Zero Knowledge Rollups Implementation For Privacy In Web3 — Complete Documentation & Simulation

Overview & System Context

Zero Knowledge Rollups Implementation For Privacy In Web3: Comprehensive Web-Sourced Technical Investigation Exhaustive Research Dossier · Pure Web-Scraped Content: ~9557 Words · Real Software Screenshots: 3 1. Executive Overview & Technical Background Ethereum is a decentralized blockchain with smart contract functionality. Ether (abbreviation: ETH) is the native cryptocurrency of the platform. Among cryptocurrencies, ether is second only to bitcoin in market capitalization. It is open-source software. Ethereum was conceived in 2013 by programmer Vitalik Buterin. Other founders include Gavin Wood, Charles Hoskinson, Anthony Di Iorio, and Joseph Lubin. In 2014, development work began and was crowdfunded, and the network went live on 30 July 2015. Ethereum allows anyone to deploy decentralized applications onto it, which anyone can then use. Decentralized finance (DeFi) applications provide financial instruments that do not directly rely on financial intermediaries like brokerages, exchanges, or banks. This facilitates borrowing against cryptocurrency holdings or lending them out for interest. Ethereum allows users to create fungible (e.g. ERC-20) and non-fungible tokens (NFTs) with a variety of properties, and to create smart contracts that can receive, hold and send those assets in accordance with the contract's immutable code and a transaction's input data. On 15 September 2022, Ethereum transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in an update known as "The Merge", which cut the blockchain's energy usage by over 99%.

Ethereum was initially described in late 2013 in a white paper by Vitalik Buterin, a programmer and co-founder of Bitcoin Magazine, that described a way to build decentralized applications. Buterin argued to the Bitcoin Core developers that blockchain technology could benefit from other applications besides money and that it needed a more robust language for application development that could lead to attaching real-world assets, such as stocks and property, to the blockchain. In 2013, Buterin briefly worked with eToro CEO Yoni Assia on the Colored Coins project and drafted its white paper outlining additional use cases for blockchain technology. However, after failing to gain agreement on how the project should proceed, he proposed the development of a new platform with a more robust scripting language—a Turing-complete programming language—that would eventually become Ethereum. Ethereum was announced at the North American Bitcoin Conference in Miami, in January 2014. During the conference, Gavin Wood, Charles Hoskinson, and Anthony Di Iorio (who financed the project) rented a house in Miami with Buterin at which they could develop a fuller sense of what Ethereum might become. Di Iorio invited friend Joseph Lubin, who invited reporter Morgen Peck, to bear witness. Peck subsequently wrote about the experience in Wired. Six months later the founders met again in Zug, Switzerland, where Buterin told the founders that the project would proceed as a non-profit. Hoskinson left the project at that time and soon after founded IOHK, a blockchain company responsible for Cardano. Ethereum has an unusually long list of founders. Anthony Di Iorio wrote: "Ethereum was founded by Vitalik Buterin, Myself, Charles Hoskinson, Mihai Alisie & Amir Chetrit (the initial 5) in December 2013. Joseph Lubin, Gavin Wood, & Jeffrey Wilcke were added in early 2014 as founders." Buterin chose the name Ethereum after browsing a list of elements from science fiction on Wikipedia. He stated, "I immediately realized that I liked it better than all of the other alternatives that I had seen; I suppose it was that [it] sounded nice and it had the word 'ether', referring to the hypothetical invisible medium that permeates the universe and allows light to travel." Buterin wanted his platform to be the underlying and imperceptible medium for the applications running on top of it.

"The Merge" (formerly called Ethereum 2.0) was a set of three updates (Bellatrix, Paris, and Shapella) that transitioned Ethereum's consensus protocol from proof-of-work to proof-of-stake. Bellatrix updated the proof-of-stake Beacon chain and introduced economic slashing. Paris was the event at block 15537393 on 15 September 2022 that merged Ethereum to the Beacon chain. Shapella (Shanghai-Capella) was the update that allowed for staking withdrawals. The switch from proof-of-work to proof-of-stake has cut Ethereum's energy usage by over 99%. However, the effect this has on global energy consumption and climate change may be limited since the computers previously used for mining ether may be used to mine other cryptocurrencies that are energy-intensive.

Ethereum is a peer-to-peer network that maintains a database containing the storage values of all Ethereum accounts and processes state-altering transactions. Approximately every 12 seconds, a batch of new transactions, known as a "block", is processed by the network. Each block contains a cryptographic hash identifying the series of blocks that must precede it if the block is to be considered valid. This series of blocks is known as the blockchain. Each "node" (network participant) connects with a relatively small subset of the network to offer blocks and unvalidated transactions (i.e. transactions not yet in the blockchain) to its peers for download, and it downloads any from its peers that it doesn't already have. Each node usually has a unique set of peers, so that offering an item to its peers results in the propagation of that item throughout the entire network within seconds. A node's collection of unvalidated transactions is known as its "mempool". A node may choose to create a copy of the state for itself. It does this by starting with the genesis state and executing every transaction in the blockchain, in the proper order of blocks and in the order they are listed within each block. Any Ethereum account may "stake" (deposit) 32 or more ETH to register a "validator". At the end of each "epoch" (32 block slots, each slot lasting 12 seconds), each validator is pseudorandomly assigned to one of the slots of the epoch after the next, either as the block proposer or as an attester.

During a slot, the block proposer uses their mempool to create a block that is intended to become the new "head" (latest block) of the blockchain, and the attesters attest to which block is at the head of the chain. If a validator makes self-contradicting proposals or attestations, or if it is inactive, it loses a portion of its stake. Any Ethereum account may send ETH to a validator at any time to increase its stake. A validator's attestation is given a weight equal to its stake or 2,048, whichever is less. According to the Ethereum protocol, the blockchain with the highest accumulated weight of attestations at any given time is to be regarded as the canonical chain. Validators are rewarded for making valid proposals and attestations.

A validator's rewards are paid via transactions within the same chain that contains their proposal or attestation, and therefore would have little or no market value unless that chain becomes the canonical chain. This incentivizes validators to support the chain that they think other validators view as the canonical chain, which results in a high degree of consensus. Figure 1: ZippyChain’s Privacy Architecture with Zero-Knowledge Rollups | by ...

The Ethereum Virtual Machine (EVM) is the runtime environment for transaction execution in Ethereum. The EVM is a stack based virtual machine with an instruction set specifically designed for Ethereum. The instruction set includes, among other things, stack operations, memory operations, and operations to inspect the current execution context, such as remaining gas, information about the current block, and the current transaction. The EVM is designed to be deterministic on a wide variety of hardware and operating systems, so that given a pre-transaction state and a transaction, each node produces the same post-transaction state, thereby enabling network consensus. The formal definition of the EVM is specified in the Ethereum Yellow Paper. EVMs have been implemented in C++, C#, Go, Haskell, Java, JavaScript, Python, Ruby, Rust, Elixir, Erlang, and soon WebAssembly.

