Why has ZK become a Rising Star field?
Author: Kevin Hao (Analyst) from Cipholio Ventures
Recently, zero-knowledge proofs (ZK) have attracted wide attention in the blockchain industry. As can be seen from the table below, the ZK project is actively sought after by investment institutions. The financing amount of the ZK project is particularly high. The funding of ordinary projects reaches millions of dollars, and the funding of star projects can be tens of millions of dollars or even higher. For example, StarWare raised $50 million in a round of financing in November 2021, with a valuation of $2 billion; Just a few months later, StarkWare is making a new round at a valuation of $6 billion.
The investment institutions behind the ZK project are excellent. Andreessen Horowitz, Softbank, Sequoia Capital and other major investment institutions are actively laying out ZK projects. With the support of these institutions, ZK has great development potential. Meanwhile, there are more and more ZK related projects, and the projects are widely distributed on tracks, such as Layer 1, Rollups, DApp and DAO.
Why is the valuation of the ZK project so high and why do investment institutions still compete to participate under such a high valuation?
1. High-performance team
Zero-knowledge proof is a cryptographic technology proposed by S.Goldwasser, S.Micali and C.Rackoff in the 1980s. It is a protocol involving two or more parties. In the ZK system, participants are divided into provers and verifiers. The prover makes the verifier believe that a certain conclusion is correct without providing and disclosing any useful information to the verifier. There are many classic cases about zero-knowledge proof, so it will not be elaborated in this article.
In the development and application of ZK, the development teams of representative protocols and projects are very excellent.
Professor S.Micali won the 2012 Turing Award for his contribution in the field of cryptography and complexity theory. The development team of Zcash, the first blockchain project to apply the ZK concept, has a good educational and working background, and cooperates with various teams of Johns Hopkins University, MIT, Israel Institute of Technology and Tel Aviv University in the development process. The StarkWare team that developed zk-STARKs consists of world-class cryptologists and scientists. Due to the high development difficulty of ZK projects, there are high requirements for team members, and a high-quality project team will raise the valuation of the project.
2. Application scenarios
ZK is not a new technology proposed in recent years. It came out earlier than blockchain. However, due to the influence of factors such as low efficiency and few suitable application scenarios, ZK stayed in the theoretical stage for a long time and did not get much attention and application. ZK was mainly used in the account password system in the early stages to increase the security and privacy in the authentication process. The rise of blockchain has brought new development opportunities to ZK. More and more blockchain projects use ZK to solve practical problems in the industry, and ZK has developed rapidly in both theoretical and practical aspects.
For public chains such as Bitcoin, the on-chain transaction information is recorded in the public distributed ledger. Any node running in the blockchain network can obtain the transaction records of the whole network. However, this fully transparent architecture can not protect users’ privacy. Especially after the rise of DeFi, online transactions have become more and more frequent, and many users do not want their trading behaviours to be monitored by others.
ZK can play an important role in the field of privacy protection for blockchain. ZK’s solution can encrypt the on-chain data and cut off the correlation between on-chain transactions, so as to prove that the ownership and transaction of assets on the blockchain are effective without disclosing the transaction amount, transaction parties and other information.
For Ethereum and other application platforms, performance is the bottleneck restricting their further development. Due to limited resources on the chain, a lot of calculations have to be solved off-chain to better scale the public chain, and only put the most important data on the chain for verification. In this process, a key problem is to prove that the calculation under the chain is credible, and ZK can play an important role in it.
In the Rollup expansion scheme, you can compress multiple on-chain transactions and generate proofs, and then publish the transaction information to the underlying public chain in the form of batch packaging. The underlying public chain only needs to verify and store this proof without extra calculations, which can significantly improve the performance of the underlying public chain. The proof itself is much smaller than the data it represents, and ZK cryptography technology is used to ensure security and effectiveness. At the same time, ZK’s verification cost can be distributed to multiple transactions, so as to reduce the Gas fee.
3. Grand vision & narrative
From the current situation, the head ZK projects are seen as important infrastructure for the future of the blockchain industry, and when analyzing and evaluating these projects, they are often benchmarked to public chains, Layer 2 projects, which serve as blockchain infrastructure.
As can be seen from the table, the market capitalization or TVL of ZK’s benchmark projects is very high. With most participants recognizing that ZK has application potential and market prospects in the privacy and scaling areas, more and more blockchain projects are experimenting with different technical architectures and mechanism designs, and the valuations of ZK projects are also being raised in the process.
4. Support from Top KOLs
The ZK project has received a lot of recognition in terms of transaction cost, user experience and security, and the support of top KOLs in the blockchain industry will undoubtedly raise the market’s expectations and valuation of the ZK project.Vitalik believes that ZK will be a major technological revolution in the future, and he personally participated in the investment of StarkWare. 1inch Network co-founder Anton Bukov has also said that the best scaling solution for Ether is zk-SNARKs Rollup, and once the scaling problem is solved, Ether has a chance to become the largest cryptocurrency in terms of market capitalization.
