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Which Ethereum L2 will win the race? đ§đ§
21 April 2023
The newsletter is put together by Giottus Crypto Platform and The News Minuteâs Brand Studio. You can read all the previous issues of Cryptogram
.
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Hello there,The Ethereum ecosystem is most definitely a magnificent Web3 edifice of the future being built right in front of our eyes, brick by brick, one baby step at a time. Unless something goes horribly wrong, a few years from now we will be making transactions on Ethereum with the same speed and ease as UPI, and looking back at Ethereumâs journey in awe, giddy with happiness on how far the ecosystem has come â and how much profit your early ETH investments have reaped.
Layer 2 solutions are key to that. There is a debate in some corners of the crypto ecosystem on whether they are the right kind of solution to Ethereumâs high-gas-fee problem, but the fact is that L2s are the best available, workable options we have got right now and they are not going anywhere for the foreseeable future. But not all of them are going to win. Who will? We donât know, but our lead piece below explains how things are looking.
Before that, Top 5 stories on this issue of Cryptogram
1
Ethereum Name Service will allow users to buy
using MoonPay. If you havenât got your .eth just yetâŚ
2
Societe Generale's crypto division, SG Forge,
on Ethereum, saying it is the first such asset deployed on a public blockchain.
3
The European Union has introduced a new crypto licensing regime,
, making it the first major jurisdiction in the world to introduce a comprehensive crypto law.
4
Forbes reported that the Kingdom Of Bhutan secretly
, including bitcoin. King of Bhutan, more like secret King of Bitcoin!
5
Brokerage firm Bernstein has said that FTXâs collapse has lined up the crypt markets for the biggest bull cycle yet.
WEEKLY MACROS
Total crypto market cap - $1.19 trillion -
7%
Bitcoin market cap - $545 billion -
8.6%
The dollar index (DXY) - 101.84 -
1%
Bitcoin Dominance - 45.8% -
1%
Crypto Fear and Greed Index
- 50 - the market is neutral.
WEEKLY PRICE TRACKER
Price movements from last Friday
BTC Watch
8.6% as BTC battles its key support zone near $28,000
ETH Watch
9% as hype over Shapella update fades away
Altcoins Watch
BNB
:
5% is holding strong compared to the overall market
MATIC
:
12% is fighting to stay above $1 given current bearish market sentiment
TON
0.2% as it rolls out a two-way bridge to facilitate the transfer of ERC-20 tokens to natively wrapped fungible tokens on TON.Total crypto market cap
WHAT'S HOT
Coins to watch out for
Avalanche
(AVAX) is a layer one blockchain that functions as a platform for decentralized applications and custom blockchain networks. As dapps have gained traction, popular applications have been limited by the blockspace and fees of the chain they currently call home.
Subnets can also be permissioned, unlocking use cases for more traditional institutions. AVAX is currently trading at $18.27. With many web2 giants onboard, investors who accumulate during this bear market are positioned to enjoy better ROI in the forseeable future.
Project to watch out for
Ethereum
(ETH) is a decentralized open-source blockchain system that features its own cryptocurrency, Ether. ETH token needs no introduction to those who are in crypto for quite some time but observing developer and total locked value (TVL) growth in the past couple of years has driven so much growth in terms of adoption and will likely to continue to do so in the coming years.
OKB
(OKB) is a cryptocurrency released by the OK Blockchain Foundation and Maltese crypto exchange, OKEx. OKB is the OKEx utility token that enables users to access the crypto exchangeâs special features. OKX experiences a significant surge in its utility token OKBâs value, with the announcement of its support for the upcoming SUI token sale.
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THE HOT TAKE
Battle for ZK rollups supremacy: who will win?
Quick brief: We have heard of Polygon (MATIC). We have observed (even profited from) the airdrops of Optimism (OP) and Arbitrum (ARB). We are preparing for an upcoming airdrop from zkSync. Now we are wondering which Layer 2 solution on Ethereum will eventually win the race? Rather what differentiates them and which ones we can invest in for the next bull run?
Refresher: why we need Layer 2?