Ethereum also allows for the creation of unique and indivisible tokens, called non-fungible tokens (NFTs). Since tokens of this type are unique, they have been used to represent such things as collectibles, digital art, sports memorabilia, virtual real estate, and items within games. ERC-721 is the first official NFT standard for Ethereum and was followed up by ERC-1155 which introduced semi-fungibility; both are widely used, though some fully fungible tokens using ERC-20 have been used for NFTs such as CryptoPunks. The first NFT project, Etheria, a 3D map of tradable and customizable hexagonal tiles, was deployed to the network in October 2015 and demonstrated live at DEVCON1 in November of that year. In 2021, Christie's sold a digital image with an NFT by Beeple for US$69.3 million, making him the third-most-valuable living artist in terms of auction prices at the time, although observers have noted that both the buyer and seller had a vested interest in driving demand for the artist's work.

Decentralized finance (DeFi) offers financial instruments in a decentralized architecture, outside of companies' and governments' control, such as money market funds which let users earn interest. DeFi applications are typically accessed through a Web3-enabled browser extension or application, such as MetaMask, which allows users to directly interact with the Ethereum blockchain through a website. Many of these DApps can connect and work together to create complex financial services. Examples of DeFi platforms include MakerDAO. Uniswap, a decentralized exchange for tokens on Ethereum grew from US$20 million in liquidity to US$2.9 billion in 2020. As of October 2020, over US$11 billion was invested in various DeFi protocols. Additionally, through a process called "wrapping", certain DeFi protocols allow synthetic versions of various assets (such as bitcoin, gold, and oil) to be tradeable on Ethereum and also compatible with all of Ethereum's major wallets and applications. Aave is a protocol for microlending using Ethereum.

The legal status of ether (ETH), Ethereum's native token, remains subject to uncertainty and varies substantially from one jurisdiction to another. In the United States, regulatory authorities have increasingly signaled that ether should be treated as a commodity under the jurisdiction of the Commodity Futures Trading Commission (CFTC). The CFTC has repeatedly asserted its regulatory authority over Ethereum, with former CFTC Chairman Heath Tarbert stating in 2019 that "ETH is a commodity" and subsequent leadership maintaining this position. From a private law perspective, many jurisdictions have recognized ether as a form of intangible personal property that can be owned, transferred, and used as collateral, similar to other forms of personal property. In the United States specifically, the 2022 Amendments to the Uniform Commercial Code (UCC) introduced "controllable electronic records" (CERs) as a new category of personal property that includes digital assets like ether. Under UCC Article 12, ETH is classified as a CER, which provides a comprehensive framework for its commercial circulation.

Figure 2: Understanding Zero Knowledge Rollups [Definition and Principles] Cryptocurrency is a type of digital asset that uses distributed ledger, or blockchain, technology to enable a secure transaction. Individual coin ownership records are stored in a digital ledger or blockchain, which is a computerized database that uses a consensus mechanism to secure transaction records, control the creation of additional coins, and verify the transfer of coin ownership. The two most common consensus mechanisms are proof of work and proof of stake. Despite the name, which has come to describe many of the fungible blockchain tokens that have been created, cryptocurrencies are not considered to be currencies in the traditional sense, and varying legal treatments have been applied to them in various jurisdictions, including classification as commodities, securities, and currencies. Cryptocurrencies are generally viewed as a distinct asset class in practice.

In 1983, American cryptographer David Chaum conceived of a type of cryptographic electronic money called ecash. Later, in 1995, he implemented it through Digicash, an early form of cryptographic electronic payments. Digicash required user software in order to withdraw notes from a bank and designate specific encrypted keys before they could be sent to a recipient. This allowed the digital currency to be untraceable by a third party. In 1996, the National Security Agency published a paper entitled How to Make a Mint: The Cryptography of Anonymous Electronic Cash, describing a cryptocurrency system.

The paper was first published in an MIT mailing list (October 1996) and later (April 1997) in The American Law Review. In 1998, Wei Dai described "b-money," an anonymous, distributed electronic cash system. Shortly thereafter, Nick Szabo described bit gold. Like bitcoin and other later cryptocurrencies, bit gold was proposed as a digital currency system in which users would generate money by completing proof-of-work functions whose solutions were cryptographically chained and published. In January 2009, bitcoin was created by pseudonymous developer Satoshi Nakamoto. It used SHA-256, a cryptographic hash function, in its proof-of-work scheme. In April 2011, Namecoin was created as an attempt at forming a decentralized DNS. In October 2011, Litecoin was released, which used scrypt as its hash function instead of SHA-256.

Peercoin, created in August 2012, used a hybrid of proof-of-work and proof-of-stake. Cryptocurrency has undergone several periods of growth and retraction, including several bubbles and market crashes, such as in 2011, 2013–2014/15, 2017–2018, and 2021–2023. In August 2014, the UK announced its Treasury had commissioned a study of cryptocurrencies and what role, if any, they could play in the UK economy. The study was also to report on whether regulation should be considered. Its final report was published in 2018, and it issued a consultation on cryptoassets and stablecoins in January 2021. In June 2021, El Salvador became the first country to accept bitcoin as legal tender, after the Legislative Assembly had voted 62–22 to pass a bill submitted by President Nayib Bukele classifying the cryptocurrency as such. In August 2021, Cuba followed with Resolution 215 to recognize and regulate cryptocurrencies such as bitcoin. In September 2021, the government of China, the single largest market for cryptocurrency, declared all cryptocurrency transactions illegal. This completed a crackdown on cryptocurrency that had previously banned the operation of intermediaries and miners within China. In September 2022, the world's second largest cryptocurrency at that time, Ethereum, transitioned its consensus mechanism from proof-of-work (PoW) to proof-of-stake (PoS) in an upgrade process known as "the Merge". According to the Ethereum Founder, the upgrade would cut both Ethereum's energy use and carbon-dioxide emissions by 99.9%. On 11 November 2022, FTX Trading Ltd., a cryptocurrency exchange, which also operated a crypto hedge fund, and had been valued at $18 billion, filed for bankruptcy.

