In-Sync with the Scalability Narrative — zkSync Fundamental Analysis
This fundamental analysis was published in a paywall restricted newsletter for cryptocurrency investors on July 11th 2024. The fundamentals remain valid, while the technical analysis may be considered outdated. Thank you for your patronage.
Imagine a library with a magical bookkeeper. This bookkeeper has a unique talent: they can verify that a book contains specific knowledge without ever opening it. When someone needs to prove they’ve read a particular book, they don’t show the book’s content. Instead, they visit the bookkeeper, who somehow confirms their claim without peeking inside.
This magical process represents zero-knowledge (ZK) technology. The reader (prover) demonstrates their knowledge of the book (the secret) to the bookkeeper (verifier) without revealing the actual content. It’s as if the bookkeeper can sense the truth without seeing it, ensuring privacy and security. This way, secrets remain hidden while trust is maintained.
This is not the first euphemism CCI readers have encountered to illustrate the mechanics of ZK proofs. However, in order for zero-knowledge proofs to work, there are three characteristics that must be upheld:
Completeness: Tests need to be able to verify that you know what you know within predefined conditions.Soundness: As a prover, it is impossible to cheat the verifier.Zero-Knowledge: First condition is the prover is right, then the verifier knows it is right without knowing how the answer was reached, and with repetitions the same answer is generated. Second condition is there is no leakage of information that a third party could observe whether the process was scripted or genuine.
The most digestible use case for ZK proofs is in blockchains and cryptocurrencies whereby we can know a wallet address and its contents, but we do not have an auditable path for how the transaction was approved. This use case is antithesis to blockchains primary value proposition of being open and auditable, but has value in instances where privacy is highly valued.
Another use case for ZK proofs is authentication for when passwords are not enough and higher security is required. Passwords can be compromised from a database or brute force hacked, with ZK authentication it is not possible to gain access with a password alone.
An additional use case may be in the financial and insurance realms. Say you wanted to apply for a loan, you would usually need to disclose your bank account information that discloses how much money you have in your bank account. While most people do not want a third-party being able to scrutinize how much money you have and where you spend it, ZK proofs can verify that your bank account falls within an acceptable range in terms of assessing the ability to repay a loan.
Given the instability in the macro, specifically toward perceived election integrity, ZK proofs offer confidence for voters. With ZK proofs, you can verify that you are eligible to vote and record your vote without revealing your identity. Finally, ZK proofs are utilized in machine learning whereby an algorithm can be verified as having correct outputs without compromising the process that an AI Language Learning Model undertook to reach that output.
As is tradition, we will seek to build upon previous editions of the CCI FA series that touched briefly on zkSync among several other potential airdrops (we will discuss the aftermath of this event) and have explored Loopring in a recent edition. It is likely accurate to say that zero-knowledge proofs are the most complex form of cryptography that has been implemented in Layer-2s (L2s) to date alongside sharding. In light of this, the current FA will revisit what ZK proofs are, what is under the hood of zkSync, discuss the challenges with implementing ZK proofs in the current investment climate and where that leaves zkSync.
Your TLDR summary, D.I.S.R.U.P.T. key takeaways.
Wisdom is knowing how little we know
Zero-knowledge proofs has been touted by Vitalik Buterin as the next logical step to scale Ethereum to meet the speed and privacy needs of the masses. In practice, due to the incredibly strenuous task of proving an event mathematically without disclosing how one reached that conclusion, we do not need to be computer scientists and know every line of math that enables ZK Proofs. But a good place to start is what are zero-knowledge proofs?
Zero-knowledge proofs (ZKPs) are cryptographic methods that enable one party (the prover) to prove to another (the verifier) that they possess certain knowledge without revealing the information itself. This method is crucial for Ethereum’s scalability, as it enhances privacy and reduces the computational load on the network. By bundling multiple transactions into a single proof using ZK-Rollups, Ethereum can process more transactions efficiently. This reduction in on-chain data results in lower transaction costs and higher throughput while maintaining security and privacy.
