As crypto markets become more mainstream, investors and traders alike have their eyes on Ethereum (ETH +2.01%). As one of the most popular cryptocurrencies in the world, Ethereum has seen its value surge so far this year. But what is driving this rebound?
CRYPTO: ETH
Key Data Points
One catalyst for Ethereum that isn't widely discussed is the potential optimistic and zero-knowledge rollups provide in terms of scaling for decentralized finance (DeFi) applications. Given the importance of DeFi applications in driving a majority of the demand on Ethereum's blockchain, this is a big potential upside. Therefore, these scaling solutions are becoming increasingly important to ensure that Ethereum can keep up with growing demand.
Let's dive into what these rollups are and why they matter.
Optimistic and zero-knowledge rollups
Optimistic rollups (ORs) allow for scalability by batching transactions into one single transaction, reducing the overall workload on Ethereum's blockchain. This batching process significantly increases the throughput of transactions and substantially reduces fees, both of which have been problems for Ethereum.
Zero-knowledge rollups (ZKs) leverage cryptography to further reduce the workload on Ethereum. ZK rollups allow developers to create proofs for secure transaction data without revealing the details behind those transactions. This further reduces user fees and most importantly improves the scalability of Ethereum's network.
Zero-knowledge rollups are more commonly viewed as the most important technological improvement to bring the speed and utility of blockchain technology to the next level. These can best be thought of as privacy- and speed-enhancing upgrades, which would allow the Ethereum network to do much more with the same amount of resources.
Indeed, for investors, both optimistic and zero-knowledge rollups present some exciting opportunities. Both rollups can increase usage of applications built on Ethereum while simultaneously reducing transaction costs. These scaling solutions are therefore great catalysts for Ethereum's long-term success and have already been implemented by many projects.
The question is, which rollup technology will Ethereum choose for its scalability goals?
There are pros and cons to both technologies
Steven Goldfeder is a big name in the world of rollup technology. He co-founded Offchain Labs, which is the parent company of leading optimistic rollup Arbitrum.
Goldfeder has publicly discussed the potential downsides of ZK rollups, highlighting the incredibly difficult nature of this technology relative to optimistic rollups. Like other skeptics in the crypto world, Goldfeder has cited the fact that this technology always seems to be three to six months away.
Additionally, optimistic rollups may be better suited to enhancing the Ethereum Virtual Machine (EVM), the environment in which all smart contracts and Ethereum accounts reside. Optimistic rollups do this by making the network more accessible, and appealing to a larger group of developers and users. Thus, the complex engineering work done by ZK teams to target the EVM could, paradoxically, mean that optimistic rollup technology takes longer to implement than it otherwise would.
What now?
From a practical standpoint, optimistic rollups make more sense today. These have been proven to work, enhance scalability immediately, and can provide the sort of scalability Ethereum needs to grow.
On the other hand, I think zero-knowledge rollups have more long-term potential. Thus, it's really a question for the Ethereum developer team as to whether it prefers short-term pain for long-term gains or whether optimistic rollup technology can be improved to mimic the promised performance of ZK rollups.
It's a tough question. For now, I think the fact that the Ethereum network is on the cusp of this technological revamp is something to keep an eye on. As we learn more about future upgrades, I think investors will start to see how big a deal these rollups are. For now, this is the next big catalyst to watch that isn't here quite yet for Ethereum.
