Research Center
/ Insights

|

Aug 2022

Has the Blockchain Trilemma been solved? A note on the promise of zkEVM scaling solutions

by Hashdex Research
Aug 01, 2022

Has the Blockchain Trilemma been solved? A note on the promise of zkEVM scaling solutions

The “Blockchain Trilemma” is a long-held belief that decentralized networks cannot provide all three of their main benefits—decentralization, scalability, and security—at the same time [1]. Anyone who has bought NFTs on OpenSea or swapped ether for another token using a decentralized exchange knows how cumbersome it can be to perform these functions on the Ethereum blockchain: slow transaction speeds, high gas fees, and low throughput. However, there is a way to solve these shortcomings without giving up Ethereum’s security and decentralization properties—scaling via rollups. We believe that zk-Rollups are allowing for scaling solutions that will help solve the Blockchain Trilemma and will permanently change the investment landscape for Etheruem and other decentralized networks. 

What are zk-Rollups?

Rollups are a Layer-2 (L2) scaling solution built on top of the base Ethereum Layer-1 (L1). They allow transactions to be bundled into one big basket and then executed off-chain (L2), sending transaction data back to the blockchain (L1). This leads to lower fees while still leveraging the security of the Ethereum network. There are two types of rollups: Zero Knowledge (zk) and Optimistic[2]. Given recent announcements from Polygon and others, our focus in this note is on zk-Rollups.

 

In sum, zk-Rollups bunch several transactions and execute them on the L2, generating proofs to be sent to the L1 and validating the authenticity of what happened off-chain. According to Polygon co-founder Sandeep Nailwal, this “makes Ethereum almost technically and theoretically infinitely scalable. [3]” 

 

We believe zk-Rollups have the upper hand over Optimistic when it comes to efficiency given that they have faster transaction speeds and withdrawal times. However, early zk-Rollups were designed to perform specific functions like token swaps and payments but couldn’t execute general-purpose smart contracts due to computational obstacles. While having Solidity[4] code on a zk-Rollup with security from the Ethereum network to execute general-purpose applications was only a dream in the past, today we are in the midst of a potential  “Holy Grail '' of Ethereum scaling: zkEVM rollups.

 

zkEVM Rollups

A zkEVM rollup is a zk-Rollup fully compatible with the Ethereum Virtual Machine (EVM). In layman's terms, the general code used to build applications on Ethereum can now be readily deployed on  zk-Rollups, which comes with harnessing the speed and scalability of an L2 and the security of an L1. A working zkEVM rollup would create a severe network effect in development and mass adoption. Initially, only companies like Optimism and Arbirtrum that use Optimistic rollups were able to accommodate any Ethereum smart contract. The general consensus was that a zkEVM was far off in the horizon. However, this month (July 2022), Polygon, zkSync, and Scroll each announced their own zkEVM rollups, a “trifecta” of announcements that is a much anticipated milestone for the Web3 industry.

 

On July 19, the Scroll team announced on Twitter a pre-alpha testnet for their zkEVM rollup, with 18,000+ developers signed up. They have a long way to go before launch of the public mainnet, as they are in phase 2 out of 5 on their roadmap.

 

On July 20, Matter Labs’ zkSync, released a roadmap for zkSync 2.0, planning to launch the “first zkEVM rollup” on the mainnet in 100 days. The zkSync 2.0 will support code in Solidity and Vyper, with porting from Ethereum being effortless as mentioned in their blog post. They also hinted at zkSync 3.0 coming sooner than anticipated.. 

​​

Polygon also announced their zkEVM on Twitter, the first EVM-equivalent zk-Rollup. EVM-equivalent means that “It’s just like using Ethereum, but with the ground-breaking scaling power of ZK tech,” as stated in the Polygon announcement[5]. According to the team, their zkEVM will reduce transaction fees by 90% and will increase transactions per second to 40-50 from Ethereum’s usual 15. They have just open-sourced the code and plan to have a public testnet soon, with a mainnet launch in early 2023.