In a typical zero-knowledge proof process, the prover generates a proof of knowledge without exposing the actual data. The verifier, using this proof, can confirm the validity of the knowledge without ever seeing the underlying information. This interaction ensures both privacy and trust.
For Ethereum, ZK-Rollups combine multiple off-chain transactions into a single proof, which is then verified on-chain. This process reduces the amount of data that needs to be processed by the blockchain, making it more efficient and less costly.
ZKPs and ZK-Rollups offer a scalable, secure, and private solution for Ethereum, addressing current limitations and paving the way for broader adoption and more complex applications.
Which brings us to zkSync.
To maintain its leading position, Ethereum must address scalability issues, and zkSync is a promising solution. As a layer-2 scaling solution for Ethereum, zkSync enables faster and cheaper transactions, currently handling up to 300 transactions per second. zkSync’s zkEVM allows for EVM compatibility, allowing Ethereum dApps to run efficiently with zero-knowledge proofs, ensuring privacy and efficiency. Future enhancements, including the ZK Porter solution, aim to scale up to 20,000 transactions per second, significantly boosting Ethereum’s throughput.
When a user submits a transaction on zkSync, they first connect their wallet to a zkSync-compatible application and initiate the transaction by specifying the recipient and amount, then sign it with their private key. This transaction is sent to the zkSync sequencer, where the transaction is sequentially ordered and batched with other transactions in a block. The batch is sent to the prover that must agree to the validity of the transaction before a ZK proof is generated for the batch. This proof is then submitted to the Ethereum mainnet, where the Ethereum smart contract verifies the proof. Upon successful verification, the zkSync smart contract updates the state on the Ethereum blockchain, finalizing the transaction. This ensures the transaction is secure and recorded immutably on Ethereum.
Under the Hood
Vitalik Buterin has expressed strong support for zero-knowledge (ZK) technology as a solution for Ethereum’s scalability issues. He believes that ZK rollups are a crucial step forward because they can significantly increase transaction throughput while maintaining security and decentralization. By leveraging ZK proofs, Ethereum can process many transactions off-chain and only submit concise proofs on-chain, drastically reducing the computational load and gas costs
The theoretical dictates for ZK technology outlined above only scratch the surface.
As the below diagram illustrates an overall view of base layer circuits in zkSync, it is useful to understand there are a lot of moving parts to zkSync.
At the highest level, an L2 build upon ZK technology may possess several components: a Sequencer, a Virtual Machine, a Prover, Shared Bridges (Hyperbridges), and Circuits that perform mathematical operations to generate a proof.
The Sequencer module in zkSync processes incoming transactions, organizes them into blocks, and ensures they follow the system’s rules. It includes two main components:
Tree and TreeBackup: These maintain a local database (RocksDB) that stores the complete layer-2 storage tree, continuously updating to reflect the latest state.StateKeeper: This component executes transactions and securely stores sealed blocks in the local database, ensuring data integrity and continuity of the state.
What we find with zkSync, and some of its competitors, is a renaissance with the Blockchain Trillema, as you would recall involves the interplay with Decentralization, Scalability, and Security that often results in compromising on one to optimize for two. A common issue with L2s is implementing decentralized sequencers, meaning more than one entity is responsible for ordering transactions. Currently, zkSync operates a single sequencer under their control with plans to move toward decentralized sequencers.
The zkSync Virtual Machine (zkVM) is designed to efficiently run the State Transition Function (STF), which is crucial for creating proofs of correct transaction execution in rollups. Unlike Ethereum’s EVM, zkVM executes transactions using its own bytecode but will eventually support EVM bytecode through an interpreter. It includes special features like custom storage handling and gas metering for rollups, and supports pre deployed contracts called precompiles, and system contracts. System contracts have special permissions and are mainly used for managing specialized operations by the Bootloader.
