Starknet (STRK): Analysis of Ethereum's most technological layer 2

The Big Whale's view 🐳

His proposal differs from other Ethereum layers 2 in that it uses a new programming language, Cairo, which is considered to have great potential.

This ambitious choice reduces its compatibility with the rest of the ecosystem.

The airdrop of its STRK token has been poorly received by many ineligible users.

His biggest challenge now is to attract users and liquidity.

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General presentation 🧬

Starknet is a layer 2 of Ethereum, i.e. a secondary layer solution that enables cheaper transactions while relying on the security of the main blockchain.

Starknet uses zero-knowledge proofs, which are based solely on mathematical principles: they are considered more secure, and most experts believe they represent the technology with the greatest potential in terms of scalability.

The project has chosen to develop a new programming language, Cairo. As a result, it is relatively difficult to migrate applications already developed on Ethereum to Starknet. Cairo is presented as a language offering more possibilities and specially adapted to zero-knowledge proofs.

The network was initially created by the Israeli start-up StarkWare, which still plays an important role. It has supplied the technology to major players in the sector such as ImmutableX and Sorare.

The London-based Starknet Foundation is officially responsible for its development.

The first version of Starknet was launched in November 2021, and its STRK token has been available since 20 February 2024.

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Financing 💰

Starkware, the company behind Starknet, has raised a total of $273 million.

The first seed round of $6 million took place in May 2018 and was led by Pantera Capital along with Polychain Capital, Bitmain, as well as numerous business angels, such as Ethereum co-creator Vitalik Buterin.

A second round of funding (Series A), worth $30 million, took place in September 2018 and was led by Paradigm and Sequoia Capital, with participation from Consensys and Coinbase Ventures.

A third round (Series B) of $75 million took place in January 2021 and was led by Paradigm, with participation from Sequoia Capital and Three Arrows Capital (now bankrupt).

A $50m Series C took place in September 2021 and was led by Sequoia Capital, with participation from Paradigm, Blockchain Founders Fund, Three Arrows Capital and Alameda Research (the FTX-related investment firm).

A $100m Series D took place in May 2022, with Tiger Global Management, Coatue and Greenoaks Capital as investors.

StarkWare also received a $12m grant from the Ethereum Foundation in 2018.

Key takeaway: StarkWare has been funded by almost every major venture capital fund in the crypto ecosystem.

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Team and community 👾

Eli Ben-Sasson is the co-founder and current boss of StarkWare. Former CEO Uri Kolodny stepped down in January 2024 for personal reasons, but continues to serve on the board.

Eli Ben-Sasson is one of the world's leading experts in zero-knowledge proofs (ZKP). He has held research positions at Harvard, MIT and Princeton's Institute for Advanced Study. He is the co-creator of STARKs, a type of ZKP.

StarkWare is based in Israel, where most of the team is also based.

Diego Oliva has headed the foundation since April 2023. He comes from the world of venture capital.

Starknet has 300,000 subscribers on X (formerly Twitter) and 252,000 members on Discord.

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Governance  🗳️

This is exercised by the holders of the STRK token. The latter is 29% concentrated between StarkWare and its private investors (10.8% and 18.2% respectively).

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Social analysis  👥

According to Kaito, Starknet is the fourth most mentioned crypto project on social networks over the last seven days.

There was a spike in attention around the project on 14 February, coinciding with the announcement of the airdrop of its STRK token.

This airdrop created controversy because of its very generous distribution to developers, to the detriment of users.

Functioning ⚙

Starknet comprises two main components: the sequencer and the prover. The sequencer is responsible for executing and ordering transactions before transmitting them to Ethereum. The prover, meanwhile, generates a proof that mathematically guarantees the validity of the transactions and publishes it on Ethereum.

In the context of layers 2, the main attraction of zero-knowledge proofs lies in their ease of verification. For this reason, they are also known as validity proofs.

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The STRK token 🪙

The STRK token is used to pay transaction fees on Starknet, as well as to participate in the governance of the ecosystem.

It is important to note that it is also possible to pay for transactions in ETH. Within at least 12 months, STRK will be able to be put into play (staked) to contribute to the decentralisation of the network.

