Scaling the blockchain
Analyzing a crypto asset should not be done in isolation. The high amount of composability in many Layer-1 blockchains means that many parts in the system derive value from each other to achieve higher utility and efficiency. Investing in a certain project could be mildly interesting on its own, but if you learn that the project gets used by many others, the prospects go up tremendously.
We have briefly outlined this before with Avalanche subnets, that allow other projects, companies, DAOs, or other collective organizations to launch their own flavor of a blockchain, built on-top of Avalanche. This in turn bolsters the need for Avalanche, while enriching the ecosystem of that crypto asset as well.
Rolling up transactions
Similar (but different) infrastructure is taking a hold over the Ethereum crypto ecosystem. Previously, up until about two years ago, the Ethereum ecosystem existed mostly in the form of a base layer where different actions were performed, like transacting or interacting with a smart-contract.
Nowadays, blockchains are built on top of Ethereum that rely for security on the Ethereum main-chain. Even after the latest crypto crash, Ethereum remains expensive for many to use. That’s because the Ethereum blockchain is slow and has maxed out its capacity on many occasions. Rollups, built on top of the Ethereum Network, cut down on blockchain transaction costs by "rolling up" batches of transactions into a single one, lowering the cost significantly. The combined, final transaction is sent as a single transaction to the Ethereum network.
Rollups reduce expenses by distributing among users the cost of an Ethereum transaction as well as the minimal cost of rolling up batches of transactions. They also expedite processes: the rollup takes very little time to complete, and the Ethereum blockchain only needs to process one transaction instead of many.
Optimistic or Zero-knowledge
Rollups can be divided into two categories: optimistic rollups and zero-knowledge rollups.
Optimistic rollups assume that all of this rolled-up data is accurate and that no one is attempting to trick the blockchain by obfuscating real transactions with fake ones. The premise is that by presuming truth, processes move more quickly. Optimistic rollup rules enable people to challenge faulty deals in order to safeguard against fraudulent transactions. A 7-day period of dispute can then verify the legitimacy of the claim and resolve the conflict. In the event of an error or a deception, both parties would lose the ETH they have risked.
ZK-rollups, also known as zero-knowledge rollups, operate quite differently. They rely on a type of encryption known as a zero-knowledge proof, which enables one to mathematically demonstrate the veracity of a claim without giving any extra information regarding that claim. These are referred to as zk-SNARKs in crypto, which stands for "succinct non-interactive argument of knowledge," another type of cryptography. The "SNARK" bit only allows genuine transactions to be uploaded to the rollup, hence this method gets around the dispute-resolution system inherent to optimistic rollups.
Scanning the ocean
Since inception, 25 different Rollups have been launched on the Ethereum Network. Arbitrum One and Optimism, with a TVL of around $1 billion dollars have been the most successful ones so far attracting significant usage by deploying new protocols on a blockchain with low fees that inherits much of the security of the Ethereum Network.
One such example on Optimism is Synthetix, which is a primitive enabling the creation of synthetic assets, offering unique derivatives and exposure to real-world assets on the blockchain. Another example on Arbitrum is GMX, a novel way to trade BTC, ETH, AVAX, LINK and other top cryptocurrencies with up to 30x leverage directly from your wallet. Both projects have proved to gain prominence by having a good product-market fit, quality code, built on a reliable blockchain, while still having cheap fees.
This value proposition is likely to repeat while Rollups grow bigger, interoperatilibly between Rollups gets better and much of the user unfriendly-ness will get abstracted away. For the foreseeable future, Rollups offer another way to look at Ethereum scaling and offer a way for projects that need micropayment transaction fees to still guarantee a high amount of safety.
Currently, Fourstack Capital is using the Rollups sparsely, mostly for assets that are not available elsewhere. This is because, while exciting technology, it is still quite new and in development.