zkLink Research Report: Focused on Multi-Chain DeFi Layer 2

Author: Jian Shu

On July 18, zkLink launched its Alpha mainnet, followed by the introduction of a new loyalty points system and a clear announcement of an airdrop in the fourth quarter, attracting a large number of users to interact. Therefore, while completing tasks, to enhance everyone's understanding of zkLink, this article will focus on the principles of zkLink's multi-chain DeFi, an introduction to ecological projects, team and financing situations, and more, presenting a comprehensive view of zkLink in an accessible manner.

What is zkLink

zkLink is an L2 focused on multi-chain decentralized trading, which connects multiple different blockchains (including L1 and other L2s) through the mechanism of "ZK Rollup + Oracle Network."

As a result, Dapps deployed on zkLink (such as DEXs, decentralized derivatives trading markets, NFT trading markets) can leverage its seamless multi-chain liquidity, making trading and combining native assets across different chains possible, thus solving the problem of liquidity islands on-chain.

A Controversial L2

In the past, zkLink has been promoted in many public media and articles as a cross-chain infrastructure or multi-chain middleware, which was the basic impression most people had of zkLink. However, now many people, including the official team, are increasingly inclined to promote zkLink as an L2. So, does zkLink belong to the L2 track?

As we know, the core of L2 includes two aspects: one is that it functions as an extension of L1, and the other is that its transaction security ultimately relies on L1. zkLink primarily aggregates liquidity of assets across different chains, essentially extending the functionality of multiple chains, rather than enhancing the TPS of a single chain (like Ethereum) as other L2s do; in terms of transaction security, zkLink is similar to other L2s, using the ZK Rollup solution to aggregate transactions to L1 to ensure the final security of transactions.

Therefore, in summary, zkLink is a multi-chain L2 that extends functionality across multiple chains, and its security also fully relies on multiple chains. However, the L1 it defines may differ slightly from our common understanding; the L1 referred to by zkLink includes all chains it can connect to, such as Ethereum, BSC, and other public chains, as well as Ethereum's second-layer networks like Optimism, Arbitrum, Starknet, and Linea.

How Does zkLink Achieve Multi-Chain DeFi?

To better explain how zkLink achieves multi-chain DeFi, I will assume a scenario: ETH and BNB have experienced significant price fluctuations, and users want to conduct frequent spot trading between ETH and BNB for profit without using centralized exchanges.

At this point, users can operate on the ecological project ZKEX on zkLink:

• Suppose the user first deposits 10 ETH they own on the Base chain (or other chains supported by zkLink) into the zkLink contract address on Base; at this time, the user needs to pay the Gas fee themselves;
• After zkLink monitors the transaction completion, it credits the user's account on ZKEX with 10 ETH (ignoring Gas fees for simplicity), then the user conducts some spot trades, ultimately earning a profit of 5 BNB through buying and selling ETH and BNB. The transaction data during this period will also be aggregated and packaged into blocks by zkLink, ultimately summarized to L1 to ensure data availability, but the user only pays the transaction fees, while the Gas fees for on-chain transaction data are borne directly by ZKEX;
• Finally, the user initiates a withdrawal request on ZKEX to withdraw the earned 5 BNB to their BSC chain address in their MetaMask wallet. Since zkLink uses ZK Rollup, there will be a considerable amount of time from accepting the user's withdrawal request to verifying execution. To address this issue, zkLink introduces the concept of a broker; that is, in addition to standard withdrawals, users can initiate a fast withdrawal request. At this point, the broker will immediately pay the user, and once the on-chain verification is successful, the zkLink contract will reimburse the broker's address.

Introducing Brokers for Fast Withdrawals

In summary, this is the entire process of how zkLink achieves multi-chain DeFi, essentially aggregating orders from different chains through ZK Rollup technology to realize seamless multi-chain atomic swaps. Because of this feature, in zkLink's network, users' deposits of the same type of asset from different chains (such as USDT on Ethereum and USDT on Solana) are indistinguishable, which helps provide users with a better trading experience.

Of course, the ZKEX mentioned above is a multi-chain order book DEX that has already launched on zkLink. zkLink also supports the creation of multi-chain AMM pools, where liquidity pools consist of two or more tokens that do not come from the same chain, allowing for seamless trading and exchange of tokens between two chains. However, there are currently no example DEXs on zkLink that have adopted the multi-chain AMM pool solution.

At the same time, compared to the bridge and intermediate token solutions used in traditional cross-chain scenarios, zkLink's multi-chain AMM not only reduces the risk of asset custody but also avoids issues of liquidity fragmentation or imbalance. Instead, by eliminating the differences between the same type of assets from different source chains, it significantly deepens the liquidity pool.

