experience by enhancing access to wallet providers across various hyperchains.
On the security front, GRVT employs a combination of zkSync and validium technology to afford users data privacy for sensitive information. In tandem with the DEX's self-customizing nature, the GRVT team strives to enhance privacy protection concerning issues like MEVs and sandwich attacks through validium. This approach empowers users with complete control over their assets within a self-customized system while ensuring a CEX-like UX. As a security measure, GRVT's order book operates off-chain, while the actual payments are executed on-chain, ensuring a high level of security and transparency.
One notable aspect of Hyperchain is its remarkable ability to handle computationally intensive tasks, including intricate business logic and risk assessments for derivatives transactions. This capability is coupled with a commitment to decentralization, ensuring transparent and equitable trading conditions.
Expanding on the features mentioned above, GRVT incorporates the following on Hyperchain:
- Hyperchain-based, highly scalable transaction settlement and clearing with elevated Transactions Per Second (TPS) and low latency.
- Parallel scaling of multiple interoperable Hyperchain-based infrastructures, empowering existing market makers to offer liquidity comparable to centralized exchanges.
- Utilization of Hyperchains' notably low gas fees to facilitate gasless trading.
- Enhanced accessibility to a variety of wallet providers on the Hyperchain.
- Accomplishment of computationally intensive tasks while preserving decentralization.
GRVT's Service Offerings
In addition to the ZK Stack-based elements discussed earlier, the GRVT team provides detailed solutions that set it apart from other exchange platforms. Offering comprehensive investment solutions, including derivatives and asset management services, GRVT leverages powerful technology to address needs that are challenging to fulfill on existing exchanges. Emphasizing three core principles—Safety, Simplicity, and Scalability—GRVT aims to distinguish itself in each of these areas, ensuring a robust and user-friendly platform.
Furthermore, GRVT offers a range of solutions characteristic of a hybrid exchange. The following details delve into these offerings.
Solution 1: Tailored Trading Products for Varied Traders
GRVT takes pride in offering CEX-level interfaces and a diverse array of trading products to establish a secure, comprehensive trading platform catering to both retail investors and institutions. The platform includes the following features:
- Provision of abundant hedging tools, facilitating options trading and perpetual futures trading for professional traders.
- Tailored support for institutional complex strategies through an RFQ query system
- Integration of margin systems and hedging functions within the same platform to enhance collateral utilization.
Solution 2: Advantages of ZK Technology
The synergy between GRVT's zk-based off-chain order book matching engine and zk validium technology delivers notable advantages:
- A seamless one-click trading experience with low latency, reminiscent of a centralized exchange, for self-managed accounts.
- Assurance of sensitive trade privacy by preventing on-chain data from becoming public, thereby reducing the likelihood of attacks such as margin attacks in DeFi.
- Elimination of counterparty risk.
- Mitigation of asset liquidity risk with shorter challenge periods compared to alternative solutions.
Solution 3: Risk Minimization Strategies
GRVT adopts a proactive approach to minimize operational risks on multiple fronts:
- Formation of a team comprising members with backgrounds in traditional finance, emphasizing expertise in personal information data development and financial regulation and practice.
- Emphasis on establishing a ZK-based AML and KYC compliance system to align with stringent regulatory requirements.
- Implementation of permission-based access control on-chain, akin to (CEXs, to enhance security and control.
*permission based access control- Each trading account supports the registration of multiple private keys, with the flexibility to grant specific access permissions to individual private keys. This includes options such as withdraw-only, trade-only, or deposit-only, offering tailored access management, particularly beneficial for institutional users.
Considering the increasing regulatory scrutiny and crackdowns on major players, the GRVT team is proactively designing its system to meet future on-chain regulatory requirements. Recent developments, such as the arrest of Tornado developers, Consensus MetaMask's IP Surveillance RPC, and Uniswap's integration of centralized trading channels, indicate a potential shift towards AML and KYC measures for on-chain users. In response, GRVT aligns with Vitalik's advocacy for partial auditability using zk-proofs, addressing the current limitations in AML capabilities and emphasizing strict on-chain auditing schemes.
