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ZKSwap: A Layer-2 DEX Built on ZK-Rollup Technology

8 mins
Updated by Artyom Gladkov
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As DeFi protocols have evolved, more people have been flocking to decentralized exchanges, particularly those striving for efficiency. This guide explores one such exchange, ZKSwap, which uses ZK rollups to boost user experience. Read on to find out how ZKSwap works and what benefits it offers.

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What is ZKSwap?

what is zkswap

Origin

ZKSwap is an automated market maker (AMM) Ethereum-compatible decentralized exchange that uses zero-knowledge (ZK) rollups. It is part of the ZKSpace layer-2 protocol. ZKSpace also includes NFT marketplace ZKSea and payment service ZKSquare. 

L2 Labs Foundation launched the mainnet of ZKSwap in February 2021 to solve Ethereum’s scalability issues. Five months later, it rolled out version two of its mainnet, offering users more features through the update. 

Did you know? ZKSwap grew rapidly after its mainnet launch in February. The project already boasted around $11.5 billion in total trading volumes in July 2021. The project also said it had hit numbers of 87,000 users. 

Team

The lead developer at L2 Labs is Alex Lee. According to CoinMarketCap, he’s experienced in smart contract development and zero-knowledge-proof research. Lee leads a team of experts dedicated to the development and success of the protocol.

Funding

During the mainnet launch, L2 Labs had $1.7 million in financial backing. The participants of this round were Longling Capital, FBG Capital, and Bixin Capital. They raised the seed money in November 2020.

Roadmap

As of mid-May 2023, L2 Labs has several tasks on its to-do list. In Q1 and Q2 of 2023, the project deployed ZKSwap on ZKSync Era. ZKSync Era is a ZK rollup with Ethereum virtual machine compatibility. Moreover, it will upgrade its token, ZKS, to become a dual-ecosystem governance token. 

In Q3 and Q4, L2 Labs is planning on releasing ZKSwap V2. This will be a ZKSync version. Additionally, it will create a zero-knowledge proof (ZKP) mining system on ZKSync Era, among other things.

How does ZKSwap work?

zkswap how

Overview

ZKSwap is based on ZK rollups, a layer-2 solution that helps scale layer-1 blockchains. This solution enables the DEX to move transactions off-chain to achieve fast processing. Afterward, the roll-up creates zero-knowledge proofs called ZK-Snarks and submits them to layer-1 for ultimate verification.

DEX components

ZKSwap consists of several components, namely, on-chain smart contracts, an off-chain server, and the zero-knowledge proof system. The protocol has deployed smart contracts on Ethereum, linking layer-1 to the off-chain ZKSwap server. These smart contracts store tokens and record and verify layer-2 updates and proofs.

On the other hand, the ZKSwap server processes all transactions off-chain. It includes a mempool, swap engine, block proposer, stake keeper, committer, and prover server.

The protocol sends valid transaction requests to the mem pool. Next, the swap engine processes them. The block proposer rolls up the transactions and produces a new block. After this, the state keeper updates the status of the layer-2 network and sends its state to the committer. Subsequently, the committer communicates with the prover server to obtain proof of the corresponding transactions. It then sends the proofs and the network state to the ZKSwap smart contracts on Ethereum. In that way, ZKSwap generates proofs using the zero-knowledge proof algorithm known as PLONK

Adding & removing liquidity

Users can become liquidity providers (LPs) on ZKSwap by depositing tokens to an existing pool on layer-2. Alternatively, they can create a new liquidity pool for a pair of digital assets. Liquidity providers receive LP tokens in return for providing liquidity to a pool. Moreover, they also earn 0.25% of the transaction fees that traders pay to the protocol. When removing liquidity, the protocol burns the LP tokens and allows LPs to withdraw their deposited tokens.

Token swapping

LPs’ liquidity in the form of digital assets enables traders to swap tokens. These swap transactions occur in the layer-2 liquidity pools, where the trader sends one token and receives another. 

Community mining

Users can participate in the ZKSwap system through community mining. There are four types of mining that the community can take part in. They include:

Proof-of-liquidity (PoL) mining

In PoL mining, liquidity providers earn ZKS tokens for providing liquidity on ZKSwap.

Proof-of-sas (PoG) 

The PoG mechanism allows gas fee providers to pay users’ gas costs. In exchange, they earn ZKS tokens as a reward. This mechanism permits users to enjoy low-cost transactions. To become a gas fee provider, you must deposit ETH in a ZKSwap smart contract.

Proof-of-ZK-snarks (PoZK)

The PoZK mechanism enables users to contribute the computing power needed to generate ZK-Snarks. In exchange for their contribution, participants earn rewards in ZKS tokens. 

Proof-of-transFee (PoT)

PoT encourages people to use ZKSwap by paying them a reward based on the transaction fees they pay each day.

Staking

ZKSwap leverages the proof-of-stake (PoS) mechanism, which incentivizes long-term ZKS holders to stake their tokens by locking them in a smart contract. That way, they contribute to security. In exchange, users earn rewards based on the number of tokens they have staked.