The financial impact of the collapse extended beyond the immediate FTX customer base, as reported, while, at a Reuters conference, financial industry executives said that "regulators must step in to protect crypto investors." Technology analyst Avivah Litan commented on the cryptocurrency ecosystem that "everything...needs to improve dramatically in terms of user experience, controls, safety, customer service." An October 2024 survey from the Pew Research Center found that 63% of adults in the U.S. "have little to no confidence that current ways to invest in, trade or use cryptocurrencies are reliable and safe." The survey also reported that 17% of U.S. adults had directly interacted with cryptocurrency, which was statistically unchanged from 2021.

The word "cryptocurrency", in its modern sense, was added to the Oxford English Dictionary in September 2018, with its earliest usage noted as being on Twitter in September 2009; its diminutive, crypto, was entered in 2022. In March 2018 cryptocurrency was added to the Merriam-Webster Dictionary. After the early innovation of bitcoin in 2008 and the early network effect gained by bitcoin, tokens, cryptocurrencies, and other digital assets that were not bitcoin became collectively known during the 2010s as alternative cryptocurrencies, or "altcoins".

Sometimes the term "alt coins" was used, or disparagingly, "shitcoins". Paul Vigna of The Wall Street Journal described altcoins in 2020 as "alternative versions of Bitcoin" given its role as the model protocol for cryptocurrency designers. A Polytechnic University of Catalonia thesis in 2021 used a broader description, including not only alternative versions of bitcoin but every cryptocurrency other than bitcoin. As of early 2020, there were more than 5,000 cryptocurrencies.

Figure 3: What Are Zero-Knowledge Rollups? Altcoins often have underlying differences when compared to bitcoin. For example, Litecoin aims to process a block every 2.5 minutes, rather than bitcoin's 10 minutes which allows Litecoin to confirm transactions faster than bitcoin. Another example is Ethereum, which has smart contract functionality that allows decentralized applications to be run on its blockchain. Ethereum was the most used blockchain in 2020, according to Bloomberg News. In 2016, it had the largest "following" of any altcoin, according to the New York Times. Significant market price rallies across multiple altcoin markets are often referred to as an "altseason".

Memecoins are a category of cryptocurrencies that originated from Internet memes or jokes. One example is Dogecoin, a memecoin featuring the Shiba Inu dog from the Doge meme. Donald Trump and his wife Melania are the subject of their own meme coins, both of which declined in value soon after launch. Memecoins are known for extreme volatility; for example, the record-high value for a Dogecoin was 73 cents, but that had plunged to 13 cents by mid-2024. Scams are prolific among memecoins.

2. System Architecture & Core Working Principles Physical cryptocurrency coins have been made as promotional items and some have become collectibles. Some of these have a private key embedded in them to access crypto worth a few dollars. There have also been attempts to issue bitcoin "bank notes". The term "physical bitcoin" is used in the finance industry when investment funds that hold crypto purchased from crypto exchanges put their crypto holdings in a specialised bank called a "custodian". These physical representations of cryptocurrency do not hold any value by themselves; these are only utilized for collectable purposes. For example, the first incarnation of the bitcoin Casascius, coins made of silver, brass or aluminum sometimes with gold plating, or Titan Bitcoin, which in silver or gold versions are sought after by numismatists.

The underlying technical system upon which cryptocurrencies are based was created by Satoshi Nakamoto. Within a proof-of-work system such as bitcoin, the safety, integrity, and balance of ledgers are maintained by a community of mutually distrustful parties referred to as miners. Miners use their computers to help validate and timestamp transactions, adding them to the ledger in accordance with a particular timestamping scheme. In a proof-of-stake blockchain, transactions are validated by holders of the associated cryptocurrency, sometimes grouped together in stake pools. Most cryptocurrencies are designed to gradually decrease the production of that currency, placing a cap on the total amount of that currency that will ever be in circulation. Compared with ordinary currencies held by financial institutions or kept as cash on hand, cryptocurrencies can be more difficult for seizure by law enforcement.

The validity of each cryptocurrency's coins is provided by a blockchain. A blockchain is a continuously growing list of records, called blocks, which are linked and secured using cryptography. Each block typically contains a hash pointer as a link to a previous block, a timestamp, and transaction data. By design, blockchains are inherently resistant to modification of the data. A blockchain is "an open, distributed ledger that can record transactions between two parties efficiently and in a verifiable and permanent way". For use as a distributed ledger, a blockchain is typically managed by a peer-to-peer network collectively adhering to a protocol for validating new blocks. Once recorded, the data in any given block cannot be altered retroactively without the alteration of all subsequent blocks, which requires collusion of the network majority. Blockchains are secure by design and are an example of a distributed computing system with high Byzantine fault tolerance. Decentralized consensus has therefore been achieved with a blockchain.

On a blockchain, mining is the validation of transactions. For this effort, successful miners obtain new cryptocurrency as a reward. The reward decreases transaction fees by creating a complementary incentive to contribute to the processing power of the network. The rate of generating hashes, which validate any transaction, has been increased by the use of specialized hardware such as FPGAs and ASICs running complex hashing algorithms like SHA-256 and scrypt. This arms race for cheaper-yet-efficient machines has existed since bitcoin was introduced in 2009. Mining is measured by hash rate, typically in TH/s. A 2023 IMF working paper found that crypto mining could generate 450 million tons of CO2 emissions by 2027, accounting for 0.7 percent of global emissions, or 1.2 percent of the world total. With more people entering the world of virtual currency, generating hashes for validation has become more complex over time, forcing miners to invest increasingly large sums of money to improve computing performance. Consequently, the reward for finding a hash has diminished and often does not justify the investment in equipment and cooling facilities (to mitigate the heat the equipment produces) and the electricity required to run them. Popular regions for mining include those with inexpensive electricity, a cold climate, and jurisdictions with clear and conducive regulations. By July 2019, bitcoin's electricity consumption was estimated to be approximately 7 gigawatts, around 0.2% of the global total, or equivalent to the energy consumed nationally by Switzerland.

Some miners pool resources, sharing their processing power over a network to split the reward equally, according to the amount of work they contributed to the probability of finding a block. A "share" is awarded to members of the mining pool who present a valid partial proof-of-work. As of February 2018, the Chinese government has halted trading of virtual currency, banned initial coin offerings, and shut down mining. Many Chinese miners have since relocated to Canada and Texas. One company is operating data centers for mining operations at Canadian oil and gas field sites due to low gas prices. In June 2018, Hydro Quebec proposed to the provincial government to allocate 500 megawatts of power to crypto companies for mining. According to a February 2018 report from Fortune, Iceland has become a haven for cryptocurrency miners in part because of its cheap electricity. In March 2018, the city of Plattsburgh, New York put an 18-month moratorium on all cryptocurrency mining in an effort to preserve natural resources and the "character and direction" of the city. In 2021, Kazakhstan became the second-biggest crypto-currency mining country, producing 18.1% of the global exahash rate. The country built a compound containing 50,000 computers near Ekibastuz.

