The latest ethereum hard fork, Istanbul, is bringing Layer 2 solutions to the network – this time in the form of a payment channel.

Cryptographic research hub Matter Labs released Thursday the testnet of ZK-Sync, in what the firm claims is a step toward making blockchains compete with centralized systems for handling millions of transactions a day.

Famously, Visa can handle 24,000 credit card transactions per second (tps) while ethereum can only deal with about 15 tps.

“ZK-Sync resembles a blockchain on top of the blockchain, which is completely fungible so you can send money to somebody else,” Matter Lab CEO Alex Gluchowski said in a phone interview. “Nobody has to be online and check it for me. And it feels very much like using a normal blockchain.”

Based on Rollups, a scaling protocol first proposed by ethereum developer barryWhiteHat and expounded upon by ethereum creator Vitalik Buterin in 2018, the Layer 2 solution uses zero-knowledge proofs (also known as zk-SNARKs) and recent changes to the ethereum network from the Istanbul hard fork for implementation.

A full programming framework launch is slated for January 2020.

The tech behind ZK-Sync

ZK-Sync transactions are completed using a smart contract created on the ethereum state, the underlying blockchain which serves as a digital ledger of all ethereum transactions.

However, Matter Labs created a sidechain for ethereum transactions to interact with one another without touching the mainchain. By operating off-chain in smart contract-based escrow accounts, ZK-Sync transactions settle more quickly and have the potential to cost less, Matter Labs’ said in a technical release.

Funds move between users inside the smart contract, which is orchestrated by validators and guardians. When a contract is open, validators package transactions into blocks. Elected by guardians, validators have a near-perfect probabilistic guarantee of participating honestly with safety features such as built-in collateral (to disincentivize cheating). Users also decide when a contract closes, sending funds back to the main ethereum chain. In other words, the funds are always #safu.

Gas fees on the blockchain

Other Layer 2 ethereum solutions have stalled at the same point, facing costs too high to justify using the system. As Gluchowski said, Istanbul proved to be the answer for Matter Labs and other Layer 2 payment systems.

Like a mailing service, users pay a gas fee to transmit information on the ethereum blockchain. As an open market, the miners that transmit the information can charge varying amounts of gas by raising or lowering fees on certain types of data, specifically calldata.

Calldata refers to information requested by smart contracts outside of the contract itself, broadcast on the network. Typically priced at 68 gas per byte, Istanbul lowers the price by a factor of four to 16 gas per byte through a new ethereum improvement proposal (EIP). While gas costs were previously too high to implement ZK-Sync-styled contracts, the lower calldata rates open up a new Layer 2 option.

“After Istanbul, with the cost of calldata as low as it's going to be, we will have a lot of, ‘Let's see what happens.’ We're going to be in a very good position so we can easily get to thousands of transactions per second,” Gluchowski said.

With calldata so cheap, ZK-Sync is setting its sights on matching traditional financial services such as Visa and PayPal, Gluchowski said. 

Why zk-SNARKs?

Blockchains prove the validity of transactions by broadcasting the inputs and outputs to all other participants on the network. In short, group consensus proves transaction validity. 

However, when working off-chain, a new checks-and-balances system is needed to replace the group vote. That’s where zk-SNARKs come in.

A compact way of communicating anonymous information, zk-SNARKs can be used to prove the total holdings of a contract without revealing its inner workings. By packaging transactions off-chain and stamping them with a cryptographic proof for validity, Matter Labs says Layer 2 solutions like ZK-Sync have the possibility to scale ethereum’s current payment network.

In order to create a protocol that was both censorship-resistant and could scale at mass, Matter Labs constructed its own zk-SNARK variant, Redshift, which included more trustless features than alternatives such as zcash’s Halo.

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