ZKSwap’s key features

key features
Key features: ZKSwap

Zero-knowledge rollups 

The protocol executes transactions on layer-2 in real time thanks to ZK rollups. Next, it “rolls up” transactions in a bundle and generates zero-knowledge proofs. This enables immediate confirmation of transactions. As a result, users can enjoy faster transaction times, as they no longer need to wait for the one-block confirmation period to pass.

Self-custody

ZKSwap is a decentralized exchange that doesn’t custody digital assets on behalf of users like centralized crypto exchanges. Instead, users connect a self-custodial wallet to the DEX they fully control. Furthermore, they don’t have to register an account and provide personal information, as they do with traditional exchanges when needing to provide KYC data.  

Smart contracts

ZKSwap uses an AMM model. It uses smart contracts instead of intermediaries in the form of centralized market makers to facilitate token swapping. Additionally, on-chain smart contracts connect Ethereum and the off-chain ZKSwap server. These contracts record and verify state changes and proofs.

The pros and cons of ZKSwap

Pros

  • ZK rollups move transactions off-chain for faster processing.
  • The protocol executes transactions on layer-2 in real time. Therefore, users don’t have to wait for the one-block confirmation time to pass.
  • ZK Swap is non-custodial, giving users full custody over their digital assets.
  • The PoG mechanism reduces gas fees for users.
  • Community mining is a source of passive income.

Cons

  • The design of ZKSwap is complex since it uses several proof mechanisms.
  • Regulatory uncertainty. While DEXs may seem out of regulators’ reach, the US SEC has clarified this isn’t true. 
  • ZKSwap is a relatively new technology, and its long-term sustainability and adoption are yet to be fully tested and proven.

ZKS token

Tokenomics

ZKS is an ERC-20 token with a fixed maximum supply of 1 billion tokens. The project has allocated 60% of the tokens to community mining, 15% to the ZKSwap team, and 8% to ecosystem developers and growth, ensuring continued support for the network’s development and sustainability.

Subsequently, 6.7% of the tokens will go to angel investors and 5.3% to potential round A investors. The project will also distribute 4% to initial liquidity and 1% to advisors. As part of its token distribution strategy, the project will unlock the tokens within four years after launch, according to its economic whitepaper.

Token price

As of this writing, ZKS’s price is $0.04. This is a 99.56% drop from the all-time high (ATH) of $11.37. ZKS hit this ATH on February 25, 2021. The token’s market cap was $9,739,006 at the time of writing. 

ZKS traded above its launch price of $0.35 throughout 2021. However, it dropped below this mark in 2022 during the bear market and has yet to recover. Below is a graph showing the price action of ZKS since its launch.

ZKS Token
ZKS price action since launch: CoinMarketCap

Airdrop

L2 Labs held its first airdrop in January 2021 before the mainnet launch. It gave away 40 million ZKS tokens worth around $70 million. In February 2021, the project airdropped another 80 million tokens to ZKS holders. Later that year, L2 Labs did another airdrop on CoinMarketCap. This time, 150,000 ZKS tokens were given away.

Token uses

ZKS Token uses include:

Payment of community mining rewards

Community mining participants receive rewards in ZKS tokens.

Staking

Stakers lock ZKS tokens to get staking rewards. Network participants that stake ZKS for 360 days acquire gZKS, the community governance token. It helps users initiate and vote for or against proposals. Token holders need 50,000 gZKS tokens or more to initiate governance proposals. 

Compatible wallets

ZKSwap supports MetaMask, Coinbase Wallet, BitKeep, OKX Wallet, and WalletConnect-enabled wallets. These wallets allow users to add or create liquidity, swap tokens, transfer tokens from layer-1 to layer-2, and vice versa. Additionally, they give users full control over their digital assets. Therefore, users are responsible for the security of their wallets.

JKSwap is furthering DeFi accessibility

Although ZK rollups are complicated for non-technical people, ZKSwap is using them to improve user experience in multiple ways. Through the use of ZK rollups, the project aims to provide fast transaction speeds and low gas fees. As it stands, the exchange can manage about 100 transactions per second. This throughput could rise as the network grows and the development team upgrades it. Therefore, ZKSwap is worth watching in the coming months and years.   

Frequently asked questions

What does ZK mean in blockchain?

What is a ZK coin?

What are the benefits of ZK?

How does ZKSwap integrate with Ethereum?

What is the role of the ZKS token in the ZKSwap ecosystem?

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Alex Lielacher
Alex Lielacher is an experienced figure on the Crypto world. Journalist and founder, an agency that works with a range of bitcoin businesses. He first came across bitcoin in 2011 and has worked full-time in the cryptocurrency industry since 2016. Previously Managing Editor of Bitcoin Market Journal, Alex holds a first-class honors in Investment and Financial Risk Management from Bayes Business School. Today, Alex contributes to leading media publications and works with a range of bitcoin...
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