A cryptocurrency wallet is a means of storing the public and private "keys" (address) or seed, which can be used to receive or spend the cryptocurrency. With the private key, it is possible to write in the public ledger, effectively spending the associated cryptocurrency. With the public key, it is possible for others to send currency to the wallet. There exist multiple methods of storing keys or seed in a wallet. These methods range from using paper wallets (which are public, private, or seed keys written on paper), to using hardware wallets (which are hardware to store your wallet information), to a digital wallet (which is a computer with software hosting your wallet information), to hosting your wallet using an exchange where cryptocurrency is traded, or by storing your wallet information on a digital medium such as plaintext.

Bitcoin is pseudonymous, rather than anonymous; the cryptocurrency in a wallet is not tied to a person but rather to one or more specific keys (or "addresses"). Thereby, bitcoin owners are not immediately identifiable, but all transactions are publicly available in the blockchain. Still, cryptocurrency exchanges are often required by law to collect the personal information of their users. Some cryptocurrencies, such as Monero, Zerocoin, Zerocash, and CryptoNote, implement additional measures to increase privacy, such as by using zero-knowledge proofs. A recent 2020 study presented different attacks on privacy in cryptocurrencies. The attacks demonstrated how the anonymity techniques are not sufficient safeguards. In order to improve privacy, researchers suggested several different ideas, including new cryptographic schemes and mechanisms for hiding the IP address of the source.

Cryptocurrencies are used primarily outside banking and governmental institutions and are exchanged over the Internet. Cryptocurrency exchanges allow customers to trade cryptocurrencies for other assets, such as conventional fiat money, or to trade between different digital currencies. Crypto marketplaces do not guarantee that an investor is completing a purchase or trade at the optimal price. As a result, as of 2020, it was possible to arbitrage to find the difference in price across several markets.

Jordan Kelley, founder of Robocoin, launched the first bitcoin ATM in the United States in February 2014. The kiosk installed in Austin, Texas, is similar to bank ATMs but has scanners to read government-issued identification such as a driver's license, or a passport to confirm users' identities. According to Alan Feuer of The New York Times, libertarians and anarcho-capitalists were attracted to the philosophical idea behind bitcoin. Early bitcoin supporter Roger Ver said: "At first, almost everyone who got involved did so for philosophical reasons. We saw bitcoin as a great idea, as a way to separate money from the state." Economist Paul Krugman argues that cryptocurrencies like bitcoin are "something of a cult" based in "paranoid fantasies" of government power. David Golumbia says that the ideas influencing bitcoin advocates emerge from right-wing extremist movements such as the Liberty Lobby and the John Birch Society and their anti-Central Bank rhetoric, or, more recently, Ron Paul and Tea Party-style libertarianism.

Steve Bannon, who owns a "good stake" in bitcoin, sees cryptocurrency as a form of disruptive populism, taking control back from central authorities. Bitcoin's founder, Satoshi Nakamoto, supported the idea that cryptocurrencies go well with libertarianism. "It's very attractive to the libertarian viewpoint if we can explain it properly," Nakamoto said in 2008. According to the European Central Bank, the decentralization of money offered by bitcoin has its theoretical roots in the Austrian school of economics, especially with Friedrich von Hayek in his book Denationalisation of Money: The Argument Refined, in which Hayek advocates a complete free market in the production, distribution and management of money to end the monopoly of central banks.

The rise in the popularity of cryptocurrencies and their adoption by financial institutions has led some governments to assess whether regulation is needed to protect users. The Financial Action Task Force (FATF) has defined cryptocurrency-related services as "virtual asset service providers" (VASPs) and recommended that they be regulated with the same money laundering (AML) and know your customer (KYC) requirements as financial institutions. In May 2020, the Joint Working Group on interVASP Messaging Standards published "IVMS 101", a universal common language for communication of required originator and beneficiary information between VASPs. The FATF and financial regulators were informed as the data model was developed. In June 2020, FATF updated its guidance to include the "Travel Rule" for cryptocurrencies, a measure which mandates that VASPs obtain, hold, and exchange information about the originators and beneficiaries of virtual asset transfers.

Subsequent standardized protocol specifications recommended using JSON for relaying data between VASPs and identity services. As of December 2020, the IVMS 101 data model has yet to be finalized and ratified by the three global standard setting bodies that created it. The European Commission published a digital finance strategy in September 2020. This included a draft regulation on Markets in Crypto-Assets (MiCA), which aimed to provide a comprehensive regulatory framework for digital assets in the EU. In June 2021, the Basel Committee on Banking Supervision proposed that banks that held cryptocurrency assets must set aside capital to cover all potential losses. For instance, if a bank were to hold bitcoin worth $2 billion, it would be required to set aside enough capital to cover the entire $2 billion. This is a more extreme standard than banks are usually held to when it comes to other assets. However, this is a proposal and not a regulation. The IMF has sought seeking a coordinated, consistent and comprehensive approach to supervising cryptocurrencies. Tobias Adrian, the IMF's financial counsellor and head of its monetary and capital markets department said in a January 2022 interview that "Agreeing global regulations is never quick. But if we start now, we can achieve the goal of maintaining financial stability while also enjoying the benefits which the underlying technological innovations bring," In May 2024, 15 years after the advent of the first blockchain, bitcoin, the US Congress advanced a bill to the full House of Representatives to provide regulatory clarity for digital assets. The Financial Innovation and Technology for the 21st Century Act, which defines responsibilities between various US agencies, notably between the Commodity Futures Trading Commission (CFTC) for decentralized blockchains and the Securities and Exchange Commission (SEC) for blockchains that are functional but not decentralized. Stablecoins are excluded from both CFTC and SEC regulation in this bill, "except for fraud and certain activities by registered firms." On 9 June 2021, El Salvador announced that it will adopt bitcoin as legal tender, becoming the first country to do so.

The EU defines crypto assets as "a digital representation of a value or of a right that is able to be transferred and stored electronically using distributed ledger technology or similar technology." The EU regulation Markets in Crypto-Assets (MiCA) covering asset-referenced tokens (ARTs) and electronic money tokens (EMTs) (also known as stablecoins) came into force on 30 June 2024. As of 17 January 2025, the European Securities and Markets Authority (ESMA) issued guidance to crypto-asset service providers (CASPs) allowing them to maintain crypto-asset services for non-compliant ARTs and EMTs until the end of March 2025. The rest of MiCA came into force as of 30 December 2024, covering crypto-assets other than ART and EMT and CASPs. MiCA excludes crypto-assets if they qualify as financial instruments according to ESMA guidelines published on 17 December 2024 as well as crypto-assets that are unique and not fungible with other crypto-assets.

