The encryption economy is not just a technological innovation

The encryption economy cannot be simply regarded as a technological revolution. One of the main reasons many practitioners or enthusiasts find it difficult to adapt is the strong cyclicality and extreme volatility in this field. Ordinary investors may achieve tenfold or even hundredfold returns during a bull market, but they can also suffer significant losses in a bear market. Regardless of who it is, anyone entering the encryption field needs to learn the necessary investment knowledge.

This round of bear market is mainly triggered by the Federal Reserve's interest rate hikes and capital tightening. Decentralized finance ( DeFi ) no longer has the astonishing yield of 20%, and currently, the yields of mainstream lending protocols are generally below 2%. However, the yield on US Treasury bonds has exceeded 3%, which has prompted institutional investors and stablecoin project parties to continuously transfer funds from the encryption market to the traditional financial market to purchase Treasury bonds.

Since the 1980s, the Federal Reserve has experienced six interest rate hike cycles, each lasting 1-3 years, with an average of 10 hikes. The slower the pace of rate hikes, the worse the effect, making inflation harder to control. For example, the sixth interest rate hike cycle from 2015 to 2018 was relatively slow, with prices of raw materials, mainly oil, rising instead of falling. After October this year, oil prices have remained strong, which may prompt the Federal Reserve to continue adopting a strong interest rate hike policy. There is no doubt that global stock markets and the encryption market will continue to face the pressure of institutional fund withdrawals in 2023, the bottom of the bear market has yet to be reached, and it is not advisable to easily attempt to catch the bottom.

The Ethereum zkRollup solution is worth looking forward to

Putting aside the large cycles of the capital market, solely from the perspective of the encryption technology revolution and the possible wave of Web3.0 it may trigger, Ethereum and its zkRollup scaling solutions, especially the zkRollup solutions based on the next-generation zkEVM, are worth looking forward to.

Vitalik Buterin stated at a meeting on September 30: "The next step for Ethereum after the merge is scalability." Scalability is a core issue hindering many encryption currencies and blockchain applications from becoming mainstream. It is well known that zkRollups can achieve scalability by bundling hundreds of transactions and validating all transactions in a single task.

With the strong support of Vitalik, Rollup has become the mainstream scaling solution for Ethereum. Rollup solutions can be divided into Optimistic Rollup and zkRollup, with the main difference being the method of ensuring transaction validity. Optimistic Rollup uses fraud proofs, while zkRollup employs zero-knowledge proofs.

Compared to optimistic Rollup, zkRollup uses zero-knowledge proofs for mathematical verification, offering more technical advantages. Some projects have been exploring this field for many years.

However, the Ethereum Virtual Machine (EVM) was not designed to support zero-knowledge proofs, making it very difficult to build a virtual machine that is compatible with Solidity and supports zero-knowledge proofs. To address this issue, multiple teams are developing virtual machines that support zero-knowledge proof computations and are compatible with Solidity, known as zkEVM. Unlike regular virtual machines, zkEVM can prove the correctness of execution, including the validity of inputs and outputs used during the execution.

Redesign of zkEVM

Some projects implement zkEVM using different approaches. Some compile bytecode into micro-operation code, use STARK to generate validity proofs for state transitions, and then submit them to Ethereum after using SNARK to verify the correctness of the proofs. Other projects adopt similar but slightly different methods.

Are these systems mature enough to be put into production? Do we need to redesign a better zkEVM? In theory, zkRollup can use zero-knowledge protocols to prove and aggregate all transactions, allowing a layer chain to verify a short "proof" covering thousands of complex transactions, with no possibility of cheating. However, after the release of certain zkEVM testnets, people found that the reality was not ideal - processing a few transactions took tens of minutes.

A team has redesigned a more efficient zkEVM by optimizing the zkEVM structure. The main improvement lies in the adoption of a well-designed layered structure, which compresses redundant space in the circuit and the size of the commitment polynomials, ultimately shortening the time required to generate proofs. At the same time, its sorter operates Ethereum nodes, receives user transactions, generates new states, and creates special zkEVM-friendly tracking. The proof generator obtains this tracking from the sorter and uses multiple small tables ( instead of a single large table ) for processing in the zkEVM, significantly reducing redundancy and improving the speed of proof generation.

The Importance of Faster Zero-Knowledge Proofs

Although SNARK is concise, it is not as efficient as STARK. However, with the emergence of new technologies, STARK has also become outdated. Since speed is the bottleneck of zkEVM, comparing computational efficiency is very important. STARK achieves quasi-linear proof time and verification time, which is faster than SNARK but clearly slower than emerging technologies. Some new technologies are the world's first to achieve linear proof time and sub-linear verification time in zero-knowledge proofs, reaching theoretical extremes. It remains transparent and requires no trusted setup, thus maintaining the highest level of security.

This new technology is based on linearly time-encodable codes and is the fastest among all existing zero-knowledge proof schemes. Additionally, due to the use of recursive techniques, the proof size is reduced to 1/7 of existing schemes, allowing end users to enjoy Ethereum Layer 2 services for just about a cent.

The Necessity of Independent Data Availability Layers

Currently, zkRollup mainly focuses on reducing the computational burden of validating transactions. This is particularly important for Ethereum, as the execution cost of validating complex smart contracts is high. However, Ethereum nodes still need to store the original transaction data simultaneously. This is not wise, as Ethereum is better suited as a consensus layer rather than a storage layer, meaning that scalability bottlenecks still exist - when node bandwidth and storage are insufficient ( rather than computational power ), they will be affected.

This is why Ethereum needs an independent data availability layer to store these raw transaction data, in order to prevent the entire smart contract from freezing due to the failure of zkRollup servers or Ethereum nodes. More importantly, it decouples the layer two costs from layer one, further reducing the zkEVM-based zkRollup transaction costs by more than half.