Has the increase in zkSync Era on-chain data been driven by speculators or fundamentals?

Has the increase in zkSync Era data been driven by speculation or fundamentals?

Author | Joyce

Source | Blockchain Simplified (ID: hellobtc)

The zkSync Era mainnet was opened to everyone on March 24, and in just over two months, TVL reached $480 million, with a weekly growth rate of nearly 20%. Currently, the number of independent addresses in zkSync Era has reached 920,000, far surpassing popular Layer2 networks such as Arbitrum, Optimism, and Starknet.

Layer2 project TVL rankings, currently zkSync Era ranks third, second only to Optimism, data source: L2beat

Although these impressive data are not unrelated to zkSync Era’s token distribution expectations, zkSync Era has become one of the rare hotspots and topic successors in the market after the heat of the Bitcoin ecosystem led by BRC-20 subsided.

So what is the current state of development of zkSync Era’s ecosystem? What about the usability of ZK Rollup, which has always been criticized for its technical difficulty and slow progress? Can zkSync Era continue to maintain high heat and high TVL growth after the token incentive expectation ends?

01, Layer2 war spread, what are the advantages of zkSync Era

The high fees, low speed, and even congestion of the Ethereum mainnet have brought about the explosion of the Layer2 sector. Especially in the past six months, Arbitrum, Optimism, and other tokens airdrops have successively been released. The stories of a large number of people getting rich have attracted wool party’s attention to Layer2 projects that have not yet released tokens. Layer2 has become a focus of industry funds and topic focus. In addition, Binance, Coinbase, ConsenSys, and other giants have successively entered the Layer2 sector. The blessing of giant funds has made Layer2 a highly anticipated cryptographic narrative.

So among the many Layer2 projects, where does zkSync Era stand and what are its advantages?

The Layer2 that currently receives the most attention from the industry is still the Rollup solution, including Optimistic Rollup and ZK Rollup. The basic principle of the two is to package some transactions in Layer2 and then submit them to the Ethereum mainnet for on-chain, but the difference lies in the form of data verification.

Optimism Rollup assumes that all transaction data is valid, but provides a period of time for checking. If someone finds fraudulent transaction data, they will receive a reward in the form of penalty funds pledged by audit nodes.

On the other hand, ZK Rollup uses zero-knowledge proofs. After the data is packaged, a zero-knowledge proof of the data is generated through a large amount of computation and submitted to the chain with other relevant core data to verify whether there are any errors. It gives a deterministic result based on algorithms and computing power, which is much more straightforward than the convoluted game process in Optimism Rollup.

However, the problem with ZK Rollup is that the technical implementation is much more complex than Optimism Rollup. Therefore, when projects such as Arbitrum and OP, which are optimistic Rollup projects, go online early and take the lead, other ZK projects can only be anxious. After all, the technical difficulties require real time and resource investment, which cannot be rushed.

However, the construction of the ecology is particularly important for both public chains and Layer2 projects. And the construction of many projects is a process of repairing aircraft while flying. It is difficult to truly wait for a project to be perfect before going online. Bitcoin is an exception, because its functions and incentive mechanisms are very simple.

For most projects, it is a process of iterating while running after going online, just like Ethereum, which is typical. Today’s Ethereum, compared with the one that just went online, has undergone significant changes in performance, architecture, and even consensus mechanisms. However, the continuous construction of the ecology has made Ethereum an industry giant.

Therefore, it is not difficult to understand why some public chains or Layer2 projects are eager to go online and run even before the technical solution is fully mature.

From the current Layer2 ecosystem, after Arbitrum went online in September 2021, TVL quickly soared to more than one billion U.S. dollars in just a few days. Although OP went online a month earlier than Arbitrum, the stability and experience of the mainnet were not as expected, and TVL growth was not as fast as Arbitrum. But no matter what, compared with ZK projects such as zkSync and Starknet, which will not launch their mainnets until a year later, they have indeed taken the lead in ecosystem construction.

As the first ZK Rollup to launch on the mainnet, zkSync Era has achieved impressive data since its launch. Unlike Starknet, which uses an independent contract language, zkSync Era’s language tools are highly compatible with the existing Ethereum mainnet. This high compatibility allows projects on the Ethereum mainnet to move smoothly to the zkSync Era mainnet, just like the early days of Arbitrum, which enabled zkSync Era to quickly climb to over $2 billion in TVL within just twenty days of launching on the mainnet, matching the initial state of Arbitrum, which currently dominates the leaderboard. So, while zkSync Era’s TVL currently accounts for less than 5% of all Layer2 projects, with a growth rate of nearly 20% per week, could it have a promising future?

02. Overview of the zkSync ecosystem

Arbitrum currently has a TVL of $5.6 billion, accounting for about 65% of the TVL of all Layer2 projects. After a year and a half of ecosystem construction, there are now over 500 DApps on Arbitrum, especially GMX (launched on Arbitrum in September 2021), which was once at the top of the hot list during the bear market, is the native flagship project of the Arbitrum ecosystem.