One of the biggest challenges facing ZK rollups is the implementation of the Ethereum Virtual Machine (EVM) that enables users to interface with Ethereum dApps. ZK rollups face challenges with bytecode because they must efficiently generate and verify proofs for transaction execution. Traditional Ethereum bytecode (EVM bytecode) is complex and not optimized for ZK proof systems, leading to inefficiencies and higher costs. To address this, ZK rollups like zkSync have developed their own bytecode that is more compatible with zero-knowledge proofs. However, this creates a compatibility issue with existing Ethereum smart contracts, which are written in EVM bytecode. zkSync plans to support EVM bytecode through an interpreter, but this adds complexity and can impact performance.
In standard Ethereum, transactions are executed one by one, but this method is inefficient for zkSync due to the need for proof generation for each transaction. To improve efficiency, zkSync uses a bootloader, which processes a batch of transactions as a single operation. This bootloader’s hash is stored on Ethereum’s Layer 1 and can only be changed through a system upgrade. Additionally, zkSync uses special system contracts for some operations, which have special privileges and are located in a reserved address space, updated only via system upgrades managed from Layer 1.
ZK proofs let a verifier confirm that a computation is done correctly without revealing the transaction details. In zkSync, a prover shows that the Ethereum Virtual Machine (EVM) executed correctly, and this proof is checked by a smart contract on Ethereum.
When a user makes a transaction, a witness is generated, acting as proof of the transaction’s validity without revealing details. These witnesses validate transactions in batches. To create proofs, the transaction code is converted into circuits, ensuring each step can be mathematically verified. zkSync’s proof system, Boojum, handles these circuits, which are tested to ensure accuracy. The prover’s job is to show each circuit step is correct, preventing errors and ensuring security.
Ethereum’s future focuses on interconnected zero-knowledge Ethereum Virtual Machines (zkEVMs) known as ZK chains, supported by Layer 1 smart contracts for coherence and security. The approach involves building L1 smart contracts with specific architectures to support and integrate new features as Ethereum evolves. Features like permissionless ZK chain launches, unified liquidity through hyperbridges, and simplified multi-chain contract development are prioritized. Verification standards and a bridging architecture ensure trust and facilitate smooth interactions across the ecosystem. This modular design adapts to evolving needs and ensures future compatibility.
Getting in sync with the ZK Landscape
zkSync was developed by Matter Labs, a German company founded by Alex Gluchowski and Vladimir Gamov in 2018. The project has received significant backing from investors including Union Square Ventures, a16z (Andreessen Horowitz), Placeholder, et al that have raised over $458M in capital for zkSync.
Since its founding in 2018, Matter Labs, the team behind zkSync, has focused on research and development to create a robust and efficient layer-2 scaling solution for Ethereum. Initially, they worked on zkRollups, a technology to batch transactions for increased scalability. They launched zkSync 1.0 in June 2020, offering cheaper and faster transactions. However, due to compatibility issues with the EVM an intuitive user experience (UX) was lacking.
Research scientists with backgrounds in Computer Science and Machine Learning at Matter Labs have focused on various aspects of zero-knowledge (ZK) technology to enhance the performance, UX, and security of zkSync. Their work includes developing efficient ZK proof systems, optimizing the zkSync virtual machine (zkVM) for better compatibility with Ethereum’s EVM, and creating advanced data availability solutions for generating proofs. They have also explored innovative approaches to improve scalability and reduce transaction costs while ensuring robust security. This research has been crucial in evolving zkSync from its initial version to the advanced zkSync Era, providing a scalable and secure layer-2 solution for Ethereum.
zkSync Era (2.0) officially went live on mainnet to all users on March 24, 2023. This marked a significant milestone as zkSync Era became the first zkVM to launch on the mainnet, laying the foundations for major improvements like Ethereum Virtual Machine compatibility and smart contract support. Leading up to the $ZK token launch on June 17, 2024, they have engaged in extensive testing, security audits, and partnerships to ensure the platform’s reliability and effectiveness. Much of this testing was conducted by users seeking to qualify for what was a hypothetical $ZK airdrop, which we will discuss further below.
