Aztec is a privacy-focused zero-knowledge rollup aiming to provide security, scalability, & privacy for layer 2 blockchain transactions.

Aztec Technology and Zero-knowledge Proofs

Aztec leverages an in-house technology stack that focuses primarily on two overall protocol objectives: privacy and scalability. At a broad, fundamental level, Aztec is a type of zero-knowledge rollup. Zk-rollups create large bundles of transactions for off-chain computation in the form of cryptographic proofs known as SNARKs. SNARKs allow someone to prove they have a particular piece of information without actually revealing the contents of the information. Popularized by Zcash for enabling anonymous transactions, zero-knowledge-proof technology provides scaling efficiencies for the rollup chain that are then submitted to the main chain. This zk-SNARK approach is also called using validity proofs, i.e., highly complex cryptography to ensure all L2 transactions are valid and correct. The proof is submitted and checked by an on-chain L1 contract.

Aztec Privacy Design

Aztec intends to take its protocol one step further than just proofs, however. It also intends to enable private transactions for users to use when on layer-2 applications. This means users will have the ability to leverage fully confidential Ethereum transactions. Ethereum being a public ledger means anyone can search for an ETH address and have a full history of that wallet’s transactions. To counter this, privacy protocols like Aztec are being designed.

To go into more detail, transactions on Aztec are encrypted. The proof, in this case, doubles as proving the validity of each transaction while also proving the encrypted data was obtained & executed correctly. The data in this circumstance is only known by the two users engaged in a transaction. To do this, Aztec uses a zk-zk-rollup design (two zero-knowledge proofs: one for the proof itself and one for the encrypted data).

To facilitate privacy and scalability, a rollup circuit validates a batch of privacy proofs and then updates the existing database with the encrypted data. These proofs are created by a third party with computing resources (zk-rollups are extremely taxing & costly initially). The key here is that the third party is trustless as they do not have access to the actual data. They only see the encrypted outputs from the Aztec proofs.

In Q4 2022, Aztec released Noir, a Rust-based programming language for writing and validating zero-knowledge proofs. Noir enables developers to create zk-based applications in a familiar and straightforward manner without prior cryptography understanding.

UTXO Transaction Model

Aztec leverages the well-known UTXO transaction model to facilitate transactions on the platform similar to Bitcoin and fellow rollup Fuel. Using UTXOs instead of an account/balance model provides users with far more privacy as it allows the UTXO to demonstrate a change in ownership over the note (i.e., what is being transacted, like 1 ETH). Both the sender and the receiver know of the ownership change over the note, but no one else is required to.

What is a “note” in Aztec? They are a user’s balance within the Aztec network that only the user can access via their private key. They can be thought of as traditional bank notes in legacy finance. Within the Aztec protocol, if Alice wants to send Bob 1 ETH, she “destroys” her original 1 ETH note, creates a new 1 ETH note, and sends it to Bob. The destruction and creation of notes are how Aztec increases transactional privacy.

Most blockchains, like Ethereum, utilize a Merkle tree data architecture within their blocks for efficiency gains. Aztec, however, utilizes two Merkle trees in its architecture. One Merkle tree is for tracking the destruction of notes, and the second tracks the creation of notes. Each Merkle tree has its own encryption algorithm that makes relating the destruction of one note to the creation of another (nearly) impossible!

This is extended further with the encryption of the transaction data, protecting the privacy of both parties from the third-party validator. To prove the value of the transaction input is the same as the output, the sender can locally generate a zk-proof. That proof can validate that the state of the transaction value is the same without revealing the underlying data.

Aztec's Scalability Design

Initially, zk-rollups lack the advantage of low costs associated with optimistic rollup designs as zk-rollups are significantly more expensive to execute. However, when it comes to economies of scale, zk-rollups are typically designed in a way that the price-per-transaction continues to diminish with scale, not increase as many monolithic layer-1 blockchain platforms experience, like Ethereum. As transaction volumes increase, batches can be better organized and lower the overall transaction cost over time.