The legal status of cryptocurrencies varies substantially from country to country and is still undefined or changing in many of them. At least one study has shown that broad generalizations about the use of bitcoin in illicit finance are significantly overstated and that blockchain analysis is an effective crime fighting and intelligence gathering tool. While some countries have explicitly allowed their use and trade, others have banned or restricted it. According to the Library of Congress in 2021, an "absolute ban" on trading or using cryptocurrencies applies in 9 countries: Algeria, Bangladesh, Bolivia, China, Egypt, Iraq, Morocco, Nepal, and the United Arab Emirates. An "implicit ban" applies in another 39 countries or regions, which include: Bahrain, Benin, Burkina Faso, Burundi, Cameroon, Chad, Côte d'Ivoire, the Dominican Republic, Ecuador, Gabon, Georgia, Guyana, Indonesia, Iran, Jordan, Kazakhstan, Kuwait, Lebanon, Lesotho, Macau, Maldives, Mali, Moldova, Namibia, Niger, Nigeria, Oman, Pakistan, Palau, Republic of Congo, Saudi Arabia, Senegal, Tajikistan, Tanzania, Togo, Turkey, Turkmenistan, Qatar and Vietnam. In the United States and Canada, state and provincial securities regulators, coordinated through the North American Securities Administrators Association, are investigating "Bitcoin scams" and ICOs in 40 jurisdictions. Various government agencies, departments, and courts have classified bitcoin differently. China Central Bank banned the handling of bitcoins by financial institutions in China in early 2014. In Russia, though owning cryptocurrency is legal, its residents are only allowed to purchase goods from other residents using the Russian ruble while nonresidents are allowed to use foreign currency. Regulations and bans that apply to bitcoin probably extend to similar cryptocurrency systems.

In August 2018, the Bank of Thailand announced its plans to create its own cryptocurrency, the Central Bank Digital Currency (CBDC). 3. Software Implementation, Frameworks & Protocols Baidu Bing—Ended June 2022 Facebook—Ended December 2021 Google—Ended August 2021 Line LinkedIn MailChimp Snapchat Tencent Twitter Weibo Yandex In February 2014, the world's largest bitcoin exchange, Mt. Gox, declared bankruptcy. Likely due to theft, the company claimed that it had lost nearly 750,000 bitcoins belonging to their clients. This added up to approximately 7% of all bitcoins in existence, worth a total of $473 million. Mt. Gox blamed hackers, who had exploited the transaction malleability problems in the network. The price of a bitcoin fell from a high of about $1,160 in December to under $400 in February. On 21 November 2017, Tether announced that it had been hacked, losing $31 million in USDT from its core treasury wallet. On 7 December 2017, Slovenian cryptocurrency exchange Nicehash reported that hackers had stolen over $70 million using a hijacked company computer. On 19 December 2017, Yapian, the owner of South Korean exchange Youbit, filed for bankruptcy after suffering two hacks that year. Customers were still granted access to 75% of their assets. In May 2018, Bitcoin Gold had its transactions hijacked and abused by unknown hackers. Exchanges lost an estimated $18m and bitcoin Gold was delisted from Bittrex after it refused to pay its share of the damages. On 13 September 2018, Homero Josh Garza was sentenced to 21 months of imprisonment, followed by three years of supervised release. Garza had founded the cryptocurrency startups GAW Miners and ZenMiner in 2014, acknowledged in a plea agreement that the companies were part of a pyramid scheme, and pleaded guilty to wire fraud in 2015. The SEC separately brought a civil enforcement action in the US against Garza, who was eventually ordered to pay a judgment of $9.1 million plus $700,000 in interest. The SEC's complaint stated that Garza, through his companies, had fraudulently sold "investment contracts representing shares in the profits they claimed would be generated" from mining. In January 2018, Japanese exchange Coincheck reported that hackers had stolen cryptocurrency worth $530 million. In June 2018, South Korean exchange Coinrail was hacked, losing over $37 million in crypto. The hack worsened a cryptocurrency selloff by an additional $42 billion. On 9 July 2018, the exchange Bancor, whose code and fundraising had been subjects of controversy, had $23.5 million in crypto stolen. A 2020 EU report found that users had lost crypto-assets worth hundreds of millions of US dollars in security breaches at exchanges and storage providers. Between 2011 and 2019, reported breaches ranged from four to twelve a year. In 2019, more than a billion dollars' worth of cryptoassets was reported stolen. Stolen assets "typically find their way to illegal markets and are used to fund further criminal activity". According to a 2020 report produced by the United States Attorney General's Cyber-Digital Task Force, three categories make up the majority of illicit cryptocurrency uses: "(1) financial transactions associated with the commission of crimes; (2) money laundering and the shielding of legitimate activity from tax, reporting, or other legal requirements; or (3) crimes, such as theft, directly implicating the cryptocurrency marketplace itself." The report concluded that "for cryptocurrency to realize its truly transformative potential, it is imperative that these risks be addressed" and that "the government has legal and regulatory tools available at its disposal to confront the threats posed by cryptocurrency's illicit uses". According to the UK 2020 national risk assessment—a comprehensive assessment of money laundering and terrorist financing risk in the UK—the risk of using cryptoassets such as bitcoin for money laundering and terrorism financing is assessed as "medium" (from "low" in the previous 2017 report). Legal scholars suggested that the money laundering opportunities may be more perceived than real. Blockchain analysis company Chainalysis concluded that illicit activities like cybercrime, money laundering and terrorism financing made up only 0.15% of all crypto transactions conducted in 2021, representing a total of $14 billion. In December 2021, Monkey Kingdom, a NFT project based in Hong Kong, lost US$1.3 million worth of cryptocurrencies via a phishing link used by the hacker. On 2 November 2023, Sam Bankman-Fried was pronounced guilty on seven counts of fraud related to FTX. Federal criminal court sentencing experts speculated on the potential amount of prison time likely to be meted out. On 28 March 2024, the court sentenced Bankman-Fried to 25 years in prison.

