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Newman Research: A Brief Primer On Ethereum’s Scaling Solutions

December 29, 2022

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With the ongoing boom of Layer 2s (L2s) such as Arbitrum and Optimism, we can see that the Ethereum community is eager for L2 scaling solutions. The community has more or less converged towards Rollups as the “Holy Grail” of these L2 scaling solutions – with Vitalik himself having written an entire article describing and endorsing the technology. There are two main types of rollups – Optimistic and ZK-Rollups, and their core offerings have been summarized in the table below:

It is worth noting, however, that the current landscape is dominated by Optimistic Rollups – with Optimism and Arbitrum taking over 80% of market share in terms of TVL amongst all L2s. The reason for this is simple: Currently, ZK-Rollups are application specific and don’t offer general-purpose computation.

dYdX is a decentralized exchange, while Loopring is a payment and trading solution – both of them are specialized products and don’t offer a broad base of d-Apps like Uniswap, GMX, Aave, etc. that you would see on Optimism and Arbitrum. Optimistic Rollups have hence had the first mover advantage in this space – and with no other competitors, they have taken a large share of TVL.

Fig 1. TVL on different Layer2s, L2Beat

However, we believe that this situation will see a drastic change over time, especially with the introduction of the zkEVM. zkEVM is a technology that combines two existing technologies: zero-knowledge proofs and the Ethereum Virtual Machine (EVM). Let’s break this down:

As said above, zero-knowledge (validity) proofs are the core piece of technology in ZK-Rollups. They are a way for one party to prove to another party that a statement is true, without revealing any additional information beyond the fact that the statement is true, using cryptography.

On to the next part – the Ethereum Virtual Machine (EVM). The EVM is the runtime environment for smart contracts in the Ethereum blockchain. It is a decentralized, Turing-complete virtual machine that can execute arbitrary code provided by a smart contract.

In essence, the zkEVM is a technological marvel that combines zero-knowledge proofs and the EVM, allowing the creation of zero-knowledge proof-based smart contracts that can be executed on the EVM.Thus, ZK-Rollups no longer have to be application specific and can expand to offer decentralized applications.

zkEVMs: The Next-Generation Of Ethereum Scalability

It’s important to not understate the magnitude of building an EVM-compatible ZK-Rollup. Why? ZK-Rollups are recognized as the best scaling solution for Ethereum – not only does it have the shortest finalizing time across other scaling solutions, but it also solves the crucial problem that Optimistic Rollups face: the 7-day withdrawal period of funds.

Current bridges in and out of Optimistic Rollups utilize the “mint and burn” mechanism which introduces weakness into the system – if the growth of Optimistic Rollups continue, the bridges themselves will be a juicy target for hackers. If the world is to be onboarded to blockchain technology, there must be as few weakest links in the system as possible to minimize damage in the case of a black swan event.

The creation of a working zkEVM is significant because they represent a new generation of possibilities for Layer 2 scaling solutions. Just like how the creation of Ethereum brought forth a barrage of other Layer 1s that utilize different technologies and have their own ecosystem of d-Apps all wonderfully working together to create De-Fi, the technological innovation of the zkEVM can be viewed in the same light.

With the zkEVM now supporting general-purpose computation, applications that require high transaction throughput and low fees can now be built – for example, more decentralized order-book exchanges like dYdX, or other possibilities that we can’t fathom right now. In general, the creation of a new technological product is exciting as it opens up new opportunities for businesses and individuals.

This can also lead to network effects – as Ethereum becomes cheaper with more scalability solutions being open for d-Apps to use, the argument of Ethereum being “too expensive” becomes null. And consequently, more users will get onboarded to Web3, leading to a virtuous positive flywheel – more users attract more builders to build more protocols. Thus, the breakthrough of the zkEVM is undoubtedly a game-changer in the space.

Fig 2. Network Effects Infographic, Gary Fox

We believe that the zkEVM – a technology that improves upon Optimistic Rollups across every metric, will come to dominate the Layer 2 space. Layer 2s have seen actual adoption, as gas spending reaches all-time highs in recent months. And while Optimistim and Arbitrum have had the first mover advantage due to their ease of implementation, we expect zkEVMs to be the hub for Ethereum activity over the long run – as such, we have backed Scroll: The first EVM-Equivalent zkEVM.