The transaction processing power of layer 1 blockchains are currently limited. Layer 2 (L2) solutions are ideally a scaling solution built on top of layer 1 blockchains (like Ethereum) to improve the base layer performance. The layer 1 blockchain will remain the settlement layer, while scaling solutions (L2) will continue to manifest their place as execution layers for the growing ecosystem.
Within L2, rollups have been the most successful scalability approach and has aided the growth of Ethereum. Rollups can be classified as Optimistic and ZK based. Without going into the technicalities, zero-knowledge (ZK) is an upcoming field that is driving new developer resources into it whereas Optimistic rollups are a standard implementation of transactions and integration onto Ethereum.
While ZK can be faster, they can be computationally complex. Among the ones we are tracking today, Optimism and Arbitrum are optimistic rollups while zkSync and Polygon have a ZK play.A brief comparison is below:
Source: Galaxy DigitalNote: EVM is Ethereum Virtual Machine
Knowing the above, let us identify some trends on ZK-rollups in the market currently.
1. Adoption for ZK rollup is growing
Polygon and zkSync launched their ZK Rollups in late March (named Polygon zkEVM and zkSync Era) and have shown promising growth. The networks have garnered a total value locked (TVL) of $4.2M and $246M respectively in a short span of 3 weeks. dYdX and Loopring are the other major contributors to zkRollup TVL.
Source: L2Beat
Do note that the high buzz surrounding zkSync in comparison to Polygon might be attributed towards surrounding news about an impending airdrop for the zkSync early users. However, according to Dune analytics, 85% of the users in zkSync have only done one deposit - hoping for airdrop rewards.
Source: Dune
2. Polygon may migrate to ZKrollup from PoS chain in the future
Polygonâs proof-of-stake chain has had issues over the years. In December 2021, a $24B bug was discovered in PoS chain smart contracts which was patched later. The network also seems to be suffering from âreorgsâ or rollbacks of previously finalized transactions frequently.
As zkEVM solutions mature, we may see Polygon look to transition to validity proofs or hybrid solutions, leveraging their existing user bases to attract dApp development and maintain their market dominance.
3. Uniswap to launch on Polygon, 1inch to launch on zkSync
Polygon zkEVM may get a much-needed boost from Uniswap, Ethereumâs leading decentralized exchange by volume. A vote to launch Uniswap on Polygon zkEVM was passed last Friday, with 42 million voting in favour of the move.
On similar lines, 1inch, Ethereum decentralized protocol, has deployed its aggregation and limit order protocols on zkSync to tap
.
4. Vitalik Buterin, Ethereum co-founder, observes that ZK rollups may win eventually
In his 2021 rollup primer, Vitalik Buterin of Ethereum wrote, âIn general, my own view is that in the short term, Optimistic rollups are likely to win out for general-purpose EVM computation and ZK rollups are likely to win out for simple payments, exchange and other application-specific use cases, but in the medium to long term ZK rollups will win out in all use cases as ZK-SNARK technology improves.â
What should you, the investor, do now?
Outside of BTC and ETH, invest in MATIC: Polygon (MATIC) has been a solid performer of the last 3 years even during 2022, the bear market year. While Optimism (OP) and Arbitrum (ARB) have taken some sheen away recently with their spectacular launches (both tokens are in top 75 by market capitalization), MATIC has potential to do well in the next few years as its ZK play solidifies.
Prepare of zkSync airdrop: Who doesnât love free tokens? Given that users have already been transacting with zkSync in hopes of being rewarded, it is prudent to do at least one transaction on zkSync Era. Once the token is announced and launched, wait for the eventual drop in price to pick up a bag for the medium term.
L2 are overall a good investment: Along with MATIC and ZkSync token (eventual), OP and ARB have good potential to do well. As Ethereum grows in adoption, all these tokens will be useful in their own right. If the protocols figure a way to make their transactions interoperable in the future, the L2 play will not be a zero-sum game and will grow the ecosystem even further. The key risks in all of this is the performance of ETH and the regulatory concerns in the US around it being a security if any.
Thatâs it for this issue, see you next week.
If you have any questions or feedback for us, write to us at [email protected]. You can check out the previous issues here.
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