As for what comes next, zkSync are working toward taking zkPorter from testnet to mainnet. zkPorter is an advanced data availability layer developed by zkSync to enhance Ethereum’s scalability beyond the capabilities of traditional zkRollups.
zkPorter not only increases the network’s transaction throughput drastically, but also maintains the security and integrity of the data through cryptographic means. This setup ensures that, although the data is stored off-chain, it remains secure, tamper-proof, and accessible for transaction validation.
zkPorter dramatically increases scalability and reduces the operational cost of transactions by minimizing the amount of data that needs to be handled on Ethereum’s main chain. This cost efficiency is particularly advantageous for high-volume applications, making operations more affordable for users. Additionally, ZK Porter maintains compatibility with Ethereum, facilitating seamless integration with existing applications and ensuring a smooth user experience without necessitating significant changes from developers.
This approach, which blends aspects of zkRollups and Validiums, aims to strike a balance between scalability, security, and data availability. It’s designed to cater to the needs of a broad range of applications within the Ethereum ecosystem, providing a scalable and cost-effective solution that encourages wider adoption.
zkSync also are continuing work on their “Elastic Chain”. The Elastic Chain aims to address issues related to UX and capital efficiency that have emerged in multi-chain environments. By reconfiguring zkSync’s native bridge into a shared router, Elastic Chain facilitates smoother and more efficient asset transfers across the various ZK chains. This allows for a more unified user experience, mimicking a single blockchain operation where transactions across different chains require only a single wallet confirmation, thereby reducing the complexity for users.
With over 20 new ZK Chains planned to launch by the end of 2024, zkSync’s Elastic Chain is poised to significantly expand its network. This expansion supports a diverse range of applications and services, further establishing zkSync as a leading solution in the scaling and interoperability of blockchain networks.
To support the Elastic Chain, zkSync is also actively working on Layer 3 development, specifically focusing on a concept called “Opportunity,” which is a Layer 3 proof of concept designed to operate as a fractal Hyperchain on top of zkSync’s Layer 2. This development aims to further enhance scalability and reduce gas costs for Ethereum. The prototype, part of the zkSync 3.0 updates, was planned for deployment on a public testnet in the first quarter of 2023. This Layer 3 initiative is part of zkSync’s broader strategy to create a more scalable, interconnected ecosystem of ZK chains, enhancing the overall functionality and efficiency of their network.
Upgrades and Governance diagram
Smart Contract Architecture
ZK Tokenomics
Price: $0.149
Market capitalization: $543,951,138
Circulating Supply: 3,675,000,000
Maximum Supply: 21,000,000,000
Inflation: “Token supply can be increased through a protocol governance upgrade.”
$ZK airdrop was recently completed.
Tokens allocated to investors and the team are set for a four-year unlocking period from June 2024 to June 2028, which includes a one-year cliff. In June 2025, 3.66% of the total token supply designated for the team and investors will be released. Following this, up to 0.82% of the total token supply will be unlocked each month until the end of the period in June 2028.
March 12th 2024 saw the highest non-canonical total value locked at $927M. Excluding native tokens (pink) from launch, non-canonical TVL sits at $530M today according to L2 Beat.
December 16th 2023 transactions per second were approximately 5x Ethereums. This appears to be an outlier and has since remained within a reasonable deviation from the Ethereum mainnet.
Following the $ZK airdrop, network activity appears to have steadily declined.
Fog of War — Discussion
Time is the soil in which patience yields the harvest of success.
We know this to be true as sophisticated investors that time and patience in volatile markets are our greatest leverage toward realizing our investment goals.
Same can be said for projects that consistently chip away at some of the biggest challenges in the cryptocurrency space. ZK proofs have presented one of the most formidable challenges to builders in the space, and the Matter Labs team have made significant progress on the journey toward implementing ZK technology.
It has become a trope in the CCI FA that we pay homage to not only the most resilient projects that endure multiple bear markets, but also to solid teams with an abundant runway to meet their goals.
