The role of ZK-Rollups within the DeFi sector

2021-12-08, 04:03

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Summary
The problem of scalability affects many blockchain systems
However, the blockchain networks can use layer 1 and layer 2 solutions
ZK-rollups are one of the solutions which increase the volume of transactions for a blockchain
Gate.io’s ZKSwap, uses the ZK-rollup technology to enable the transfer of ERC20 tokens to layer 2

<_iframe_ title="ZK Rollups or Zero-Knowledge Rollups changed crypto forever" src="https://www.youtube.com/embed/wD9bpVK00Tg" allow="autoplay; encrypted-media" allowfullscreen="true" data-time="339" data-date="2023-02-01" data-desc="This video explores in detail with technical and professional terms the history and the roles that ZK plays in blockchain. In this video, we also explore how Zero-Knowledge Rollups impact the crypto industry." data-thumb="https://gimg2.gateimg.com/image/1677566187659779488Z.jpeg">
</_iframe_>

The increase in the adoption of the blockchain technology has resulted in the problem of congestion on the network resulting in slower transactions. Engineers have tried several ways to overcome the problem of scalability. In simple terms, scalability refers to the ability of the blockchain network to process a high volume of transactions in a period.

The ability of the blockchain system to handle many transactions within a short time makes it suitable to compete with the traditional financial sector. Definitely, the legacy banking institutions are able to process many transactions within a given time frame.
![](https://gimg2.gateimg.com/image/article/16775714531.jpeg)

Let’s take an example of Visa and <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a>. The <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> protocol processes an average of between 4 to 7 transactions per second while Visa handles around 1 700 transactions within the same period. This shows the need to enhance the scalability of our blockchain network systems. Currently, there are two main types of scaling solutions namely layer1 and layer 2.

## Layer 1 scaling solution

In general, layer 1 solution refers to the upgrading of the blockchain system while layer two is about integrating a third party to scale the system’s output. In other words, layer 1 solution involves augmenting the base layer of the blockchain system such as <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> or <a href="/id/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a>. It is all about changing the underlying rules of the smart contract in order to improve its performance.
Sharding is one of the layer 1 scaling solutions which some blockchain systems use. This involves splitting and storing a data set in multiple machines, resulting in the existing database to handle more transactions than before. <a href="/id/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a> 2.0 is an example of a blockchain which is exploring sharding.
![](https://gimg2.gateimg.com/image/article/16775714752.jpeg)
## Layer 2 scaling solutions

Layer 2 refers to a solution designed to scale up a blockchain through integrating another technology which operates alongside the existing protocol. As a result, there is transfer of the transaction burden to an auxiliary architecture synced with the existing system.

In this way the base system is decongested, thus more scalable than before. The <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> lightning network is an example of layer 2 scaling solution. Nonetheless, we can also put the layer 2 scaling solutions into categories such as state channels, sidechains and zero knowledge rollups.

## State Channels

State channels allow two way communications between on-chain and off-chain channels in order to increase the transactional capacity of their protocols. In this case, there is no need for validation by the layer 1 network. In reality, it is the multi-signature mechanism which seals the adjacent resource until all the batches of transactions are completed. Once the transactions are fulfilled, they are recorded on the digital ledger. The examples of state channels are <a href="/id/price/bitcoin-btc" target="_blank" class="blog_inner_link">Bitcoin</a> Lightning, and <a href="/id/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a>'s Raiden Network.

## Sidechains

A sidechain is a separate network or blockchain which operates alongside the main one such as <a href="/id/price/ethereum-eth" target="_blank" class="blog_inner_link">Ethereum</a>. There is a two-way bridge which connects the mainnet and the sidechain. Interestingly, the sidechain has its own consensus algorithm which increases the transaction volume of the blockchain.

## ZK-Rollups

Layer 2 is a means of scaling blockchain activities through handling some of the network transactions off-chain, yet relying on the security of the mainnet. In addition; the main blockchain system stores all the transaction records. As a result, the transactions are fast and the gas fees remain as low as possible. The combined use of the off-chain functionalities and the mainnet means that ZK-rollups perform far better than the traditional layer 1 blockchain system.

This is possible as a result of Merkle trees which prevent people from faking data in the on-chain records of ZK-rollups. In fact, there are two Merkle trees on the blockchain. Whereas one of the Merkle trees stores the accounts, the other one keeps the balances. More to this, the system keeps the rest of the data off-chain. This arrangement means that the Merkle trees handle the information which is most relevant to the smart contract, saving much of the processing power and reducing the time required for the various transactions.

Apart from submitting highly compressed data, ZK-Rollups or zero knowledge (ZK) rollups generate cryptographic proofs which validate the transactions. In all this, the system submits the validity proof to the mainnet.
If the system detects fraudulent transactions, it runs the fraud proof process in which it corrects the computations using the data stored in layer 1.

## Why developers and traders prefer ZK Rollups

ZK-rollups are essential in increasing usability of the various products based on the blockchain. The fact that ZK-rollups result in faster and cheaper transactions means that they create better value for traders and investors. One thing for certain, ZK-Rollups function exceptionally well with discrete tasks such as trading of cryptocurrencies or direct transfers of digital assets. For instance, it eliminates or reduces the chances of cancelling transactions, which inconveniences the users.

In addition, ZK-Rollups are handy in increasing the production and distribution of NFTs. The increase in the demand of non-functional tokens like NFTs means that blockchain systems need to scale up their activities.
![](https://gimg2.gateimg.com/image/article/16775715053.jpeg)

Exchanges such as Gate.io are also adopting ZK-Rollup technologies to meet the increase in demand for tokens and coins. Notably, Gate.io recently introduced the ZKswap, which is an exchange protocol running on the ZK-Rollup technology. This technology enables the transfer of the various ERC20 tokens to layer 2.

As a result of this, there is near instant swap of tokens, with zero gas fees as well as unlimited scalability. Apart from increasing the user experience, the technology enables them to maintain full custody of their assets.

<div class="blog-details-info">
<div>By Mashell. C, Gate.io Researcher
<div class="info-tips">\*This article represents only the views of the researcher and does not constitute any investment suggestions.
<div>\*Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.
</div>

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