So, zk-rollups have initial fixed costs and limited finality speeds, but they provide the ability to lower the marginal costs of transactions over time. Think of it as a long-term ROI for the immense hardware required to initiate the process. For example, the Aztec system can currently process 896 transactions per rollup, down from the initial 112 per rollup. This has already lowered the gas costs associated with each rollup by over 10x.

Economics and Transaction Fees

Aside from the economies of scale allowing Aztec to have diminishing transaction fees over time, the economic incentives of the system are based on the privacy technology of Aztec that comes in the form of shielding tokens. At its current state of development, Aztec allows users to “shield” assets by depositing them into Aztec’s smart contracts, effectively encrypting them within the UTXO state system.

Anytime those funds are utilized (i.e., transferred, swapped, etc.), a fresh set of encryption is applied. This keeps the assets perpetually private so long as they remain within the Aztec ecosystem. Currently, due to the protocol being early in development, users are limited to shielding up to 5 ETH or 10,000 DAI.

Transactions & Fees

Transactions on the platform do not have instant finality. Each transaction is grouped into a batch to lower gas fees, but this process increases the finality time in early stages of development. As more transactions are posted in the system, this process will naturally speed up over time. Aztec TVL peaked in 2022 at ~$15 million in TVL but has since hovered around $3-4 million since July 2022.

Currently, fees are decided in a process decided by the batch slots in a rollup. There are 28 slots for any given batch. The base fee for that batch is split between the 28 slots (1/28 of the gas costs per transaction included). The rollup provider will then take that batch and execute a proof. Estimations of the gas required for this process are as follows:

Deposits: 51,000 gas
Internal Sends: 17,000 gas
Withdrawal: 5,000 gas (ETH)

Aztec Connect

In Q2 2022, Aztec introduced Aztec Connect, a tool stack in development that will help create accessible “private DeFi” for Ethereum users. . Connect can be likened to a VPN for dapps. In order to utilize the privacy benefits of Connect, developers simply embed the Connect standard development kit (SDK) into the front-end design of their dapp. This tool stack will directly connect L1 Ethereum to the Aztec privacy protocol. This includes major Ethereum-based applications like:

Lido Finance
Element
Aave
Compound
Uniswap

Aztec Connect functions similarly to a proxy DeFi service where anyone utilizing Ethereum DeFi will be able to interact directly with Aztec’s smart contracts. This gives those users the ability to execute cheap layer-1 transactions while also substantially boosting privacy.

Aztec’s technology & infrastructure already allows the protocol to leverage the zk-rollup design to significantly lower gas fees across a large user base. Aztec Connect is how the protocol will create a direct linear path between Aztec and mainstream DeFi.

Zk.Money

Zk.Money is a layer-2 privacy application that is built on top of the Aztec protocol. This is the application that users can leverage to actually shield their ERC-20 tokens. In combination with Aztec Connect, users can go on Zk.Money to privatize their transactions, utilizing Zk.Money’s yield aggregation to ensure earnings can be made outside of the typical public ledger.

Zk.Money supports many different functions, including the following:

Token Shielding
Private Transacting (Send)
Staking
Fixed Yield

Vulnerabilities

Currently, transactions on Aztec are extremely slow. It can take up to six hours to reach finality. The network has ~3,700 blocks in its chain as of Q3 2022. With a low amount of users, it can take longer to fill up batches, resulting in transaction settlement times being so high.

This is an expected functionality issue of the system in its early days. The value proposition of zk-rollups systems is not in the immediate improvements but long-term payoffs. The more users that flock to the Aztec ecosystem, the faster transactions will become over time.

It is also worth mentioning that following the Tornado Cash sanctions, there is at least the grounds to assume privacy protocols like Aztec may attract regulatory eyes. Nevertheless, there must be sufficient incentives (or at least a large enough user pool willing to endure long wait times) to build up the user base. Aztec is betting that cheap DeFi privacy is that incentive.

Aztec also faces a centralization issue as it is being developed. Currently, Aztec is the sole provider of block validation. Of course, the goal of the protocol is to decentralize this over time as well. There is a barrier of entry to note with zk-rollups as calls for demanding hardware specifications to process zk-proofs.

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