The protocol has created 10 billion STRK tokens, and this quantity will remain fixed until the staking system is implemented on Starknet.

Starknet performed an airdrop of 700 million STRKs on 20 February 2024: half were distributed to Starknet users, almost a quarter to Ethereum stakers, and the rest to Starknet and Ethereum developers and contributors.

This airdrop differs from many other projects in the proportion of tokens reserved for developers, a choice fully assumed by Starknet, which believes it must attract developers first.

The tokens allocated to the team and private investors will be gradually released starting from April 15, 2024: 0.64% per month until April 15, 2025, then 1.27% per month until 2027.

This schedule was modified due to criticisms from the community, as the initial plan anticipated releasing 13.1% of the tokens as early as April 15, 2024.

This had raised concerns about a massive sell-off of tokens in the near future.

The 9% "rebates" are funds intended to facilitate the onboarding of new users. Although there are as yet no details of their precise use, we can anticipate that they will be used to cover certain transaction costs.

Risks and centralisation of Starknet ⚠

Like almost all other layer 2s, Starknet can be updated via a multiple signature (multisig), i.e. an address controlled by several entities.

This situation is temporary and can be explained by the youth of the network, which is not yet ready to be fully decentralised.

This therefore presents a theoretical risk for the funds deposited there, even though to date no major project has suffered cryptocurrency theft by its managers.

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Regulation ⚖

Starknet does not present any particular regulatory risks, and Europe recognises the STRK token as a digital asset.

The situation is nevertheless more uncertain in the United States, which does not have a clear regulatory framework for this sector. For example, it is highly likely that the SEC will consider STRK to be an unregistered financial security, which would be illegal.

For this reason, US citizens have been excluded from the airdrop by Starknet, although many have probably received tokens due to the difficulty of associating nationalities with each wallet.

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Competition ⚔

Starknet is facing stiff competition in a sector aimed at improving Ethereum's scalability (read our investigation into the L2 war). A good fifteen projects with varying properties are vying to attract the maximum number of projects, users, and liquidity.

We are not in a situation where one of them will win the entire market, but a handful should stand out and concentrate the market in the medium term.

To date, Arbitrum and Optimism are the two layer 2s (L2s) with the largest locked-in value (TVL), with $12.7 billion and $7.4 billion respectively. Starknet, meanwhile, has "just" 185 million.

These two projects have been around for more than two years and use the same programming language as Ethereum, which makes it very easy to duplicate projects on these platforms.

Their future could be limited, however, because they do not use the famous zero-knowledge proofs (ZKPs), which enable transactions on Ethereum to be validated almost instantaneously. On Arbitrum and Optimism, a delay of several days is required before transactions are definitively validated (Optimistic Rollup).

Starknet is not the only project to use ZKPs. Others include ZkSync, Linea, Polygon zkEVM, and Scroll. Among them, ZkSync has the largest TVL with 601 million dollars. It has also become the L2 with the lowest transaction costs, which testifies to the potential of ZKP. A token is due to be distributed soon.

Linea is the zk-rollup launched by ConsenSys, the US start-up behind the MetaMask wallet. There are no tokens, but a system of quests with points has been set up to attract users, a feature often used before an airdrop.

Polygon zkEVM, launched by Polygon Labs, is struggling to attract users, which can be explained by high transaction fees and the fact that Polygon already has a token (MATIC), limiting the chances of a future airdrop.

Scroll is the newest and the one with the lowest TVL. It's still too early to form a definitive opinion, but an airdrop has already been announced.

Market analysis by Chadi El Adnani, Head of Content & Research at SUN ZU Lab 📈

As Starknet's token (STRK) was only listed on the exchanges yesterday, let's take a look at the performance of two leaders, Arbitrum and Optimism.

A year-to-date market analysis shows us that ARB's price has risen by 32%, compared with just 5% for OP.

On daily USD/USDT volumes, ARB also dominates, accounting for an average of 60% of volumes traded on the two leaders. The first two weeks of 2024 (which preceded the launch of the ETFs) saw a clear dominance by ARB in terms of volumes, exceeding $1 billion on the day of 3 January.