Similar to the Oraichain that boasts multiple pHDs working on their tech stack, and Near Protocol’s inquisitive approach toward solving some of the biggest challenges in the space by examining the strengths and weaknesses of dominant projects throughout their podcast series, we place a high price tag on teams that are competent, understand the problems in the space, and can deliver on solutions. It is difficult to argue that a technology as complex as ZK proofs could be implemented by a rag-tag team of self-taught solidity developers that are used to copying and pasting code to meet their development goals. ZK Proofs are effectively an experimental concept in the realm of computer science, thus the need for developers with an impressive resume and high-grade formal qualifications to boot.
zkSync is no exception. Having worked through its ideation phase in 2018, to releasing their ZK Lite 1.0 MVP, and continuing research efforts in the lead up to the launch of zkEra and the $ZK token, they undoubtedly have the resources to be a major player in the L2 narrative as the bottleneck narrows for viable advanced scaling solutions.
Indeed, it is clear that the big tech money in the space favours competence with approximately $458M in funding raised from Andreessen Horowitz, Binance, Dekrypt Capital, et al.
In light of this, zkSync have an appropriately qualified team to explore innovations in computational science, have stood the test of time prior to launching their zkEra and the $ZK token, and have large backers that are likely too exposed to allow zkSync to fail.
As far as UX is concerned, zkSync Era is as intuitive to the end-user as any other EVM blockchain. However, this has not facilitated the TVL required to rival the leading L2, Arbitrum (an Optimistic Rollup) that is currently sitting at a whopping $15.78B TVL.
This brings us to the elephant in the room — the $ZK airdrop.
In our special airdrop edition of the CCI Newsletter, we outlined the steps to take to potentially qualify for an airdrop.
Little did anyone know that they would apply what can only be described as ruthless sybil filtering to exclude any and all wallets suspected of farming the airdrop.
In the context of network security and online systems, a Sybil attack refers to a type of security threat where one user creates many fake identities to gain a disproportionate influence on the network. These multiple fake identities can manipulate and disrupt network services, such as undermining reputation systems or affecting consensus mechanisms in peer-to-peer networks. Fun fact — the term is derived from the subject of the book “Sybil,” published in 1973 by Flora Rheta Schreiber which is about a person diagnosed with dissociative identity disorder.
In the cryptocurrencies, these sybil actors are considered to be either bots, or industrial airdrop farmers that utilize an algorithm to systematically perform tasks that may qualify for an airdrop in an attempt to obfuscate the genuinity of the user.
zkSync has suffered reputational damage as a result of the sybil detection methods used to exclude those they suspect of farming the $ZK airdrop, as opposed to being genuine users. While it is within any projects right to ensure they are rewarding a loyal user base, the issue with zkSync’s approach lies within the year-long speculation surrounding an airdrop from the time zkEra was launched to the time the airdrop was conducted.
Whether or not the users are genuine, methodically performing tasks over the course of a year to qualify for a potential airdrop is a notable commitment that requires scheduling on-chain activities, paying transaction fees to the network, and exposing users to economic and smart contract risks of an experimental network. As such, there is a significant contingent of users on social media that attack zkSync calling them a scam.
Despite the negativity that has been relatively persistent throughout their X threads, we should consider the long-term implications of denying users an airdrop.
First off, big money is, for the most part, not concerned about performing on-chain activities to qualify for a speculative airdrop. Rather, they are more concerned about the market conditions surrounding the token launch to gain capital exposure and manage risk as they would any other asset they deem valuable. Those that are concerned are likely users with less capital, or have previously made significant gains from farming past airdrops. To this end, we can speculate that the most vocal defectors of zkSync were never going to become loyal users and were only interested in dumping free tokens on legitimate investors.
Secondly, those that were in fact loyal users that utilized zkSync Era to manage their assets are likely to have been rewarded for their loyalty and received an airdrop. Granted, it would be substantially less than they may have anticipated, but that loyalty would likely extend toward them becoming legitimate investors in the token as they recognize zkSync having the potential to go well beyond their initial $1.1B fully-diluted token valuation at launch.
Third, zkSync is likely too big to fail and it is unlikely that the major venture backers that have funnelled money into its development would see it fail. If anything, it would likely present an opportunity for enterprises, dApps, and institutions with legitimate use cases for ZK technology to gain exposure to the token at a lower price contingent on the FUD generated. Similarly, we can see LayerZero, that we covered in the lead up to their airdrop, experience a similar fallout with the community from their use of sybil detection to exclude those that otherwise would have qualified for an airdrop. Despite what appears to be an advantage for zkSync having major backers, if $SOL’s reaction to the SBF-debacle revealed anything to us, it is that a black swan event (such as an exploit on a novel piece of technology) is not out of the question.
