The Weekly Wrap: ECB rate hike decision, zkEVM bonanza

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1. ECB surprises with 50 bps rate hike

The Facts:

• On Thursday, ECB’s Governing Council decided to raise the three key ECB interest rates by 50 bps, the first rate hike in 11 years.
• The ECB also introduced its new anti-fragmentation Transmission Protection Instrument (TPI) that aims to limit divergence in borrowing costs to increase price stability and therefore support countries with large debt loads like Italy.
• Another proxy for economic strength came in Thursday as well, as the U.S. revealed that jobless claims hit an 8-month high as initial unemployment claims increased last week to 251’000.

Why it’s important:

• As the anemic economy and debt crisis in the euro area put the ECB in a tricky position regarding the potential impact of a hawkish policy, they finally join other major central banks in the fight of curbing inflation.
• The United States, Canada, New Zealand, and Switzerland among others have already raised rates within this cycle by a combined 1’140 bps.
• The aggressive tightening policy of the ECB is warranted as the June HICP in the euro area shows no signs of slowing down printing a new record high of 8.6%.
• Moreover, the rate hike decision reinforced the euro that hit U.S. dollar parity last week.
• With energy being a main driver of inflation, Russia resuming gas flows via Nord Stream came in as a relief.

2. Rollups see development explosion as zkEVM season starts

The Facts:

• This week saw an influx of zkEVM announcements as three projects revealed news on their scaling solution based on zero-knowledge proofs.
• While Polygon released and open sourced their general purpose zkEVM implementation, Mater Labs’ zkSync announced their zkEVM rollup launching on mainnet in 100 days after >6 months of testnet but did not open source their prover code yet.
• Moreover, Scroll, another general purpose zkEVM, announced their pre-alpha testnet.
• The rollups differ in their computational approaches in zk and thus in their design being EVM-compatible (Solidity/Vyper-level compatibility) or EVM-equivalent (EVM bytecode-level compatibility) such as zkSync or Polygon’s zkEVM, respectively.

Why it’s important:

• With the merge being targeted for September, it is important to know that the PoS transition is not a scalability upgrade yet but rather enables their sharding implementation at a later stage.
• Vitalik Buterin stated in a talk this week at the EthCC that Ethereum will be able to process 100’00 TPS in Ethereum’s final form.
• While it likely takes a year to get there, general-purpose zkEVMs represent an important addition to the current scaling landscape available for Ethereum and are perceived as one of the most elegant scaling solutions operating on a second layer.
• As Polygon leverages their native MATIC token for staking only, the scaling layer will create additional demand for ETH as transactions are settled in Ethereum’s native token.

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In other news

• Iota’s incentivized Shimmer network launches in beta (via Shimmer)
• Lido announces plans to further expand stETH on Layer2 (via Lido)
• Goerli merge scheduled for August 10 (via Github)
• Coinbase receives regulatory approval in Italy (via Reuters)
• Minecraft bans NFTs (via Decrypt)
• Tesla sells 75% of its Bitcoin holdings (via The Washington Post)
• Sushi launches crosschain AMM SushiXSwap (via Sushi)