Digital Nugget: Zero Knowledge – catalysing growth and unlocking new use cases

Digital Nugget: Zero Knowledge – catalysing growth and unlocking new use cases

Applying zero-knowledge cryptography to blockchain projects may be the most important innovation since the successful realisation of distributed ledger technology.

Protocols based on Zero-Knowledge (ZK) proofs have been attracting a great deal of attention recently. Two highly anticipated launches focused the crypto market on new opportunities with this technology: zkSync’s launch of their smart-contract-compatible, zero-knowledge-based scalability solution, and Polygon’s launch of their zero-knowledge-based identity solution.

Zero-knowledge proofs were invented by MIT computer scientists in 1985. They solve the problem of verifying the truth of a piece of information without revealing the information itself, which is extremely valuable when it comes to sensitive financial data or personal information.

zkSync daily transaction

Source: Sygnum Bank

Privacy coins

The first use of zero knowledge in crypto was to create truly anonymous blockchain protocols after concerns that Bitcoin was not sufficiently private.

Zerocoin and Zerocash were two protocols proposed in 2013 as extensions of Bitcoin. After the Bitcoin community’s rejection of the proposals, they launched as independent protocols: Zcoin (now Firo) and Zcash. Leading privacy coin, Monero, also incorporated zero-knowledge technology in 2017.

While preserving anonymity and creating truly private cryptocurrencies are powerful applications of the zero-knowledge technology, institutions are averse to using privacy coins due to the regulatory risk. As a result, this application of zero-knowledge proofs created a niche rather than catalysing growth

Scalability

As the crypto industry worked to resolve the challenge of scalability, zero-knowledge technology emerged as one of the solutions for data compression, since transactions are processed off-chain and verified through zero-knowledge proofs.

There is still a lot of research going on to fine-tune the technology and balance futureproofing (e.g. quantum resistance) with the degree of improvement in scalability. The first zero-knowledge-based scalability protocol that is compatible with Ethereum smart contracts launched this year, and zero-knowledge is catching up with the hitherto-dominant scalability solution, the so-called ‘optimistic rollups’, by offering better security.

Identity

With zero knowledge as one of the methods, the emphasis on scalability refocused attention on the technology and spurred innovation for new applications, such as decentralised, privacy-preserving identity solutions. Zero-Knowledge proofs used in combination with decentralised platforms make information about identity auditable, traceable and verifiable while allowing individuals to maintain privacy and control data sharing.

Using zero-knowledge proofs can open the way to meaningful growth for decentralised lending to real-world corporations and individuals by verifying identity as well as relevant financial data for credit assessment.

Another subset of proving identity for interacting with decentralised platforms is verifying that the user is not a bot.

KYC

An important use case for decentralised identity solutions is applying it for know your customer” (KYC) and anti-money laundering (AML) checks on decentralised platforms. Zero-knowledge technology can solve the conundrum of privacy vs. regulatory compliance.

Proof of reserves and other audit functions

Zero-knowledge technology can also allow centralised finance (CeFi) entities serving the crypto market to provide proof of reserves, safety of user funds and asset/liability matching without disclosing confidential information. Projects such as zkSync are working on solutions in these areas.

In a broader sense, zero-knowledge technology has the potential to catalyse the growth of a decentralised audit sector within the crypto market.

Data attestations

Zero-knowledge proofs can be used to verify data from on-chain and online sources in a privacy-preserving manner. The proof can then be utilised by decentralised applications for access control, collateral verification or reputation curation.

Supply chain management

Supply-chain management has long been expected to become an important application sector for decentralised, trustless technologies, but it has not yet materialised.

Applying zero-knowledge solutions can solve the problem of simultaneously enabling privacy and traceability.

Escrow

As escrow fees can be quite significant, this creates another opportunity for decentralised platforms to deliver a low-cost solution. Zero-knowledge proofs can unlock this opportunity.

Other

Further applications of the technology are already being experimented with, while others are yet to be conceived.

For example, decentralised platforms with zero-knowledge proofs could be used to preserve the integrity of voting.

Summary

Zero-knowledge technology used in combination with decentralised platforms has the potential to catalyse significant growth for certain sectors of the crypto market, such as decentralised finance, as well as launch entirely new sectors.

Some of the opportunities are:

  • Zero- knowledge- based identity solutions, which can unlock growth in DeFi lending to real world entities
  • Zero- knowledge based KYC/AML solutions that can help institutional involvement with decentralised finance to take off
  • Decentralised audit that may emerge as a new sector – which would also make interactions with centralised entities safer

With notable innovation taking place in this area, we have seen some important solution launches recently, and we expect to see further exciting developments soon.

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About Sygnum
Sygnum is the world’s first digital asset bank, and a digital asset specialist with global reach. With Sygnum Bank AG’s Swiss banking licence, as well as Sygnum Pte Ltd’s capital markets services (CMS) licence in Singapore, Sygnum empowers institutional and private qualified investors, corporates, banks, and other financial institutions to invest in the digital asset economy with complete trust. Sygnum operates an independently controlled, scalable, and future-proof regulated banking platform. Our interdisciplinary team of banking, investment, and Distributed Ledger Technology (DLT) experts is shaping the development of a trusted digital asset ecosystem. The company is founded on Swiss and Singapore heritage and operates globally. To learn more about Sygnum, please visit www.sygnum.com.

Disclaimer
This information was prepared by Sygnum Bank AG. This information may contain forward looking statements and may be subject to change. The opinions expressed herein are those of Sygnum Bank AG, its affilitates, and partners at the time of writing. This is for informational purposes only and contains general material. It does not constitute any advice or recommendation, an offer or invitation by or on behalf of Sygnum Bank AG to purchase or sell assets or securities. It is not intended to be used as a general guide to investing, and it should be used for informational purposes only. When making an investment decision, you should either conduct your own research and analysis or seek advice from an expert to make a calculated decision. The information and analysis contained here have been compiled from sources believed to be reliable. However, Sygnum Bank AG makes no representation as to its reliability or completeness and disclaims all liability for losses arising from the use of this information.

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