For those interested in traditional cross-chain solutions, you can read the previous article in the Insight Weekly titled “ZetaChain: In-Depth Analysis of Cross-Chain Interoperability”, which provides a detailed introduction to the principles of traditional cross-chain solutions.
Comparison of Traditional Cross-Chain Solutions and Multi-Chain Solutions

ZKR + Oracle Network

Although zkLink is an L2, its main function is to connect different blockchains and aggregate asset liquidity from different ecosystems, so it also belongs to a part of the cross-chain track. The security issues of cross-chain information can actually be broken down into the correctness of off-chain information computation and the validity of cross-chain states. So, how does zkLink solve these two problems? The answer is "ZKR + Oracle Network."

Simply put, if we compare different blockchains to unconnected islands at sea, then zkLink is a huge shipping company that establishes docks on each island and uses rented ships to travel back and forth to transmit and synchronize information between the islands. The docks represent the ZK Rollup verification contracts deployed on each chain, while the ships are the third-party oracle networks.

• Ensuring the Correctness of Off-Chain Information through ZKR (ZK Rollup)

When a user initiates a cross-chain transaction, zkLink generates zk proofs for the state changes occurring between two chains and ultimately generates a final root through a recursive process to ensure the correctness of the entire link's computation. Finally, zkLink will upload all necessary transaction information and the final root to the Layer 1 contracts on both chains, just like a classic ZK Rollup solution.

Because it uses zero-knowledge proof technology (ZKP), once the final root is established, it becomes impossible to forge the source data of that final root, and the data and final root exhibit a nonlinear causal relationship.

• Ensuring the Validity of Cross-Chain States through the Oracle Network

So, how does zkLink ensure the validity of cross-chain states and determine whether the final roots from multiple interacting chains match? The answer is that zkLink introduces a third-party oracle network.

zkLink's ZK Rollup modifies the normal ZK Rollup mechanism, which typically operates in three phases: the zk proof submission phase, the verification phase, and the execution phase. To achieve unified multi-chain states, zkLink adds a synchronization phase during the verification and execution phases, where the third-party oracle network transmits the final root from one chain to another, and local smart contracts compare whether the final roots from different chains are consistent.

In simple terms, as a security design, zkLink simplifies the complex logic of cross-chain communication into a "yes" or "no" question. For the final roots generated by multiple chains, the third-party oracle network only answers "yes" or "no," and they cannot do anything else.

As shown in the figure below, this is the block detail of zkLink at block height 9423, where L2 Executed and L2 Committed indicate that the transaction information has been sorted into the block and is waiting to be uploaded to L1 for ZKP verification.

In the L1 details, Committed indicates that the L2 zk proof has been successfully submitted to all L1s.

Proved indicates that the proof is being verified, and once approved, it will emit an event and log into the corresponding blockchain, containing the current final root. Currently, all proved zkLink blocks are on Polygon, meaning that Polygon is currently zkLink's DA layer (data availability layer), and zkLink stores all data on Polygon. However, its official documentation also states that in the future, different Dapps can choose various DA solutions, including internal DA layers (i.e., selecting one or more L1s) and external DA layers (such as EigenDA and Celestia), or even a combination of both.

Executed indicates that the verified transactions have been executed.
Block details of zkLink at block height 9423

Differences from LayerZero

zkLink actually achieves cross-chain communication through "ZK Rollup + Oracle Network." So how does it differ from the leading cross-chain communication project LayerZero?

While zkLink is a specialized cross-chain facility focused on multi-chain DeFi applications, LayerZero is a general cross-chain facility that uses relayers, oracles, and endpoints (contracts deployed on each chain) as tools for cross-chain transmission. The specific cross-chain process is as follows:

• LayerZero packages block header information and transaction proof information from the source chain's endpoint and sends them to the oracle and relayer;
• The oracle reads and confirms the block header, and after confirming that the transaction will not roll back through several blocks on the source chain, it sends the block header to the endpoint on the target chain;
• The endpoint on the target chain queries the relayer for the transaction proof from the source chain using the received block header;
• Once the off-chain verification passes, the oracle and relayer send the relevant transaction information to the target chain, completing the cross-chain communication.

In terms of ensuring cross-chain security, compared to zkLink's method of using "ZKP + Oracle Network," LayerZero separates the transmission of block header information and transaction proofs to achieve relatively secure cross-chain communication, assuming that the relayer and oracle do not collude.