Circling back, we must contemplate why zkSync Era TVL has been unable to hold a candle to Arbitrum’s TVL since launching. Clearly, despite not aligning with the next phase of L2 implementations, Arbitrum has maintained dominance over all other L2 networks for one simple reason: they have more innovative dApps, and existing dApps can more readily integrate into Arbitrum then they can into zkSync. The latter element will change as zkSync edges closer to full EVM compatibility, however zkSync has not had any notable innovation from dApps on the network, or at the very least not in a timely fashion that would have enabled them to retain users from their airdrop campaign.
According to DeFiLlama, the highest performing dApp on zkSync Era is SyncSwap with $35M TVL. Hardly notable as we look toward Arbitrum that secures $723M of Aave’s TVL, and GMX at $434M TVL. While Aave has been around for some time, GMX is a great example of organic innovation that happened to take place on the network prior to the $ARB airdrop. We covered GMX at the end of 2022 in our DEX Overview edition of the CCI newsletter. As a quick reminder, GMX set the standard for decentralized perpetual exchanges whereby liquidity providers are rewarded with proceeds from funding rates, trade fees, and trader liquidations. Since traders often lose more than they win, this incentive model for liquidity provision has demonstrated that it can be rather lucrative. This innovation took place during the lead up to the $ARB airdrop, and following the airdrop GMX had managed to retain a significant proportion of their users that found value in the protocol.
Unfortunately, zkSync Era does not appear to have had an innovative revenue-generating dApp on their network that attracted new users and managed to retain them. However, as ZK technology ascends beyond proof of concept, there appear to be approximately 20 projects that are actively working on their own ZK Chains.
Use cases of note here include Space and Time that are building a verifiable compute layer for AI machine learning that posts ZK proofs on-chain, Lens Protocol which are one of the leading Decentralized Social Media (DESO) dApps, Cronos ZK EVM backed by Crypto Dot Com, and GRVT that is a hybrid CEX/DEX that settle transactions with ZK proofs. If our judgement as an investor concludes that upside is too dubious for zkSync having to compete with Arbitrum, there is certainly value in looking toward dApps with unique use cases being utilized by the zkSync network. GRVT is one of note that are onboarding users onto their waitlist (there will be a token) that can only be accessed by existing users’ limited referral codes which we have provided here and encourage readers to share amongst each other.
In terms of the $ZK token, governance is currently the only function until the DAO governing the network approves a proposal to further integrate the token into the network, such as replacing $ETH as the gas currency to pay for transactions on the network. As it stands, the bulk of users that are not seeking exposure to novel use cases with ZK technology may be less inclined to invest into $ZK when they could invest in a tried and tested L2 like Arbitrum ($ARB). While it is anticipated that Arbitrum will continue to dominate L2s by TVL in the short to mid term, there is no reliable benchmark for a speculative ceiling on the ZK tokens and for this reason it is worth considering exposure.
Speaking of ZK tokens, there are a number of competitors that have emerged such as Scroll that have far greater EVM compatibility out the gate than zkSync, however they have compromised on cost and speed of transactions to prioritize decentralization. Similarly, Linea is another recent competitor, however their unique selling proposition is unclear as they appear to be experimenting with ZK proofs as an extension of the work undertaken by Matter Labs. Loopring can be considered competitive with zkSync to an extent since they were the first protocol to utilize ZK proofs, however they have struggled with poor EVM compatibility from the outset and have since refined their value proposition toward Account Abstraction to enable Loopring to plug-in and interface with alternate blockchains as discussed in our recent FA. Until Loopring can get a wallet to the masses that completely abstract away the users having to store private keys then it is likely to remain dormant.