5. Rapid developing projects
One of the development difficulties of ZK Rollups is the creation of a common EVM execution environment, which was expected to take several more years. But the leading ZK projects are progressing quickly and the timeline for achieving full EVM compatibility is ahead of schedule. Before introducing these head projects, a brief comparison of the different ZK proof approaches is presented.
There are two main types of ZKs: zk-SNARKs and zk-STARKs.
- The full name of zk-SNARKs is Zero Knowledge Succinct Non-Interactive Argument of Knowledge. Succinct means that the amount of data for the proof is relatively small and can be verified quickly; Non-interactive means that there is no or only little interaction. Argument indicates that the verifier is valid only for provers with limited computational power, and provers with sufficient computational power can falsify the proofs.
- The full name of zk-STARKs is Zero Knowledge Scalable Transparent Argument of Knowledge.
In addition to the above two types, there are also Bulletproofs, Marlin, Sonic, Libra and other proofs.
StarkWare is a representative project based on zk-STARKs, and its development roadmap is as follows.
In the Planets phase, StarkWare launched StarkEx and allowed users to create application-specific ZK Rollups. Currently, dYdX, ImmutableX and DeversiFi all use the StarkEx extension solution. In the Constellations phase, StarkWare introduces StarkNet, a multi-application generic ZKRollups, though only applications in a specified whitelist can be launched. In the future, StarkNet will be gradually decentralized in the Universe phase.
StarkWare created the Cairo language, but since few people are willing to learn a new programming language for smart contracts, they are now collaborating to create an adapter that can seamlessly convert Solidity smart contracts to Cairo for StarkWare’s EVM compatibility. In terms of data availability, StarkWare uses Volition to allow users to choose between using Validium or ZK Rollups on the second layer, with Validium’s data availability being implemented by a centralized data availability committee. For example, dYdX chooses the ZK Rollups model and Immutable X and DeversiFi choose the Validium model.
zkSync is a representative project based on zk-SNARKs. zkSync’s roadmap is as follows.
The first phase of zkSync is the deployment of zkSync 1.0, a payment network focused on ZK Rollups. The second phase is zkSync 2.0, which implements full EVM compatibility and combinability of smart contracts. Recently, zkSync 2.0 has been released as a public test network, giving developers a space to test it. Phases 3 and 4 focus on privacy and censorship-resistant design, respectively. In terms of data availability, zkSync introduces zkPorter, which allows users to post transaction data off-chain, resulting in higher performance. The zkSync ecosystem is well developed and has already partnered with well-known DeFi projects such as Curve and Balancer.
6. Ways to participate in ZK projects
Large investment institutions and ecologies will certainly not miss ZK projects, and they will allocate tremendous amounts of money and other resources on it, investing in the most core and important projects. Take Polygon as an example, it’s considered a suite for scaling Ether infrastructure and is willing to try various Ether scaling solutions. In 2021, Polygon claims to invest $1 billion for ZK development and has acquired star ZK projects like Hermez and Mir one after another.
Currently, ZK Rollups solutions in the Polygon ecology include Polygon Miden, Polygon Hermez and Polygon Zero, and on both zk-SNARKs and zk-STARKs. In addition, Sally of Sino Global Capital, which focuses on Solana ecology, has recently expressed a greater focus on AR ecology and ZK ecology.
For smaller investment institutions, the best time to participate in ZK infrastructure-type projects has passed. Currently, the valuations of new ZK infrastructure-type projects are exceptionally high, and investors are valuing these projects against important infrastructure projects in the blockchain industry. This not only shows participants’ recognition of the technology, but also because Vitalik has said that ZK will be a major technological revolution in the future. On the other hand, there is also speculative and FOMO sentiment, with investment institutions scrambling to get involved and keep inflating the valuation of ZK projects.
What is worth highlighting is that the background of the team members of these new ZK infrastructure-type projects are also not comparable to the top ZK projects. For ZK projects in the infrastructure category, taking the public chain competition back then as a reference, there won’t be many ZK projects that eventually survive in the industry as infrastructure, and the risk of investing in such ZK projects is high.
Small and medium-sized investment institutions can focus more on middleware or service-based ZK projects, such as cross-chain bridges, prophecy machines and data availability tools, etc. There may still be some gaps in the field and there are still investment opportunities.
For retail users and investors, many ZK projects are not currently issuing tokens. After these projects go live, users can participate in them in an early stage and have the opportunity to receive airdrop rewards. These airdrop rewards can be very lucrative considering the heat and potential of ZK projects. For example, tokens that incentivize users exist in the design of zkSync.
In addition, the ZK project also needs to build its own ecology, and then the quality projects in the ecology are well worth participating in. In particular, the ZK project can achieve functions that Layer 1 cannot, and there is a great opportunity in this.
Disclaimer: This research article is opinion/insights only, it should not be viewed as financial or investment advices in any form. Readers are advised to do their own research and analyze the market on their own.