Fig 3. L2 Gas Spending, Messari

But we didn’t back Scroll just because of the technology; more importantly, they have demonstrated the core fundamental values of Web3 – being decentralized and community-owned. As VCs, we know that the team plays a monumental role in the success of a product. Scroll’s team and the values that they uphold are what makes us have conviction on this particular zkEVM – they seek to build in the open – with their community, for their community.

Introducing Scroll: The EVM-Equivalent zkEVM

But before we dive deeper into the qualitative side of Scroll, it is worth explaining the quantitative side of things – in particular, what EVM-Equivalent actually means.

In short, zkEVMs differ in terms of implementations – in fact, there are 4 main levels to the way zkEVMs are implemented. While we will not be diving deep into the specifics of what each level means, you can read more in Vitalik’s article here, and Galaxy Research’s report here. In an extremely simplified summary, they differ at the level in which they are “compatible” and “talk to” the base layer of Ethereum – and they mainly sacrifice compatibility for performance.

Fig 4. The Different Levels Of zkEVMs, by Vitalik Buterin

But why is this important? Well, the main thing to note is how easily dev tooling and current code bases can be ported over to the rollup. For example, Starknet is a Type 4 zkEVM system – it doesn’t support the language of the EVM. As a result, developer tooling, frameworks and many other building blocks of code that developers have made will likely require modification to be used on Starknet.

On the other hand, Scroll is EVM-Equivalent; As such, they are compatible with many applications and toolings. They don’t have to reinvent the wheel – existing infrastructure will be able to be ported over, with minimal changes. While this doesn’t apply to all code because Scroll isn’t fully EVM-Equivalent, they are working closely with the Ethereum Foundation’s research and development team to make full EVM-Equivalence a reality.

From a technical standpoint, we can thus see that Scroll is doing wondrous things with their solution that offers minimal trust assumptions, high throughput, fast finality, and instant migration from the base layer without any delays (unlike Optimistic Rollups).

Scroll: A Community First zkEVM

However, perhaps what’s just as important is their qualitative approach to building the world’s first zkEVM. The product is only as good as the team behind it, and as we’ve seen in the explosion of L1 networks, the best communities have shown to be built from the ground up (e.g the Ethereum Foundation). Scroll understands this, and has built their core values around being community-centric, open and collaborative.

A major reason why we believe that their values are meaningful in the work of their product is that it follows the fundamental ethos in Web3. This cultural shift focuses less on a top-down approach, but more on flatter power hierarchies with the ability for anyone in the community to contribute. In doing so, Scroll can create a vibrant ecosystem of developers all eager to work together – building trust in the protocol and aggregating the best ideas from the brightest minds in the community.

Evidence of the positive effects of being open-sourced and community-centric can already be seen: there are developers in Taiwan acting as contributors to Scroll. By being open-source, it also allows anyone to audit and understand the code – an important aspect considering the fact that this is a platform meant to hold financial assets. Thus, a sort of “anti-fragility” is born – Scroll becomes better because it is the sum of its team and community, and grows stronger by letting the world examine and work on their errors.

Concluding Thoughts

Here at Newman Capital we believe that Scroll truly is a solution that fulfills both the technical and qualitative aspects of an exceptional product. From a technological standpoint, we believe that ZK-Rollups will play a larger role than Optimistic Rollups in scaling Ethereum.

But we also are a huge proponent of the idea of decentralization, and Scroll’s vision heavily aligns with what we believe at Newman. A Rollup shaped by its community, we believe that by adopting a transparent and open process, Scroll will see much success in the long term as they forge their own community of like-minded peers that all build on each other’s efforts.

This set of values that they hold close to their heart is something that we deeply appreciate. It is an intrinsic reflection of the Web3 ethos and is something that we believe to be of paramount importance in succeeding in this space.

We believe that with such a mindset, the team can go far in building one of the best zkEVMs in the space.

Disclaimer: This material has been shared solely for information purposes, and must not be relied upon for the purpose of entering into any transaction nor investment. Newman Capital is not an investment adviser, and is not purporting to provide you with investment, legal or tax advice. You are always advised to DO YOUR OWN RESEARCH before making any investment decision. Newman Capital is an investor in Scroll.

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