This off-chain analysis (which focuses on exchange platform data) dovetails with what we see on-chain, where Arbitrum is also the leader in terms of TVL, transactions and revenue.

Optimism is still superior in terms of capitalisation, $3.8bn compared to Arbitrum's $2.5bn, but that could change quickly if ARB continues its recent performance.

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Ecosystem 🤝

As Starknet is the only Ethereum layer 2 using its own programming language, Cairo, it is more difficult for Ethereum-originating applications to deploy there.

This constraint also represents an opportunity for Starknet, as it encourages developers to come up with innovative projects rather than simply duplicating existing ones.

Decentralised finance (DeFi) giants such as Uniswap (DEX) or Aave (loans) are not present, but there are equivalents such as Ekubo and Nostra.

Argent X and Braavos are Starknet's two flagship portfolios. They benefit from Starknet's native account abstraction, which substantially enhances the user experience. For example, it is possible to use two-factor authentication (2FA) features to increase the security of the wallet and recover its private key in the event of loss.

Cairo is particularly effective for artificial intelligence (AI) and games. For example, RealmsWorld brings together around ten fully on-chain games on Starknet. This programming language is described as more efficient for performing large computer calculations directly on the blockchain.

In the category of innovative NFT projects, we can mention Briq: these are NFTs that represent coloured cubes that you can assemble and disassemble to create your own NFTs.

Starknet has set up the Starknet Stack, a development tool that makes it easy to deploy dedicated layer 2s optimised for a specific application. Paradex, a DEX that enables derivatives trading, was launched on 19 February 2024 and is the first channel launched based on the Starknet Stack.

Starknet and Celestia recently announced a partnership so that layers 3 built on Starknet can store their data on Celestia.

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Roadmap 📝

Starknet will continue to improve its use of zero-knowledge proofs and implement compression of the data it publishes on Ethereum to reduce costs.

The Ethereum update, Dencun, scheduled for 13 March 2024, will incorporate EIP-4844 which is expected to make transaction costs on all Ethereum layers 2 up to ten times cheaper.

Abdelhamid Bakhta, head of ecosystem at StarkWare, said in an interview with The Big Whale: "Currently, 95% of layer 2 costs come from data availability, i.e. sending data over Ethereum. ZkSync is actually more efficient than Starknet in this area. However, we are clearly better at the remaining 5%, which is crucial because the next Ethereum update (EIP-4844) will considerably optimise data availability. After its implementation, scheduled for March, Starknet will be able to demonstrate its full potential."

Starknet has been designed to become a "volition" by the end of 2024, which means that each application on Starknet will be able to choose which blockchain it wants to store its data on, depending on the level of security it needs. At the moment, it is only possible to use Ethereum, but those wishing to reduce their costs and increase their throughput will be able to rely on Celestia, for example.

It will be possible to put the STRK into play (staker) at the earliest in early 2025. This will decentralise the network and offer rewards to token holders.

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Where can you buy the STRK token? 🛒

Several exchange platforms have already announced the listing of the token as soon as it was launched on 20 February, including Binance and OKX.

We recommend that you give preference to these platforms, as they are registered as PSANs (Prestataire de services sur actifs numériques) in France, an accreditation issued by the Autorité des marchés financiers.

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Conclusion 🧭

Starknet stands out in the Ethereum layer 2 ecosystem for its ambitious technological choices.

His preference for developers could encourage the development of more innovative applications.

However, more advanced technology is no guarantee of success: despite its qualities, Starknet still needs to attract users to seduce liquidity.

His roadmap is clear and consistent.

The use of its token to pay transaction fees gives it a much more significant role than its competitors.

His future staking makes it possible to envisage airdrops of projects built on Starknet.

The poor reception of his airdrop could exert downward pressure on STRK's share price in the first few weeks, as could the approaching end of vesting for the team and private investors.

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Further reading 🔍

⭐ EigenLayer's analysis

⭐ The analysis of Celestia (TIA)

⭐ Lido's analysis (LDO)

⭐ Stablecoins: 13 major projects compared and analysed