According to blockchain data company Chainalysis, criminals laundered $8.6 billion worth of cryptocurrency in 2021, up 30% from the previous year. The data suggests that rather than managing numerous illicit havens, cybercriminals make use of a small group of purpose-built centralized exchanges for sending and receiving illicit cryptocurrency. In 2021, those exchanges received 47% of funds sent by crime-linked addresses. Almost $2.2 billion worth of cryptocurrencies was embezzled from decentralized finance protocols in 2021, which represents 72% of all cryptocurrency theft in 2021. According to Bloomberg and the New York Times, Federation Tower, a complex in the heart of Moscow, is home to many cryptocurrency businesses under suspicion of facilitating extensive money laundering, including accepting illicit cryptocurrency funds obtained through scams, darknet markets, and ransomware. Notable businesses include Garantex, Eggchange, Cashbank, Buy-Bitcoin, Tetchange, Bitzlato, and Suex, which was sanctioned by the U.S. in 2021. Bitzlato founder and owner Anatoly Legkodymov was arrested following money-laundering charges by the United States Department of Justice. Dark money has also been flowing into Russia through a dark web marketplace called Hydra, which is powered by cryptocurrency, and enjoyed more than $1 billion in sales in 2020, according to Chainalysis. The platform demands that sellers liquidate cryptocurrency only through certain regional exchanges, which has made it difficult for investigators to trace the money. Almost 74% of ransomware revenue in 2021 — over $400 million worth of cryptocurrency — went to software strains likely affiliated with Russia, where oversight is notoriously limited. However, Russians are also leaders in the benign adoption of cryptocurrencies, as the ruble is unreliable, and President Putin favours the idea of "overcoming the excessive domination of the limited number of reserve currencies." In 2022, RenBridge—an unregulated alternative to exchanges for transferring value between blockchains—was found to be responsible for the laundering of at least $540 million since 2020. It is especially popular with people attempting to launder money from theft. This includes a cyberattack on Japanese crypto exchange Liquid that has been linked to North Korea.

Properties of cryptocurrencies gave them popularity in applications such as a safe haven in banking crises and means of payment, which also led to the cryptocurrency use in controversial settings in the form of online black markets, such as Silk Road. The original Silk Road was shut down in October 2013 and there have been two more versions in use since then. In the year following the initial shutdown of Silk Road, the number of prominent dark markets increased from four to twelve, while the amount of drug listings increased from 18,000 to 32,000. Darknet markets present challenges in regard to their legality.

Cryptocurrency used in dark markets are not clearly or legally classified in almost all parts of the world. In the US, bitcoins are regarded as "virtual assets". This type of ambiguous classification puts pressure on law enforcement agencies around the world to adapt to the shifting drug trade of dark markets. The Bank for International Settlements summarized several criticisms of cryptocurrencies in Chapter V of their 2018 annual report. The criticisms include the lack of stability in their price, the high energy consumption, high and variable transactions costs, the poor security and fraud at cryptocurrency exchanges, vulnerability to debasement (from forking), and the influence of miners.

Cryptocurrencies have been compared to Ponzi schemes, pyramid schemes and economic bubbles, such as housing market bubbles. Howard Marks of Oaktree Capital Management stated in 2017 that digital currencies were "nothing but an unfounded fad (or perhaps even a pyramid scheme), based on a willingness to ascribe value to something that has little or none beyond what people will pay for it", and compared them to the tulip mania (1637), South Sea Bubble (1720), and dot-com bubble (1999), which all experienced profound price booms and busts. Regulators in several countries have warned against cryptocurrency and some have taken measures to dissuade users. However, research in 2021 by the UK's financial regulator suggests such warnings either went unheard, or were ignored. Fewer than one in 10 potential cryptocurrency buyers were aware of consumer warnings on the Financial Conduct Authority (FCA) website, and 12% of crypto users were not aware that their holdings were not protected by statutory compensation. Of 1,000 respondents between the ages of eighteen and forty, 70% wrongly assumed cryptocurrencies were regulated, 75% of younger crypto investors claimed to be driven by competition with friends and family, and 58% said that social media enticed them to make high risk investments. The FCA recommends making use of its warning list, which flags unauthorized financial firms. Many banks do not offer virtual currency services themselves and can refuse to do business with virtual currency companies. In 2014, Gareth Murphy, a senior banking officer, suggested that the widespread adoption of cryptocurrencies may lead to too much money being obfuscated, blinding economists who would use such information to better steer the economy. While traditional financial products have strong consumer protections in place, there is no intermediary with the power to limit consumer losses if bitcoins are lost or stolen.

One of the features cryptocurrency lacks in comparison to credit cards, for example, is consumer protection against fraud, such as chargebacks. The French regulator Autorité des marchés financiers (AMF) lists 16 websites of companies that solicit investment in cryptocurrency without being authorized to do so in France. An October 2021 paper by the National Bureau of Economic Research found that bitcoin suffers from systemic risk as the top 10,000 addresses control about one-third of all bitcoin in circulation. It is even worse for miners, with 0.01% controlling 50% of the capacity. According to researcher Flipside Crypto, less than 2% of anonymous accounts control 95% of all available bitcoin supply. This is considered risky as a great deal of the market is in the hands of a few entities. A paper by John Griffin, a finance professor at the University of Texas, and Amin Shams, a graduate student, found that in 2017 the price of bitcoin had been substantially inflated using another cryptocurrency, Tether. Roger Lowenstein, author of "Bank of America: The Epic Struggle to Create the Federal Reserve," said in a 2022 New York Times story that FTX currency exchange will face over $8 billion in claims.

According to Vanessa Grellet, renowned panelist in blockchain conferences, there was an increasing interest from traditional stock exchanges in crypto-assets at the end of the 2010s, while crypto-exchanges such as Coinbase were gradually entering the traditional financial markets. This convergence marked a significant trend where conventional financial actors were adopting blockchain technology to enhance operational efficiency, while the crypto world introduced innovations like Security Token Offering (STO), enabling new ways of fundraising. Tokenization, turning assets such as real estate, investment funds, and private equity into blockchain-based tokens, had the potential to make traditionally illiquid assets more accessible to investors. Despite the regulatory risks associated with such developments, major financial institutions, including JPMorgan Chase, were actively working on blockchain initiatives, exemplified by the creation of Quorum, a private blockchain platform.

As the first big Wall Street bank to embrace cryptocurrencies, Morgan Stanley announced on 17 March 2021 that they will be offering access to bitcoin funds for their wealthy clients through three funds which enable bitcoin ownership for investors with an aggressive risk tolerance. BNY Mellon on 11 February 2021 announced that it would begin offering cryptocurrency services to its clients. On 20 April 2021, Venmo added support to its platform to enable customers to buy, hold and sell cryptocurrencies. In October 2021, financial services company Mastercard announced it is working with digital asset manager Bakkt on a platform that would allow any bank or merchant on the Mastercard network to offer cryptocurrency services.

