zkSync: How to find an irreplaceable development direction?

1. zkSync is in the early stages of development, and a large number of applications have not yet been launched. The applications that have been launched are mainly DEX, DeFi, bridges, infrastructure, and NFT that provide basic functions.

2. zkSync 1.0 is positioned as a payment solution, and 2.0 solves the "combinability" problem. To achieve breakthrough development, zkSync needs to find an irreplaceable development direction and also needs to build differentiated advantages against StarkWare.

3. The originality and innovation of the zkSync ecological project and the "privacy" to be achieved in the next stage can become the scalable advantage of zkSync.

4. zkSync has a relatively high possibility of becoming a unicorn with a valuation of more than US$1 billion.

Ethereum Layer2 has obvious security and decentralization advantages over alt L1. Competing public chains are often exposed to downtime and security incidents, but Layer2 rarely has such news.

Among all Layer2s, ZK Rollup’s Layer2 is the most orthodox in the Ethereum branch. It is the safest of all Layer2s. And as the number of transactions increases, the transaction fee allocated to each person will decrease, which has a better expansion effect.

For these reasons, ZK Rollup Layer2 is widely supported. For example, the wallet project Argent has expressed its preference for the ZK system. Argent said it will not support the Optimistic Rollup ecosystem because it will focus on ZK's zkSync and StarkNet.

Everyone’s expectations for ZK Rollup Layer2 are mainly placed on zkSync and StarkWare. Bibi News has studied more than 100 projects in these two ecosystems. This article will analyze the current status, characteristics, challenges, development direction, and future prospects of the zkSync ecosystem.

60 zkSync ecological projects Source: Bibi News

zkSync Overview

1. Introduction

zkSync is a Layer2 developed by Matter Labs, using ZK Rollup technology. zkSync initially focused on expanding the capacity of payment scenarios. Because of the low gas fee, many users use zkSync 1.0 to make Gitcoin donations.

In June 2021, Matter Labs launched zkSync 2.0, which is committed to solving the composability problem between DAPPs and further improving the expansion effect.

In terms of the development stage, zkSync has achieved the goals of "scalable payments" and "smart contracts" in the roadmap. Now the official is focusing on upgrading version 2.0 (still in the testnet stage), and there should be more efforts and improvements in the attempts of "smart contracts" and "composability".

In the future, zkSync will gradually unlock the "privacy" and "decentralization" stages. The ZK (zero-knowledge proof) part of ZK Rollup has a natural advantage in privacy protection, and zkSync can release this feature. Decentralization means that Matter Labs cancels its control over zkSync.

2. Financing information

Crunchbase shows that Matter Labs has completed three rounds of financing (seed round, A round, and B round), raising a total of US$58 million.

The three rounds of financing took place in September 2019, February 2021, and November 2021, respectively. Placeholder, 1kx, and Dragonfly Capital participated in all three rounds, and Union Square Ventures and a16z participated in two rounds. These names in the venture capital circle are enough to show that authoritative investment institutions recognize zkSync.

3. On-chain data

TVL: 58.33 million USD. ETH and stablecoins are the main lock-up value. The total lock-up value of zkSync ecosystem is at a medium to low level among the mainstream Layer2.

Number of independent addresses: more than 330,000. The number of zkSync independent addresses ranks second in Layer2, second only to Optimism, but the daily active ratio of addresses is very low, currently only about 0.04%.

Source: Dune Analytics

In the past two weeks, the zkSync ecosystem has only had a few hundred active addresses per day on average, and the number of daily transactions is only a few hundred, far lower than the tens of thousands of transactions per day of Optimism.

This shows that users are optimistic about the overall development of zkSync and have deployed zkSync addresses in advance, but the ecosystem has not yet developed to the stage of sustained prosperity and daily transactions by users.

Gas fee: The average transfer cost is $0.02, and the average swap cost is $0.04. zkSync has a clear advantage in gas fees, and the interaction cost is only about 2%-5% of the Ethereum main network.

Layer2 gas fee comparison source: l2fees.info

The data of various dimensions of zkSync, such as the number of ecological projects, daily transaction volume, TVL, protocol revenue, etc., are still relatively bleak overall. This is mainly because the zkSync ecosystem is still in its early stages of development and not many projects have been launched.

zkSync Ecosystem Applications

zkSync is still in its early stages of development, which is reflected in the dimension of ecological applications. It is mainly manifested in that a large number of projects have not yet been launched, and the projects that have been launched are mainly DeFi and infrastructure applications, and the track is relatively limited.

