Summary: Starknet is a Layer 2 scaling solution for Ethereum, enhancing scalability and security with zero-knowledge STARK proofs. It enables developers to create high-throughput dApps using its custom Cairo language and supports the building of custom appchains or Layer 3 solutions.

Despite its innovations, Starknet faces challenges like validator centralization risks and declining user activity post-airdrop, with total value locked and user activity dropping over 80%.

What is Starknet?

Starknet is a zero knowledge proof-based Layer 2 scaling solution for Ethereum that enhances scalability while maintaining security and decentralization. Utilizing STARK proofs, Starknet validates off-chain transactions to increase transaction throughput and address Ethereum's scalability issues.

With Native Account Abstraction, Starknet allows developers to customize account behavior, facilitating the creation of complex applications. Supported by a growing developer community and resources, Starknet's native smart contract language, Cairo, empowers developers to build scalable and secure dApps effectively.

Starknet also offers Appchains, often referred to as Layer 3's, which are tailored instances for specific applications. These Appchains allow developers to configure network parameters like block size and fees to meet unique needs, ensuring optimal performance while leveraging Starknet’s high throughput and security.

What is Starknet?

How Does Starknet Work?

Starknet enhances Ethereum’s scalability through a coordinated system involving Sequencers and Provers, which validate transactions using STARK proofs. Here is an overview of how Starknet functions:

  • Sequencer Role: The Sequencer receives transactions, orders them, executes them, and bundles them into blocks. It tags transactions as "RECEIVED" initially and "ACCEPTED_ON_L2" once processed, ensuring efficient transaction management.
  • Prover Role: The Prover reprocesses blocks from the Sequencer, generating STARK proofs to confirm transaction correctness. These proofs are then submitted to Ethereum for final verification, ensuring the integrity and security of the network.
  • Nodes: Starknet nodes maintain the network state, either by replaying transactions, relying on the Sequencer's updates, or checking proof validation on Ethereum. This flexibility ensures that nodes can operate efficiently while maintaining the network's security and scalability.

This architecture allows Starknet to handle high transaction volumes while preserving Ethereum's decentralized security model.

Starknet Tokenomics

Starknet is a developing decentralized protocol with dynamic economic mechanisms, or tokenomics, influenced by community governance. The primary function of the Starknet token (STRK) is to support the network's operations and activities, rather than to serve as an investment. Below is an overview of how STRK is used and its key functionalities.

Purpose of the STRK Token

  • Transaction Fees: STRK can be used to pay transaction fees on Starknet, along with ETH. A portion of STRK fees is converted to ETH by the sequencer to cover Ethereum L1 gas costs.
  • Staking: STRK will be used for staking services critical to Starknet's security and operations, such as sequencing and data availability. This is planned for 2024-2025.
  • Governance: STRK holders can vote on proposals affecting Starknet's protocol, ensuring decentralized decision-making.

Supply and Distribution

Ten billion STRK tokens were created and distributed as follows:

  • 20.04% Early Contributors: Tokens for StarkWare team members and early contributors, with a lock-up schedule.
  • 18.17% Investors: Tokens for investors, also with a lock-up schedule.
  • 10.76% StarkWare: Tokens for operational services and engaging service providers.
  • 12.93% Grants and Development Partners: Tokens for research, development, and maintenance of Starknet.
  • 9.00% Community Provisions: Tokens for contributors to Starknet's development.
  • 9.00% Community Rebates: Tokens for onboarding costs from Ethereum, available in 2024.
  • 10.00% Foundation Strategic Reserves: Tokens for ecosystem activities aligned with the Foundation’s mission.
  • 8.10% Foundation Treasury: Tokens for future initiatives and operations.
  • 2.00% Donations: Tokens for donations to institutions and organizations.

Planned Distribution Schedule

Tokens allocated to investors and early contributors are subject to a lock-up schedule, unlocking gradually until March 15, 2027, to align long-term incentives with community interests. The total circulating supply will increase over time with new tokens minted for staking rewards and other purposes.

Starknet Risks

Starknet, a general-purpose ZK Rollup, has several technical risks according to L2Beat. The centralization of the sequencer is a primary concern, as failure or censorship by the sequencer can delay or exclude transactions with no alternative processing mechanism. The reliance on whitelisted proposers for publishing state roots on Layer 1 (L1) can result in frozen withdrawals if proposers fail.

The dependence on zkSTARKs for state validation adds complexity, requiring precise cryptographic implementation to avoid potential fund loss. Additionally, Starknet's governance structure, involving multiple permissioned addresses with upgrade capabilities, introduces centralization points that could be exploited or lead to governance actions misaligned with community interests, posing further operational risks.

Starknet Criticism

Starknet has faced criticism due to a significant drop in user activity following its airdrop in mid-February 2024. Daily active addresses fell from over 100,000 to around 20,000, despite efforts like the "DeFi Spring" program to boost engagement. The airdrop's eligibility requirements excluded many active users, causing community dissatisfaction.

Additionally, despite Ethereum's Dencun upgrade reducing transaction fees, Starknet's transaction rates and total value locked (TVL) have continued to decline, raising concerns about the network's long-term vitality and user retention.

Bottom Line

Starknet offers a promising solution to Ethereum’s scalability issues through its innovative use of STARK proofs and advanced architecture. By enabling off-chain transaction validation and customizable account behavior, it supports the development of complex, scalable dApps.

However, challenges such as centralization risks and declining user activity post-airdrop highlight areas for improvement. As the ecosystem evolves, community governance will play a crucial role in addressing these issues and ensuring Starknet's long-term success and resilience.