In summary, although zkLink and LayerZero both deploy contracts on different chains to collect transaction proofs, zkLink leans more towards application-layer L2, while LayerZero leans towards synchronizing chains at the L0 level, with different focuses.

Introduction to Ecosystem Projects

Currently, zkLink's ecosystem mainly consists of three projects: ZKEX, Zkjump, and OpenWorld. The following is a brief introduction to these three projects.

ZKEX

ZKEX is a multi-chain order book DEX and the first ecological project to launch on zkLink's alpha mainnet. It offers a CEX-like UI and UX, allowing users to avoid issues such as slippage and high Gas fees, while also benefiting from asset self-custody and cross-chain asset trading.

To better understand multi-chain order book DEXs, we will compare ZKEX with the largest and most popular order book DEX, dYdX (dYdX v4):

As shown in the figure, we can see that the biggest difference between zkLink-based ZKEX and the upcoming Cosmos-based dYdX v4 lies in multi-chain interoperability and liquidity depth comparison.

In terms of chain interoperability, dYdX enjoys interoperability with chains within the Cosmos ecosystem through the IBC protocol on Cosmos, but for assets on chains outside the Cosmos ecosystem, it still requires deploying some form of cross-chain bridge for bridging. In contrast, zkLink-based ZKEX can achieve multi-chain interoperability without any bridging.

In terms of liquidity depth, dYdX cannot aggregate the same type of assets from different chains (such as USDC on Ethereum and USDC on Solana) like ZKEX does, so ZKEX has relatively higher liquidity depth, significantly improving traders' capital efficiency. For example, on ZKEX, traders will use an aggregated "USD" token, which is composed of fully reserved stablecoins such as USDC, BUSD, TUSD, etc.

zkJump

Although zkLink focuses on cross-chain trading, as an ecosystem, it is also continuously expanding its boundaries. For example, considering that some users only want to perform simple asset cross-chain transfers without trading, using ZKEX may be a bit cumbersome (requiring deposits and withdrawals). Therefore, another ecological project on zkLink dedicated to cross-chain operations, zkJump, has emerged, serving more as a complement to ZKEX.

zkJump is currently only available in a test version, but built on zkLink, it naturally comes equipped with secure and efficient multi-chain trading capabilities. Users can seamlessly bridge their multi-chain tokens without using wrapped assets or intermediate tokens.

OpenWorld

OpenWorld is a decentralized derivatives exchange based on zkLink, currently also in a test version. It supports trading perpetual contracts for cryptocurrencies as well as trading real-world assets (RWAs) such as stocks, bonds, and gold.

For those who are not yet familiar with RWAs, you can read Jian Shu's previous article “Understanding RWAs: Hype or Opportunity” for more details.

Roadmap

zkLink was established in 2021 and has undergone more than two years of construction and development. It has now connected to 12 blockchains, launched the zkLink Scan block explorer, completed code audits, and recently launched the Alpha mainnet.

In Q4 of this year, zkLink plans to connect more zkEVM chains and implement derivatives trading and NFT minting and trading on the mainnet.

Team and Financing Situation

The founder of zkLink is Vince Yang, who is relatively mysterious. Currently, only his account on the X platform is known, and judging by his follower count and activity level, he is quite low-key on social media. Other information about the team has not yet been publicly disclosed, making it a semi-anonymous team.

So far, zkLink has gone through two rounds of financing. In October 2021, it completed its first round of financing, raising $8.5 million, led by Republic Capital, with participation from Arrington Capital, Alliance DAO, Huobi Ventures, Ascensive Assets, and others. In May of this year, it completed a strategic financing round of $10 million, with participation from Coinbase Ventures, Ascensive Assets, Efficient Frontier, and others.

Conclusion

In July of this year, top investment firm Paradigm announced 10 potential areas it is focusing on, with rollup-centric multi-chain infrastructure prominently included. Compared to L2s like Optimism, Arbitrum, Starknet, and zkSync, which are vying for the high ground of multi-chain interoperability by launching their own RaaS solutions (for details, see the previous article in Insight Weekly titled “The RaaS Battle of the Four Kings of Layer2”), zkLink, which also uses the rollup solution, has a natural advantage in multi-chain interoperability. It not only achieves interconnection between traditional L1s but also between L1 and L2, as well as between L2s.

Moreover, zkLink has captured the main user demand for multi-chain, which is cross-chain DeFi. If the invention of the single-chain AMM model represented by Uniswap enabled DeFi to go from 0 to 1, then zkLink's multi-chain DeFi may represent an innovation taking DeFi from 1 to 10.