According to statistics, there are less than 40 non-development tool projects that have been launched on zkSync 1.0 mainnet or 2.0 testnet. Among them, 7 are related to NFT, which are NFT markets or NFT projects that are relatively easy to develop, 5 are infrastructure such as oracles and browsers, 4 are wallets, and DeFi and DEX account for 8 and 4 seats respectively.

1. DEX

Bibi News has counted 11 DEX projects, of which only 4 have been launched on the mainnet or testnet.

DEX projects are mainly order book DEX and AMM, represented by Zigzag, Sat.is, CryptSwap, and SyncSwap. As a token swap platform, DEX is not only an ecological necessity, but also has reference models in terms of functions, protocol income, and profit distribution. Therefore, it is one of the most widely used tracks in the zkSync ecosystem.

4 DEXs already available on zkSync Source: Bibi News

In addition to the basic token swap function, DEXs are also expanding some additional functions. For example, Zigzag supports cross-chain, SyncSwap supports stablecoin packaging, staking, and governance, and WardenSwap (not yet launched) provides an NFT section.

2. DeFi

DeFi is the most explorable track for zkSync at the current stage. DeFi goes beyond the basic DEX scenario and has a certain room for innovation for the project. In the areas of lending, portfolio management, perpetual contracts, etc., there are already some cases for zkSync ecological projects to learn from.

In the zkSync ecosystem, many innovative DeFi projects have been deployed on other networks, such as Gro Protocol, which focuses on stablecoin income, and Babylon Finance, an asset management protocol. Most of these projects are not yet online in zkSync.

The attempts of zkSync's native DeFi applications such as Mute.io and Trustless to use DeFi mainly focus on basic functions such as staking and farming. Increment is committed to building a perpetual swap, which is a bold attempt and has not yet been launched.

DeFi is also the track most favored by investment institutions. Among the 16 projects counted by Bibi News, 7 have financing information, which is higher than other tracks. Most of the DeFi projects deployed by institutions are also not yet online.

Therefore, overall, there are no high-quality, potential, or even killer-level projects on zkSync, and the ecosystem is on the eve of an explosion.

7 DeFi projects that received institutional investment Source: Bibi News

3. Infrastructure

Infrastructure and wallets are the other two tracks that institutions are keen to invest in. Infrastructure mainly refers to full-chain general infrastructure such as ChainLink and The Graph. These projects have very high website visits, reflecting a high usage rate.

The wallets in the zkSync ecosystem are quite special compared to other ecosystems. Some general wallets deployed in multiple chains, such as Coinbase Wallet, are not applicable to ZK Rollup Layer2. Argent is the most important wallet in ZK Rollup Layer2 and is unique to ZK Rollup Layer2.

The same feature also appears in the cross-chain bridge track. General cross-chain bridges such as Hop and Multichain are not applicable in ZK Rollup Layer2. Orbiter and LayerSwap are mainly used as cross-chain bridges in the zkSync ecosystem.

zkSync Ecosystem Features and Advantages

1. A large number of projects have not been launched

As mentioned many times before, there are a large number of projects in the zkSync ecosystem that are not yet online. The projects that have been launched are mainly some DAPPs that provide basic functions, such as AMM, cross-chain bridges, DeFi that supports farming and staking, wallets, etc.

This is related to the difficulty of developing ZK Rollup Layer 2. zkSync is not as compatible with Ethereum as Optimism and Arbitrum (zkSync 2.0 testnet is also compatible with EVM, but it is not fully compatible or equivalent to EVM like OP and Arbitrum). This leads to resistance to projects in the Ethereum ecosystem migrating to zkSync, and it is difficult for projects to deploy on zkSync.

Therefore, we can see that there are relatively few projects that have been launched, and the track is relatively limited. Among the 60 projects counted by Bibi News, less than 60% have been launched.

Applications are also mainly located in tracks such as DeFi, infrastructure (wallets, bridges, oracles, etc.), NFT markets, and easy-to-deploy NFT projects. Open tracks such as GameFi and SocialFi are still relatively barren.

2. More native apps

The poor EVM compatibility also brings about the second feature of the zkSync ecosystem, which is that there are many native projects. In the zkSync ecosystem, we have not seen a large number of projects migrated from the Ethereum ecosystem like Arbitrum and Optimism. In addition to infrastructure, most projects are zkSync or ZK Rollup native.

On the one hand, this results in a relatively slow realization of the composability between DAPPs. On the other hand, it also means that there is a certain technical threshold for project deployment, and projects deployed to zkSync generally have relatively strong technical capabilities.

