ZK Rollups and Ethereum Scaling— VegaX Research Report

Major blockchains like Ethereum are only capable of processing 7–15 transactions per second, this is negligible when compared to payment behemoths like VISA which can do 100,000 transactions per second. This is exactly what Ethereum scaling solutions are trying to solve. Scalability refers to the capacity of a system to manage the significant and sudden increase in usage without tampering with the functionality. In the crypto world, this means a blockchain’s capability to increase transactions without affecting other factors like security.

So there are two primary ways of scaling, the first is to scale the base layer. Scaling the base layer tries to tackle the tricky issues of maintaining the properties of base layer transactions (immediate availability of funds or state, and final confirmation) under significantly enhanced transactional load. The most effective way to do so is Blockchain sharding, which allows the blockchain to segregate into smaller chains and proceed with validation and make the transactions. This solution helps to increase the TPS without making it centralized. However, base layer scaling faces the issue of what is known as ‘The Blockchain Trilemma’.

The Blockchain Trilemma is a thesis that decentralized networks can provide only three or two guarantees at the same time. These guarantees are Security, Scalability, and Decentralization. Currently, developers have been struggling to maximize all three of these verticals. When they try to improve one, the other two start to lose their benefits. Ethereum network aims to provide scalability, decentralization, and security at the same time. This can make transactions slow and makes scalability difficult.

The second way to scale is to outsource some of the work to a new layer — layer 2. Layer 2 scaling solutions imply making changes off the blockchain network. This means making transactions on a different base that relies on the main network to maintain security.

These solutions increase the transaction speed and are easily scalable. This also keeps the blockchain decentralized and secure because the data, after the transaction, is secured on the Ethereum network. These solutions can combine several transactions into one transaction and later combine it with the main chain.

Rollups are among the most secure methods of Layer 2 scaling. This idea enhances Ethereum throughput by almost 80 times. To implement this, Rollups use third parties, known as sequencers. They perform calculations at Level 2, then transfer transactions into batches and bring them back to the network. Every batch consists of the data state of the previous batch, the transactions in a highly compressed form, and the updated data state after processing the transactions. By splitting up, Ethereum can operate affordably and quickly. It also inherits the security of the Layer 1 network since the finalized data is housed there.

There are typically two types of rollups; the first is the Optimistic Rollups and the second is ZK Rollups, let us review the differences between the two.

Optimistic Rollups are called optimistic because they assume that all transactions are legitimate and valid. However, if anyone disagrees with the transaction, they can submit Fraud Proof to dispute it. This aspect of Optimistic Rollups explains long wait times to withdraw funds from these types of solutions because the system has to see if any challenges appear before it can finalize things.

ZK Rollups, on the other hand, take things to the next level. With regard to the current Proof-of-Work blockchain networks like Ethereum and Bitcoin, validation of transactions occurs on a node-to-node basis, and miners use their specialized machine’s computational power to compete with each other to determine who produces the next block. The first miner to produce a “block hash” under a specified threshold gets to add the transaction to the blockchain. This is beneficial for network security but adversely affects efficiency and scalability.

ZK Rollups take a different approach.

There are just a few validators who bundle transactions together, execute them and generate a cryptographic proof of the result. The single combined transaction is called a validity proof, also known as SNARK which stands for a succinct, non-interactive argument of knowledge. Because the combination is done upfront and there exists proof for it, users do not have to wait for a long time before withdrawing, unlike Optimistic Rollups.

ZK Rollups are special because they use proof, which is why It is called a Zero-Knowledge Proof. The math behind it allows someone to prove that they have the requisite transactions that generate some result without revealing the underlying transaction. It is called Zero-knowledge because one can easily verify that the sender has the right data without needing to see the actual data.

To sum up, ZK Rollups have immense scalability because transactions are bundled together and computed off-chain. They have fast withdrawals because the proofs guarantee legitimacy, so users do not have to wait for challenges. They also maintain world-class security because the data is ultimately settled on Ethereum. It has cheap fees because fees are split across transactions in the bundle. ZK Rollups lead to more decentralization because a lighter load on Ethereum means more people can run nodes which helps to improve centralization.

To understand Zero Knowledge Proofs more completely, let us review the example of the Wordle game. In the game, one can prove that one has the solution, without explicitly revealing it. Everyone agrees that you have the correct solution without any knowledge of the real solution. This is how ZK Rollups work.

Zcash was one of the first used applications of zk-SNARKs. Zcash operates on the fact that secure transactions in Zcash can be entirely encrypted on the blockchain, and can still be verified as valid under the network’s consensus rules by using zk-SNARK proofs. This makes the whole process cheaper, faster, secure, scalable, and decentralized. Because ZK Rollups can be quickly verified if the proof is not on-chain or valid, it allows the funds to be withdrawn easily and quickly, which gives it an advantage over Optimistic Rollups.

To conclude, the development in Rollups is happening at an exponential rate and both Optimistic and ZK rollups are at their early age and have not been widely adopted yet. One might debate that after ETH 2.0, the most awaited upgrade in the Ethereum blockchain, scaling solutions might not be so important, because the conversion of Ethereum’s blockchain from Proof-of-Work to Proof-of-Stake makes the blockchain more secure and reduces network congestion. But ETH 2.0 along with scaling solutions such as Rollups would be capable of processing an estimate of 100,000 transactions per second which would make the Ethereum blockchain widely usable.

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