Should You Invest in zkSync Era (ZK)? Fundamental Analysis + Charts

smart zkSync Era investor

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Key Takeaways:

  • ZKSync Era is a Layer-2 scaling solution for Ethereum that offers better scalability, lower transaction fees, and a developer-friendly environment. (See our Guide to Layer-2s.)
  • Recently ZKSync launched its native token, ZK, which caused the typical mad rush of airdrop farming (beforehand) and rapid selling (afterward).
  • The team behind ZKSync, Matter Labs, has an impressive track record of industry experience; however, fees and users have both dropped significantly.

ZK Origin Story

Vitalik Buterin, co-founder of Ethereum, recognized early on that scalability was a critical challenge. As the network grew more popular, it faced increasing congestion and high transaction fees. In response, Buterin began exploring various scaling solutions, with a particular focus on zero-knowledge proofs, where transactions can be verified without revealing (or having “zero-knowledge”) of the transactions themselves.

In 2018, Buterin introduced the concept of ZK-rollups, an improved version of the original rollup idea. ZK-rollups use zero-knowledge proofs to verify transactions off-chain, then submit a compressed proof to the Ethereum mainnet. (Think of it like tracking your expense report in an Excel sheet, then submitting it in one batch for reimbursement.) This “batching” approach significantly increases transaction throughput on Ethereum.

Buterin’s advocacy for ZK technology has been consistent over the years. He has repeatedly emphasized the potential of ZK-rollups to address Ethereum’s scalability issues. His support has been crucial in driving development and adoption of ZK solutions within the Ethereum ecosystem.

Inspired by this vision, a company called Matter Labs developed a solution called ZKSync Era (ZK).

What is ZKSync Era?

ZKSync Era is a Layer-2 scaling solution that uses ZK-rollups to streamline Ethereum. It lumps multiple transactions into a single batch, verifying them without compromising privacy or security.

Key advantages for investors to consider:

  • Scalability: ZKSync Era significantly increases Ethereum’s transaction throughput, potentially handling thousands of transactions per second.
  • Cost-efficiency: By processing transactions off-chain and submitting only compressed proofs to the Ethereum mainnet, ZKSync Era dramatically reduces transaction fees.
  • EVM compatibility: Unlike earlier ZK rollups, ZKSync Era is fully compatible with the Ethereum Virtual Machine, allowing developers to deploy existing Ethereum applications with minimal modifications.
  • Security: ZKSync Era inherits Ethereum’s robust security while adding an extra layer of privacy through zero-knowledge proofs.
  • Ecosystem growth: Major DeFi protocols like Uniswap, Curve, and MakerDAO are preparing to deploy on ZKSync Era, indicating strong potential for ecosystem expansion.
  • Innovative features: ZKSync Era introduces native account abstraction, allowing users to pay transaction fees in tokens other than ETH, making for an easier user experience.

For investors, ZKSync Era is a potentially disruptive force in the Layer 2 market. As the Ethereum ecosystem continues to grow, solutions like ZKSync Era could play a crucial role in accommodating increased demand while maintaining low fees and high security.

ZK Key Fundamentals

Daily active users: ZKSync Era has approximately 265.44k daily active users, 1.34 million weekly active users, and 3.4 million monthly active users. However, user growth has stumbled since March 2024. The likely reason is that many zkSync users were airdrop farmers who were simply using the network to acquire ZK tokens during the June 2024 airdrop. We will have to wait to see if user growth resumes in the wake of the airdrop.

Fees and Revenues: ZKSync Era generates revenue by charging off-chain and on-chain fees. Off-chain fees are fixed at approximately $0.01 per transaction and cover the cost of storage state and generating a proof. On-chain fees, or gas fees, are charged to a sender when they complete a transaction. Earnings from these fees are then used to reward block producers who validate transactions on the network.

As you can see from the chart above, ZKSync Era’s was making steady gains in fees in early 2024, however the March Dencun upgrade by Ethereum seriously eroded fee revenue. This is inline with what’s been seen across all the Layer-2 solutions, where fee revenues have dropped by 50% to 98% post-Dencun.

Transactions on-chain: As of March 2024, ZKSync Era can process 1 million transactions in 24 hours. As of June 2024, over 409 million transactions have taken place on the network. One benefit seen from the Ethereum Dencun upgrade is in the number of bridge deposits, which allow users to move crypto assets to different blockchains. As you can see in the chart below, these bridge deposits have increased post-Dencun, indicating that users prefer zkSync over other solutions.

The Team

Matter Labs, the development firm behind ZKSync Era, consists of highly skilled and experienced engineers, researchers, and technical experts. Alex Gluchowski, the company’s co-founder and CEO, holds a Master of Science in computer science from the Berlin Institute of Technology. Before co-founding Matter Labs, he served as the chief technology officer at ExpoGlobus. He also co-founded two other companies and served as the director of R&D at Entropy Labs, a software engineering firm specializing in financial technologies and networking applications.

Matter Lab’s chief product officer, Steve Newcomb, co-founded Loudfire, the company responsible for building the technology that enabled the first email to be sent from a mobile phone. Recently, the company welcomed Nana Murugesan to the team as company president. Murugesan previously served as VP of Business Development and International at Coinbase.

With this level of experience in the industry, it seems likely that the team will be capable of delivering on their vision.

Financials

Launched in June 2024, ZK is the native token used for governance in the ZKsync Era network. The token can be used to pay network fees within the ZKSync ecosystem, introduce governance protocols for networks, and cast votes regarding protocol updates.

There are 21 billion ZK tokens in supply, 17.5% of which were distributed to wallets via an airdrop on June 17, 2024. 19.9% of the supply was given to the ZKSync Foundation for ecosystem initiatives, and another 29.3% was given to governance (i.e., Total Assembly). The remaining 33.3% was split amongst team members and investors, with 16.1% going to the team and 17.2% going to investors.

zk price june 18 to june 28

As you can see in the chart above, ZK price has dropped significantly since the initial launch. This is likely due to heavy selling from those who were only looking to profit from the ZK airdrop.

Platform upgrades, including the recently launched ZKSync 3.0 and its “Elastic Chain” concept (which somewhat resembles rival Polygon's AggLayer), will likely influence the token’s price. Additionally, the growth of the ZK ecosystem, market adoption of Layer-2 solutions, regulatory developments, and overall cryptocurrency market trends will likely play a crucial role in ZK’s price trajectory.

Investor Takeaway

ZKSync Era represents a significant leap forward in Ethereum's scaling solutions, offering an interesting investment opportunity in the Layer-2 ecosystem. Its unique combination of EVM compatibility, enhanced scalability, and cost efficiency means it’s potentially a game-changer.

The technology addresses critical issues faced by Ethereum, namely network congestion and high transaction fees, which have long been barriers to wider adoption of Web3 apps.

From an investor's perspective, ZKSync Era's growing ecosystem and partnerships with major DeFi protocols signal strong potential for future growth. The platform's innovative features, such as native account abstraction, could drive user adoption by improving the overall experience.

However, investors should be aware of the challenges faced by Layer-2 solutions post-Ethereum's Dencun upgrade, which has impacted fee revenues across the board. And see our Investor’s Guide to Layer-2s to see whether it makes sense to invest in L2s at all.

 

This analysis is to help make you a better-informed investor; it is not financial advice. The future may look different than the past. All investing involves risk; see our investing approach for how we manage risk through diversification. Never invest more than you’re willing to lose, and see losses as learning.

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