To address concerns about oracle manipulation, GRVT adopts a pricing model outside the AMM framework, giving traders complete control over traded prices. In safeguarding against market price manipulation, GRVT collaborates with BlockScholes, an external oracle provider, ensuring the integrity of market prices. For options and futures, characterized by lower liquidity, GRVT secures its pricing system through aggregation methods across multiple exchanges.
In a commitment to transparency and security, the GRVT team operates under full de-identification to mitigate the risk of rug-pulling, drawing from their extensive experience and partnerships. The team's collective experience includes collaborations with prominent organizations such as Goldman Sachs, Crypto.com, DBS Bank, GovTech Singapore, and Meta. Further, their trust is underscored by partnerships with reputable organizations, including Matrix Partners, Delphi Digital, Susquehanna International Group, Hack VC, CMS Holdings, QCP Capital, and many more, either through investment or advisory roles.
The Anticipation for zkSync Token or Native Token Remains High
Anticipation is building for the launch of the zkSync token, and expectations are high for its impact on the GRVT ecosystem. Beyond the inherent competitiveness of the product, GRVT is poised for significant momentum, notably with the upcoming zkSync token launch. Historical examples, such as Arbitrum and Optimism, have demonstrated the ability to generate momentum through token airdrops, effectively leveraging marketing and network effects to rejuvenate their ecosystems.
We anticipate that zkSync will follow a similar trajectory with a native token launch, projecting that it will experience the same ecosystem hype witnessed by Arbitrum and Optimism in 2022 and 2023.
DEXs, considered representative dApps in the ecosystem, play a crucial role in enhancing liquidity and are key users of native tokens issued by the mainnet (e.g., for transaction fee payments). GRVT is expected to derive substantial benefits in this context.
Furthermore, the momentum behind GRVT's own token issuance remains robust. The planned timing for this issuance is set after zkSync's token launch. GRVT aims to debut its mainnet in April 2024 and is currently executing a reward program through airdrops. This initiative seeks to expand the community by ensuring a fair distribution of rewards to both the initial community and new contributors. GRVT plans to allocate 10% of the circulating $GRVT supply as rewards for the initial 18 months, divided into two seasons. Additionally, rewards will be distributed through mystery boxes.
For participants active in the zkSync ecosystem, the upcoming zkSync token launch holds promising prospects. As the first private appchain actively supported by Matter Labs, the zkSync token is expected to feature a substantial reward allocation upon its launch. This development is likely to attract significant attention and engagement within the zkSync community.
4. Closing Thoughts
The Layer 2 ecosystem is gearing up for its second phase of expansion, under the leadership of major chains. While considerable attention has been devoted to developing the technical infrastructure for Layer 3 networks in 2023, it is now crucial to shift our focus to emerging projects taking shape within the frameworks of different chains.
Syndr, the first Layer 3 decentralized exchange based on Arbitrum Orbit, is also preparing for launch. The OP Stack has already fostered the development of prominent projects like Base, Zora, opBNB, and WorldCoin. Examining the frameworks of each chain reveals distinct strengths, providing builders with diverse options and enhancing overall productivity.
Particularly noteworthy are the technical frameworks incorporating ZK technology, heralded as the next significant development. These frameworks are expected to offer a more profound solution to Ethereum scaling, empowering users to overcome existing challenges in service building limitations.
As highlighted earlier, GRVT is ambitiously carving its niche by aiming to deliver a hybrid trading platform catering to both retail and institutional investors, leveraging zk technology. This distinctive approach sets it apart from existing decentralized exchanges. The unfolding of the first half of the year will be intriguing, as we observe whether this technology can further mature and serve as a successful model, paving the way for widespread adoption.