Mining for proof-of-work (PoW) cryptocurrencies requires enormous amounts of electricity and consequently comes with a large carbon footprint due to causing greenhouse gas emissions. Proof-of-work blockchains such as bitcoin, Ethereum, Litecoin, and Monero were estimated to have added between 3 million and 15 million tons of carbon dioxide (CO2) to the atmosphere in the period from 1 January 2016 to 30 June 2017. By November 2018, bitcoin was estimated to have an annual energy consumption of 45.8TWh, generating 22.0 to 22.9 million tons of CO2, rivalling nations like Jordan and Sri Lanka. By the end of 2021, bitcoin was estimated to produce 65.4 million tons of CO2, as much as Greece, and consume between 91 and 177 terawatt-hours annually. Critics have also identified a large electronic waste problem in disposing of mining rigs.

Mining hardware is improving at a fast rate, quickly resulting in older generations of hardware. Bitcoin is the least energy-efficient cryptocurrency, using 707.6 kilowatt-hours of electricity per transaction. Before June 2021, China was the primary location for bitcoin mining. However, due to concerns over power usage and other factors, China forced out bitcoin operations, at least temporarily. As a result, the United States promptly emerged as the top global leader in the industry. An example of a gross amount of electronic waste associated with bitcoin mining operations in the US is a facility located in Dalton, Georgia which is consuming nearly the same amount of electricity as the combined power usage of 97,000 households in its vicinity. Another example is that Riot Platforms operates a bitcoin mining facility in Rockdale, Texas, which consumes approximately as much electricity as the nearby 300,000 households. This makes it the most energy-intensive bitcoin mining operation in the United States. The world's second-largest cryptocurrency, Ethereum, uses 62.56 kilowatt-hours of electricity per transaction. XRP is the world's most energy efficient cryptocurrency, using 0.0079 kilowatt-hours of electricity per transaction. Although the biggest PoW blockchains consume energy on the scale of medium-sized countries, the annual power demand from proof-of-stake (PoS) blockchains is on a scale equivalent to a housing estate. The Times identified six "environmentally friendly" cryptocurrencies: Bitgreen, Cardano, Chia, IOTA, Nano, and Solarcoin. Academics and researchers have used various methods for estimating the energy use and energy efficiency of blockchains. A study of the six largest PoS networks in May 2021 concluded: Cardano has the lowest electricity use per node; Polkadot has the lowest electricity use overall; and Solana has the lowest electricity use per transaction. In terms of annual consumption (kWh/year), the figures were: Polkadot (70,237), Tezos (113,249), Avalanche (489,311), Algorand (512,671), Cardano (598,755) and Solana (1,967,930). This equates to Polkadot consuming 7 times the electricity of an average U.S. home, Cardano 57 homes and Solana 200 times as much. The research concluded that PoS networks consumed 0.001% the electricity of the bitcoin network. University College London researchers reached a similar conclusion. Some studies have modeled Bitcoin mining as a potentially flexible electricity load, suggesting that, under certain conditions, mining operations could use otherwise curtailed electricity or improve project economics.

covers studies of cryptocurrencies and related technologies, and is published by the University of Pittsburgh. The journal encourages authors to digitally sign a file hash of submitted papers, which will then be timestamped into the bitcoin blockchain. Authors are also asked to include a personal bitcoin address in the first page of their papers. 2018 crypto crash – Speculative bubble involving cryptocurrency pricesPages displaying short descriptions of redirect targets Blockchain-based remittances company – Money transfer by a foreign worker to their home countryPages displaying short descriptions of redirect targets Cryptocurrency bubble – Speculative bubble involving cryptocurrency prices Cryptocurrency exchange – Trading exchange for crypto- and digital currencies Cryptographic protocol – Aspect of cryptography Cryptojacking – Hijacking computers to mine currency Ponzi scheme – Type of financial fraud List of cryptocurrencies Virtual currency law in the United States – Federal financial regulations Zero-knowledge proofs have moved from academic curiosity to production infrastructure. In 2026, ZK technology underpins everything from Layer 2 scaling solutions and private transactions to onchain identity verification and cross-chain bridges. For web3 developers, understanding ZK proofs is no longer optional -- it is a core competency that separates hobby projects from production-grade decentralized applications.

A zero-knowledge proof is a cryptographic method that allows one party (the prover) to demonstrate to another party (the verifier) that a statement is true without revealing any information beyond the validity of the statement itself. In blockchain terms, this means you can prove you have sufficient funds for a transaction, that you meet an age requirement, or that a computation was performed correctly -- all without exposing the underlying data.

The concept dates back to a 1985 paper by Goldwasser, Micali, and Rackoff, but the practical implementations that matter to web3 developers have only matured in recent years. Two primary proof systems dominate the landscape in 2026: zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge) and zk-STARKs (Zero-Knowledge Scalable Transparent Arguments of Knowledge).

4. Practical Deployment, Analysis & Case Studies zk-SNARKs produce compact proofs that are fast to verify onchain, making them ideal for applications where gas efficiency matters. They require a trusted setup ceremony, which introduces a trust assumption -- if the setup is compromised, the entire system's security breaks down. Projects like Zcash and several Ethereum Layer 2 rollups rely on SNARKs for their balance of proof size and verification speed.

zk-STARKs eliminate the trusted setup requirement entirely. They rely on hash functions rather than elliptic curve pairings, making them quantum-resistant by design. The tradeoff is larger proof sizes and higher verification costs. StarkNet and other scaling solutions have chosen STARKs for their transparency and future-proof security model. For most developers building on Ethereum in 2026, the choice often comes down to the specific use case. Privacy-focused applications that need minimal onchain footprint lean toward SNARKs. Infrastructure projects that prioritize long-term security and cannot tolerate trusted setup assumptions choose STARKs.

ZK rollups represent the most impactful application of zero-knowledge proofs for the Ethereum ecosystem. Unlike optimistic rollups that assume transactions are valid and rely on fraud proofs during a challenge period, ZK rollups generate cryptographic proofs that verify every batch of transactions before posting them to Ethereum mainnet. This approach delivers several concrete advantages. Finality is near-instant because there is no challenge window -- once the proof is verified onchain, the state transition is confirmed. Withdrawal times drop from days to minutes. Data compression is more aggressive because only the proof and minimal calldata need to land on Layer 1.

In 2026, ZK rollups process thousands of transactions per second while inheriting Ethereum's security guarantees. For developers, this means you can build applications that would be prohibitively expensive on mainnet -- high-frequency trading protocols, onchain gaming engines, micropayment systems -- and deploy them on ZK rollup infrastructure without sacrificing decentralization.

Privacy is one of the most compelling developer use cases for zero-knowledge proofs. Traditional smart contracts expose all transaction data publicly. ZK proofs enable a new architecture where computation happens offchain, and only the proof of correctness lands onchain. Consider identity verification. Instead of storing a user's date of birth onchain to prove they are over 18, a ZK circuit can accept the birthdate as a private input and output a boolean proof that the age requirement is met. The verifier contract only sees the proof -- never the actual birthdate. This pattern extends to KYC compliance, credit scoring, voting systems, and any scenario where data privacy and onchain verification must coexist.