Compared to directly migrating projects from Ethereum (or copying open source code to make a forked version) + directly achieving nested and composable projects, projects in the zkSync ecosystem are required to be more "self-reliant", which provides fertile ground for innovation.

Among the 60 projects counted by Bibi News, only about 23% are deployed to both ZK and OP, while nearly 50% are deployed exclusively to zkSync (not deployed to Arbitrum, Optimism, StarkWare).

ZK Rollup Layer2 has its own independent wallet and bridge system, which is the commonality of zkSync and StarkWare. In the fields of NFT, derivatives, and DeFi (some DeFi projects are also deployed in other ecosystems), zkSync is even "different" from ZK Rollup Layer2, and has a relatively obvious ecological uniqueness.

zkSync Valuation

There is no clear statement on the valuation of zkSync at present, but the following data can provide some reference.

StarkWare has raised a total of US$273 million, with the latest round of financing being US$100 million, and its valuation being US$8 billion.

Arbitrum has raised a total of US$123.7 million, including US$100 million in the latest round of financing, with a valuation of US$1.2 billion.

Optimism has raised a total of US$178.5 million, including US$150 million in the latest round of financing, with a valuation of US$1.65 billion.

So far, zkSync has raised a total of $58 million. As one of the four major players in the Layer2 track and an important ecosystem in the ZK Rollup track, which has more potential in the long run, zkSync embodies the market's expectations for the development of ZK-based Layer2. Whether it is funding or market sentiment, zkSync has sufficient support.

In addition, zkSync also promises to have an ecosystem-native token. In the future, zkSync will operate in a decentralized manner, and users can become network validators by staking tokens. This will have a relatively large incentive effect on the market.

Judging from the above dimensions, zkSync should be able to develop into a unicorn with a valuation of over US$1 billion.

Challenges and Future Outlook of zkSync

The challenges faced by zkSync mainly come from alt L1 and Layer2 which is highly compatible with EVM.

Competing public chains have sufficient funds, and because of their centralized operation, they provide a better user experience. These advantages have attracted enough users and funds for competing public chains. We have witnessed the development of Solana and Avalanche in recent years. However, competing public chains have experienced frequent downtime and security incidents. Security and decentralization are the biggest advantages of zkSync over competing public chains.

In the Layer2 track, in the short term, zkSync's main competitors are Arbitrum and Optimism. In the long term, zkSync and StarkWare will compete in the ZK Rollup Layer2.

Arbitrum and Optimism use Optimistic Rollup, which is technically easier to implement than ZK Rollup, so their compatibility with Ethereum and the development of the ecosystem itself are faster than zkSync.

Arbitrum and Optimism have already gained first-mover advantage. The projects, users, and transaction data in both ecosystems are better than zkSync. However, zkSync is still stuck in development progress. The technical difficulty of ZK Rollup is the biggest obstacle in the development of zkSync. However, once overcome, the ZK system will have the potential to be better than the OP system.

In addition, zkSync also needs to build a moat and develop ecological characteristics. Just as Optimism emphasizes the development of public goods and Arbitrum emphasizes first-mover advantage and ecological incentives, zkSync also needs to find an irreplaceable development direction or application track.

The original intention of zkSync was to provide a low-cost payment solution, and it has been recognized by the market. Many users have participated in Gitcoin donations through zkSync 1.0. In the payment scenario, zkSync has also specially developed the zkSync Checkout tool to support users to make batch transfers to different recipients. Therefore, the positioning of zkSync 1.0 for payment scenarios is very clear and effective.

As zkSync 2.0 is expected to be launched on the mainnet, the "composability" goal of zkSync has also been put on the agenda. In the 2.0 testnet, the biggest feature of zkSync is that the ecological project is native, unique, innovative, and high-quality. These may be scalable advantages.

In the future, "privacy" will also be written into the genes of the zkSync ecosystem. Currently, the only Layer2 that emphasizes privacy attributes seems to be Aztec. This is also a possible development direction.

However, the premise of all this is that zkSync can expand the ecosystem, get rid of the initial ecological barrenness, and make up for the shortcomings in EVM compatibility and DAPP composability. Ecological incentive plans may be able to provide help.

Finally, as both are Layer2 of the ZK Rollup system, StarkWare’s current development data is better than zkSync, especially the data of StarkEx. How to build a differentiated advantage in ZK Rollup Layer2 is also a question that zkSync should think about.

Note: This article is not intended as investment advice