It can be said that Arbitrum’s rise and these native high-quality projects are inseparable, even though the token distribution incentive has already been completed. Arbitrum’s TVL still ranks first. Although at first, Arbitrum’s high compatibility with the Ethereum mainnet EVM allowed many Ethereum DApps to migrate smoothly, accumulating initial TVL, it still relies on its native high-quality DApps to maintain its competitive advantage.

So, what is the current state of the zkSync ecosystem? Are there any indications of powerful projects like GMX? According to the current data on the zkSync official website, almost 300 DApps have been integrated into the zkSync Era ecosystem. While there are many star projects such as Uniswap, 1inch, and LayerZero, only 58 projects are currently live on Era. Moreover, from the list of online projects, it is basically difficult to see the figures of well-known DApps.

Source: zkSync Official Website

It can be said that the entire zkSync ecosystem is still in a relatively barren state, although the TVL is growing rapidly, the total amount is not high. The top-ranked SyncSwap accounts for more than 41% of the DeFi TVL on the entire chain, and the top ten DApp TVL accounts for nearly 96%. Moreover, these DApps are mainly DEXs, plus a few lending protocols. Currently, there is no project in the top ten that has unique innovative advantages like GMX.

Data source: defillama

However, although the number of independent addresses in the zkSync Era has grown very rapidly, reaching 920,700 in just two months, the number of ETH on the cross-chain bridge has also reached a new high, exceeding 280,000, but from the ETH balance of each address, more than 61.4% of the addresses have a balance of less than 0.1 ETH, 30.6% of the addresses have a balance between 0.1 and 1 ETH, 7.7% of the addresses have a balance between 1 and 10 ETH, and the remaining 0.3% of the addresses have a balance of more than 10 ETH.

From the distribution of ETH balances in independent addresses in the zkSync Era, it is not difficult to see that most users are sheep attracted by the expected distribution of zkSync Era tokens.

Independent address data for popular Layer2 projects such as zkSync and Arbitrum, source: Dune

zkSync Era address balance distribution diagram, source: Dune

De Yi is a member of the zkSync Era sheep army. When talking about zkSync, he said:

Currently, because there is a lack of star projects like Uniswap and AAVE on zkSync Era, it is difficult to accept large amounts of locked funds (participating in DEX liquidity mining or lending protocols), and the vast majority are users who are taking advantage of the situation. Especially since zkSync has clearly stated that it will release tokens, under the innovative token incentive model of Arbitrum, the expectation of zkSync airdrop has attracted a large number of sweatshops, leading to explosive growth in independent addresses.

However, the number of projects that are truly worth participating in is limited, and they are no more than DEX, lending, and a few commonly used cross-chain bridges with high TVL rankings. As for the official cross-chain bridge of zkSync, it can only currently cross-chain from the Ethereum mainnet to zkSync, and the cost is between 5-6U, reaching over 10U when the chain is congested. Therefore, for wool party members, unless it is for the expected interaction of airdrops, when it comes to truly needing to cross-chain assets, other cross-chain bridges are generally chosen, as the cost savings are over 70%.

03, zkSync Era’s current problems

As the ZKEVM project, which claims to be the first mainnet, zkSync Era has achieved over 920,000 independent addresses in just two months, surpassing all other mainstream Layer2 projects, and TVL has also experienced explosive growth. However, compared with other popular Layer2 projects such as Arbitrum, its problems are also very obvious:

1. It is still in its early stages, and although the official website has announced many cooperation projects, star projects have not yet truly launched. There are not many native projects that have been launched, and the quality is uneven, making it difficult to quickly accumulate TVL based on star projects with institutional endorsements and a large community base.

2. The native projects that have been launched are mainly Dex and lending, and there are no projects with unique competitive advantages like GMX that have broken through. For users, there are not many reasons other than the attraction of token distribution. When this token distribution expectation disappears, how to compete with Layer2 giants such as Arbitrum and Optimism to obtain high-quality TVL is a problem that must be considered.

3. The technical complexity of zkSync Era leads to unstable block production. Compared with Optimistic Rollup projects such as Arbitrum and Optimism, ZK Rollup projects are much more difficult in terms of technical development. Relative to the Ethereum mainnet, zkSync is already relatively friendly in terms of compatibility, but there are still some compatibility challenges for DApps on zkSync Era. However, with the further maturity of ZKEVM technology and the arrival of the decentralized phase in the future, these problems will be effectively improved.

04, summary

In addition to traditional star Layer2 projects, the Layer2 sector that Binance, Coinbase, ConsenSys, and other giants are all laying out may be the light of this round of bull markets. Can zkSync Era run out? There are still too many variables at present.