Developers building privacy-preserving dApps in 2026 typically work with circuit languages like Circom, Noir, or Halo2. These tools let you define the computation you want to prove, compile it into a proof circuit, and generate Solidity verifier contracts that can validate proofs onchain. Cross-chain bridges have historically been one of the most attacked surfaces in web3, with billions of dollars lost to bridge exploits. Zero-knowledge proofs offer a fundamentally more secure approach to cross-chain communication.

A ZK bridge works by generating a proof that a specific state transition occurred on the source chain. The destination chain verifies this proof onchain without needing to trust any intermediary. No multisig committees, no optimistic challenge periods -- just math. This eliminates the centralized trust assumptions that made traditional bridges vulnerable. For developers building cross-chain applications, ZK bridges mean you can move assets and data between Ethereum, Layer 2 networks, and other chains with cryptographic certainty rather than economic security assumptions.

The ZK developer toolchain has improved dramatically. Circom remains the most widely used circuit language, with a mature ecosystem of libraries and templates for common operations like Merkle tree verification, signature checking, and range proofs. Noir, developed by Aztec, offers a Rust-like syntax that many developers find more approachable. Halo2, used by the Zcash and Scroll teams, provides a more flexible proving system without trusted setup requirements.

Testing and debugging ZK circuits requires different mental models than traditional smart contract development. Circuits are constraint systems -- you define what must be true, and the prover finds inputs that satisfy those constraints. Tools like snarkjs, hardhat-circom, and the Noir toolchain provide testing frameworks that let you verify circuits locally before deploying verifier contracts.

5. Performance Evaluation & Extended Technical Observations For teams that want to integrate ZK proofs into existing smart contract projects without building circuits from scratch, platforms like thirdweb provide developer infrastructure that handles contract deployment and interaction patterns. If you are looking to scale your ZK-powered project from prototype to production, thirdweb offers developer plans that grow with your needs at https://thirdweb.com/pricing.

Proof generation time and onchain verification cost are the two primary performance bottlenecks in ZK applications. Proof generation happens offchain and can take anywhere from milliseconds to minutes depending on circuit complexity. Verification is the onchain component -- the gas cost of checking a proof in a Solidity verifier contract. SNARK verification on Ethereum costs roughly 200,000 to 300,000 gas, which is manageable for most applications. STARK verification is more expensive due to larger proof sizes, though recursive proof composition and proof aggregation techniques are bringing costs down. Developers should benchmark their specific circuits and optimize for the constraints that matter most: proof generation latency for interactive applications, verification gas cost for high-frequency onchain operations.

Batching multiple proofs into a single aggregated proof is a common optimization pattern. Instead of verifying each user's proof individually, you aggregate them into one proof that covers the entire batch. This amortizes verification costs across all users and is the core technique behind ZK rollup economics. Several developments are shaping the next wave of ZK adoption. Client-side proving -- generating proofs directly in the browser or on mobile devices -- is becoming feasible as WebAssembly-based provers improve. This enables privacy-preserving applications that never send sensitive data to a server.

Recursive proof composition, where proofs verify other proofs, is enabling increasingly complex applications. A single proof can attest to an entire chain of computations, opening the door to trustless interoperability protocols and verifiable computing platforms. For web3 developers, the message is clear: ZK proofs are no longer a niche specialization. They are becoming a foundational building block for scalable, private, and secure decentralized applications. The developers who invest in understanding ZK circuits, proof systems, and verification patterns today will have a significant advantage as the technology continues to mature throughout 2026 and beyond.

Zero-knowledge rollups (ZK-rollups) are layer 2 scaling solutions that increase throughput on Ethereum Mainnet by moving computation and state-storage offchain. ZK-rollups can process thousands of transactions in a batch and then only post some minimal summary data to Mainnet. This summary data defines the changes that should be made to the Ethereum state and some cryptographic proof that those changes are correct.

Zero-knowledge rollups (ZK-rollups) bundle (or 'roll up') transactions into batches that are executed offchain. Offchain computation reduces the amount of data that has to be posted to the blockchain. ZK-rollup operators submit a summary of the changes required to represent all the transactions in a batch rather than sending each transaction individually. They also produce to prove the correctness of their changes.

The ZK-rollup's state is maintained by a smart contract deployed on the Ethereum network. To update this state, ZK-rollup nodes must submit a validity proof for verification. As mentioned, the validity proof is a cryptographic assurance that the state-change proposed by the rollup is really the result of executing the given batch of transactions. This means that ZK-rollups do not need to post all transaction data onchain the way optimistic rollups do, since the validity proof is what finalizes the state transition. They still publish the data required to reconstruct the rollup’s state, as described below.

There are no delays when moving funds from a ZK-rollup to Ethereum because exit transactions are executed once the ZK-rollup contract verifies the validity proof. Conversely, withdrawing funds from optimistic rollups is subject to a delay to allow anyone to challenge the exit transaction with a . ZK-rollups write transactions to Ethereum as calldata or in blobs . calldata is where data that is included in external calls to smart contract functions gets stored. Either way, the data is published on the blockchain, allowing anyone to reconstruct the rollup’s state independently. ZK-rollups use compression techniques to reduce transaction data—for example, accounts are represented by an index rather than an address, which saves 28 bytes of data. Onchain data publication is a significant cost for rollups, so data compression can reduce fees for users.

A ZK-rollup chain is an offchain protocol that operates on top of the Ethereum blockchain and is managed by onchain Ethereum smart contracts. ZK-rollups execute transactions outside of Mainnet, but periodically commit offchain transaction batches to an onchain rollup contract. This transaction record is immutable, much like the Ethereum blockchain, and forms the ZK-rollup chain.

Onchain contracts : As mentioned, the ZK-rollup protocol is controlled by smart contracts running on Ethereum. This includes the main contract which stores rollup blocks, tracks deposits, and monitors state updates. Another onchain contract (the verifier contract) verifies zero-knowledge proofs submitted by block producers. Thus, Ethereum serves as the base layer or "layer 1" for the ZK-rollup.

Harvested Online Documentation & Reference Sources • https://en.wikipedia.org/wiki/Ethereum • https://en.wikipedia.org/wiki/Cryptocurrency • https://blog.thirdweb.com/zero-knowledge-proofs-in-2026-the-developer-guide-to-zk-rollups-privacy-and-scalable-smart-cont racts/ • https://ethereum.org/developers/docs/scaling/zk-rollups/