Alongside Scroll and Linea, the most likely competitor in this narrative will be Polygon’s zkEVM. While it is not ubiquitous to the average user with only $120M TVL, there is potential for Polygon zkEVM to burst out the gate since ZK proofs are being built upon their existing tech stack that has already ascended well beyond what we covered in the initial Polygon FA in January 2022 and provided an update September 2022.
While the field for ZK projects is not exceptionally busy, there have been some issues with zkSync’s public relations (PR), not only in regard to the airdrop fiasco that had rubbed would-be recipients the wrong way but also in response to competition.
This table was posted on an X thread with some not overly impressed commentators noting that zkSync were making nonsensical comparisons to the likes of Polygon zkEVM AggLayer which in the simplest of terms utilizes ZK proofs to facilitate bridging between Polygon’s plethora of subnetworks, plasma chain, and mainnet to unlock interoperability while maintaining Polygon’s EVM compatibility. The main issue appears to have arisen from a data analyst who had surmised that Polygon zkEVM is only capable of 5 tps which is a non-sequitur since TPS may not be a valid metric for an aggregation layer.
If there were a red flag for zkSync it would likely boil down to the state of their PR running the risk of zkSync being perceived as adversarial in light of the recent dissent from how they have handled the airdrop alongside making contentious comparisons to the competition. However, to negate this red flag zkSync’s LinkedIn lists 12 marketing employees and it is highly likely that major seed investors with the resources and an active audience will subtly assist in carrying the marketing load. For the short term they need to focus on strategies to rebuild trust with the broader community, keep building, and keep onboarding dApps that aptly illustrate their core value proposition around ZK proofs. Per the latter, if we are to see ongoing proof of concepts utilizing ZK proofs emerge they could serve as a potential catalysts for zkSync.
For now, at time of writing, Lunarcrush social analytics rated zkSync with an Altrank of 13th out of 2,816 projects (“AltRank™ is a combined social + market metric that looks at market volume, social volume, relative comparison vs. Bitcoin, and social engagements. A rank of 1 is the strongest.”), a Galaxy Score of 43 (“The LunarCrush Galaxy Score™ is a score that measures an asset against itself from a combined social and market perspective. A rank of 100 is a perfect score.”), and Positive Sentiment at 84% having reached a low of 69%. Based on this data, it appears that the FUD from those that did not qualify for an airdrop may be waning.
Tokenomics are also a concern. No emissions schedules dates are available, however a runway is provided that indicates after one year from launch; in June 2025, that a one year cliff will release tokens to private investors and the team, that continue to release linearly until June 2028.
While being mindful of the likes of $SOL’s launch (which is the exception, not the rule), $ZK could potentially hold up as the dust settles following the 1 year cliff, but we would require some convincing on-chain data that supports adoption taking place. In particular, we want to see a strong uptick in developer and user activity on zkSync Era Network to rival Arbitrum.
Moreover, ecosystem grants from the foundation and token assembly awarded to developers will likely be unpredictable since they can mint a capped amount of $ZK tokens over time following the cliff. Regardless, $ZK holders will undoubtedly seek to reduce risk in the lead up to the 1 year cliff, and taking profit aggressively leading into the TGE would likely be wise risk management.
With price in mind, let us take a look at the charts.
Since the token had launched June 17th 2024, we have limited price history available and will have to review short term price action and consider Bitcoin’s movement.
Since June 17th 2024, $BTC has been in a downtrend with daily closes having dropped as low as 16% on July 7th, and with the previous daily closing price down 12.9% after completing a bullish back test of $58,400. Should we regain and hold this level, BTC will be positioned to attempt a weekly close above $61,300 to flip higher timeframe structure bullish.
From $ZK’s launch, we can see a supply squeeze took place to pump it from an opening price of $0.095 to $0.2950 before closing the daily at $0.2130. From the limited price data available we can draw conclusions from the downtrend, and fibs applied to the launch candle where we can see price rejection at the golden pocket before we found strong support at the 0.236.
Should the price break above the closing price of the first week of trading at $0.1679 and retest H2 open of $0.1722 we will have a solid confirmation to support an upside thesis. For longer-term investors looking to build a position prior to tapering off in the lead up to the 1 year cliff token unlock, being a buyer at these levels is likely to turn a profit contingent on BTC price action moving forward.