​​

Going forward, we believe the development of zkEVMs will be very significant for investors, especially as The Merge goes into effect in the coming months and Ethereum fully transitions to Proof-of-Stake. The development of zkEVMs will allow Ethereum to become very scalable without giving up the benefits of security and decentralization. This could make Ethereum a far superior L1 compared to its competitors, increasing the probability of Ethereum becoming one of the final winners of the “Layer-1 scaling wars.” One simple analogy to help understand the significance of zkEVMs is to think of Ethereum as a city going from gravel roads and horses (rollups) to highways with cars (zkEVM rollups)—it’s a giant leap into the future. 

[1] See https://www.gemini.com/cryptopedia/blockchain-trilemma-decentralization-scalability-definition.

[2] A Zero-Knowledge Proof (ZKP) is a type of cryptographic proof that provides users with a higher degree of privacy when engaging in digital transactions. ZKPs enable one party to prove to another party that they know a specific value, without conveying any other information apart from the fact that they know that value. For example, you could use a ZKP to prove to a bank that your annual income is above a certain number without sharing your actual annual income. Like zk-Rollups, Optimistic Rollups are a L2 solution that runs parallel to the Ethereum mainchain. However, unlike zk-Rollups, ORs only publish the bare minimum of information to the mainchain, generating proofs only in fraud cases. Source: Adapted from Gemini, Crypto Glossary, accessed July 25, 2022.

[3] See  https://blockworks.co/polygon-unveils-zkevm-the-holy-grail-of-scaling/.

[4] Solidity is Ethereum’s programming language for general smart contract development.

[5] See https://cryptoslate.com/polygon-launches-new-evm-compatible-scaling-solution-zkevm/.

 


 

This material expresses Hashdex Asset Management Ltd. and its subsidiaries and affiliates (“Hashdex”)'s opinion for informational purposes only and does not consider the investment objectives, financial situation or individual needs of one or a particular group of investors. We recommend consulting specialized professionals for investment decisions. Investors are advised to carefully read the prospectus or regulations before investing their funds. The information and conclusions contained in this material may be changed at any time, without prior notice. Nothing contained herein constitutes an offer, solicitation or recommendation regarding any investment management product or service. This information is not directed at or intended for distribution to or use by any person or entity located in any jurisdiction where such distribution, publication, availability or use would be contrary to applicable law or regulation or which would subject Hashdex to any registration or licensing requirements within such jurisdiction. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of Hashdex. By receiving or reviewing this material, you agree that this material is confidential intellectual property of Hashdex and that you will not directly or indirectly copy, modify, recast, publish or redistribute this material and the information therein, in whole or in part, or otherwise make any commercial use of this material without Hashdex’s prior written consent. 

 

Investment in any investment vehicle and cryptoassets is highly speculative and is not intended as a complete investment program. It is designed only for sophisticated persons who can bear the economic risk of the loss of their entire investment and who have limited need for liquidity in their investment. There can be no assurance that the investment vehicles will achieve its investment objective or return any capital. No guarantee or representation is made that Hashdex’s investment strategy, including, without limitation, its business and investment objectives, diversification strategies or risk monitoring goals, will be successful, and investment results may vary substantially over time. Nothing herein is intended to imply that the Hashdex s investment methodology or that investing any of the protocols or tokens listed in the Information may be considered “conservative,” “safe,” “risk free,” or “risk averse.”

 

Certain information contained herein (including financial information) has been obtained from published and non-published sources. Such information has not been independently verified by Hashdex, and Hashdex does not assume responsibility for the accuracy of such information. Hashdex does not provide tax, accounting or legal advice. Certain information contained herein constitutes forward-looking statements, which can be identified by the use of terms such as “may,” “will,” “should,” “expect,” “anticipate,” “project,” “estimate,” “intend,” “continue”  “believe” (or the negatives thereof) or other variations thereof. Due to various risks and uncertainties, including those discussed above, actual events or results, the ultimate business or activities of Hashdex and its investment vehicles or the actual performance of Hashdex, its investment vehicles, or digital tokens may differ materially from those reflected or contemplated in such forward-looking statements. As a result, investors should not rely on such forward- looking statements in making their investment decisions. None of the information contained herein has been filed with the U.S. Securities and Exchange Commission or any other governmental or self-regulatory authority. No governmental authority has opined on the merits of Hashdex’s investment vehicles or the adequacy of the information contained herein.

© 2022 Hashdex Asset Management Ltd.
Stay in Touch
Get timely market updates and our monthly newsletter for investors.

No spam. Ever.