The encryption economy is not only a technological revolution, but investment and cycles are equally important.

The encryption economy is not just a technological revolution; it also involves investment and market cycles. One of the main reasons many practitioners and enthusiasts struggle to adapt is the clear cyclical nature and extreme volatility of this field. Ordinary people may achieve tenfold or even hundredfold returns during a bull market, but can also suffer heavy losses during a bear market. Regardless of who you are, entering the encryption field requires mastering the basics of investment.

The main reason for the current bear market is the capital tightening caused by the Federal Reserve's interest rate hikes. The yields of mainstream lending protocols have dropped from a previous high of 20% to generally below 2%, while the real-world yield on U.S. Treasury bonds has exceeded 3%. This has prompted institutional investors and stablecoin projects to move funds from the encryption market to purchase government bonds.

Since the 1980s, the Federal Reserve has experienced six rate hike cycles, each lasting 1-3 years, with an average of 10 hikes. The slower the rate hikes, the worse the effect, making it more difficult to curb inflation. For example, the sixth rate hike process from 2015 to 2018 was slow, leading to an increase in the prices of raw materials dominated by crude oil rather than a decrease. After October this year, crude oil prices continue to remain strong, which may prompt the Federal Reserve to maintain a high-pressure rate hike policy. In 2023, global stock markets and the encryption market may continue to face pressure from institutional capital withdrawal, and the bottom of the bear market has not yet arrived, making it unwise to easily catch the bottom.

Optimistic about Ethereum zkRollup scaling solution

Putting aside the large cycles of the capital market, from the perspective of the revolution in encryption technology and the potential wave of Web 3.0, we are optimistic about Ethereum and its zkRollup scaling solutions, especially the zkRollup solutions based on the new generation zkEVM.

Ethereum co-founder Vitalik Buterin stated that the next step for Ethereum after the merge is to improve scalability. Scaling is a core issue that hinders many cryptocurrencies and blockchain applications from becoming mainstream. zkRollup achieves scalability by bundling hundreds of transactions into a single execution task and verifying all transactions within that single task.

With Vitalik's strong support, Rollup has become the mainstream solution for Ethereum scalability. Rollup solutions are divided into Optimistic Rollup and zkRollup, with the main difference being the method of ensuring transaction validity. Optimistic Rollup uses fraud proof schemes, while zkRollup uses zero-knowledge proofs.

Compared to Optimistic Rollup, zkRollup uses zero-knowledge proofs for mathematical verification, offering more technical advantages. However, the 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 solve this problem, some projects are developing virtual machines that support zero-knowledge proof computations and are compatible with Solidity, called zkEVM. Unlike ordinary virtual machines, zkEVM can prove the correctness of execution, including the validity of the inputs and outputs used during execution.

The Necessity of Redesigning zkEVM

Existing zkEVM solutions have efficiency issues in practical applications, requiring dozens of minutes to execute a few transactions. By optimizing the zkEVM structure, its efficiency can be improved. The main optimization directions include adopting a well-designed layered structure, compressing the redundant space in the circuit and the size of the submitted polynomials, thereby shortening the time required to generate the proofs.

The Importance of Faster Zero-Knowledge Proofs

The speed of zero-knowledge proofs is the bottleneck of zkEVM, making it crucial to improve computational efficiency. New types of zero-knowledge proof schemes can achieve linear proof time and sub-linear verification time, reaching theoretical extremes. These schemes require no trusted setup and maintain the highest level of security.

The Necessity of Independent Data Availability Layers

Currently, zkRollup mainly focuses on reducing the computational burden of validating transactions. However, Ethereum nodes still need to store the original transaction data, which may become a new scalability bottleneck. Establishing an independent data availability layer can preserve this original transaction data, preventing smart contracts from freezing due to failures of zkRollup servers or Ethereum nodes. More importantly, it will decouple the Layer 2 costs from Layer 1, further reducing the transaction costs of zkRollup based on zkEVM.