Zooming into the 4H and drawing fibs from the opening range high price to the closing range low price, we can see the loss of the golden pocket signalled confirmation of a bearish backtest. Having found support from the weekly open that coincides with 0.236, price has formed a higher-low on the 4H. We need to see a decisive move above the 0.5 fib to form support before reclaiming Q3/H2 open.
For those operating on a longer time horizon, building a position with DCA from here down toward the wick-lows is ideal with the thesis that prior to sell-offs leading up to the 1-year cliff unlock there is a decent probability that you will risk-off in profit. Arbitrum’s token ($ARB) reached an all-time high market cap of $4.636B two days prior to its one-year cliff for token unlocks. For those looking to risk-off $ZK prior to a token unlock, taking profit in the lead up to price hitting $0.619 (roughly 3.8x from here) would be ideal for a lower-entry as increased circulation dilutes price.
For those operating on a shorter time horizon, a daily close above the closing price for the first week of trading at $0.1679 would likely be a solid support buy as we would find ourselves breaking the downtrend and the golden pocket. Building support at this level will put Q3/H2 open in reach to increase the likelihood of upside continuation.
As an investment opportunity, it is hard to look past $ZK while it is showing relative strength during a market wide correction and is likely to appreciate in value as the market speculates with a limited circulated supply until the 1-year cliff expires.
Since zkSync is among the first-movers for ZK Rollups, which as a subcategory for L2s are likely to fall into the top 10 performing narratives for the next bull market, along with a significant backers and a sizeable warchest to fund ongoing development, $ZK at these price levels is a safe investment. For those looking for exposure in more higher risk/higher reward plays, keeping an eye on projects launching into the ecosystem that are dependent on ZK proofs and short-term rotations into competitor hype (Linea, Scroll, Polygon zkEVM, etc) may be a viable approach.
zkSync fits snugly into a sophisticated investors L2 allocation for the next year, should a bonafide bull market kick off prior to circulating supply heading over its cliff it is anyone’s guess as to what benchmark $ZK can set as a front-runner in the ZK rollup narrative.
References
Coinspeaker, ‘ZKSync Elastic Chain 3.0 Roadmap’, June 25th 2024, https://www.coinspeaker.com/zksync-elastic-chain-3-0-roadmap/
Matter Labs Medium, ‘Leading Defi projects, wallets and exchanges invest to bring Solidity to zkSync’, March 2nd 2021, https://blog.matter-labs.io/leading-defi-projects-and-exchanges-invest-to-bring-solidity-to-zksync-9a3df978f824
Matter Labs Research Papers, https://matter-labs.io/research/
YouTube, CoinGecko, ‘SCROLL Layer 2 Mainnet is Here! BETTER Than zkSync Era??’, December 11th 2023, https://www.youtube.com/watch?v=BqEI-lGEiLs&t=41s
YouTube, QuickNode, ‘What are Zero Knowledge Proofs — Explain Like I’m Five’, April 8th 2023, https://www.youtube.com/watch?v=t58q7uPDfvY&t=0s
YouTube, QuickNode, ‘Differences between zk chains | zkSync vs Loopring vs Polygon zkEVM’, April 29th 2023, https://www.youtube.com/watch?v=i158Lg3p48Y
YouTube, Virtual Bacon, ‘zkSync: Layer 2 zkEVM is HERE! What it means for Ethereum!’, 24 March 2023, https://www.youtube.com/watch?v=0ke2MTBcZTs,
Zeeve, ‘zkSync’s Elastic Chain: A Bold Move Towards More Interconnected Layer3s’, July 4th 2024, https://www.zeeve.io/blog/zksyncs-elastic-chain-a-bold-move-towards-more-interconnected-layer3s/
zkSync Documentation, https://docs.zksync.io/
zkSync Tokenomics, https://docs.zknation.io/zk-token/zk-token
In-Sync with the Scalability Narrative — zkSync Fundamental Analysis was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.