Zero-knowledge technology may sound a bit complicated at first, but its potential applications can help make a lot of your online activity much more private.
What Are Zero-Knowledge Proofs?
ZKPs are digital protocols that allow data-sharing between two parties without associating any information with the transaction, like passwords. By not passing the data around, it’s also possible to improve scalability.
ZKPs are also great for security, as no information from the sender or receiver can be compromised in any way. With this in mind, there are a few aspects to consider about the impact of this novel technology.
On the one hand, we are already immersed in the process of digitalization, as we are constantly entrusting more and more of our data to centralized third parties, like government agencies and Silicon Valley companies.
Enter blockchain technology. Blockchains bring a great degree of transparency to our digital economies, but having every transaction recorded on a public ledger presents privacy concerns and increases the amount of data circulating. Even though public addresses are a random grouping of numbers and letters, if an address is linked to a person or entity, then it’s possible for anyone to see all of their transactions, both past and moving forward.
Zero-knowledge technology is the missing part of the privacy puzzle. We do not need to have all our information transparent for the world to see. Instead, we could use a verification system to make sure that information is available to others without knowing what that information is via a zero-knowledge proof.
For example, zero-knowledge technology allows individuals, businesses and governments to verify data such as transactions and personal information or identification without handing over control of the information. This is a more secure way to verify information and relieves congestion by removing the need to send and store the information on Layer 1.
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Why Is the Ethereum Network Congested?
Think of it as Ethereum being a city with a limited capacity petrol station system and users are vehicles driving through the city’s streets. If many users decide to drive simultaneously, gas becomes more scarce and therefore more expensive.
One way to guess how capable decentralized networks are to scale is by comparing them to well-established, centralized payment networks, like PayPal and Visa.
Why Is Zero-Knowledge Technology Important to Solve Congestion and Increase Scalability?
In the context of distributed ledger technologies (DLT), layers refer to frameworks built on top of existing ledgers to increase their efficiency.
Integrating a second layer provides a place where transactions can be recorded and added to the ledger in batches or groups that prevent the network from getting clogged.
Layer 2’s are not limited to Ethereum. For instance, the Lightning Network is a Layer 2 on top of Bitcoin.
Nobody likes waiting a few minutes to transfer funds between wallets or making payments. Users demand instant-finality for their transactions, which is crucial if we are to achieve mainstream adoption of blockchain technologies.
How Does Zero-Knowledge Technology Work to Solve Scalability Issues?
Thanks to zero-knowledge proofs, we do not need to count every token transfer as a transaction. That’s where zk-rollups come in. With zk-rollups, we can batch hundreds or even thousands of token transfers into one transaction, which then gets recorded on the Ethereum public blockchain.
By squeezing many transactions into one, the fees and computer power are shared amongst hundreds or thousands of users. For example, this is how the Hermez zk-rollup batches up token transactions:
OR do not rely on SNARK, and face a trade-off between finality and security. They do not suffer the complexity of using zk-SNARKs, but they compromise privacy and speed.
What Does Zero-Knowledge Technology Mean for the Future of Fintech and Decentralized Finance?
ZK technology has great potential to improve processes in many fields. For exchanges, the obvious benefit is increased margin in their operations, which could trickle down to benefit traders using their platform in the form of lower trading fees.
What Is Next for Zero-Knowledge Technology?
Amongst the more promising use cases for zero-knowledge proofs are chain voting models, verifying computation results and data auditing.
There are ongoing experiments of chain voting in the blockchain, commonly referred to as governance. Outside the blockchain world, there are great possibilities for increasing the legitimacy of political elections and corporate voting.
Zero-knowledge proofs can help increase the security and anonymity of voting processes, and lower the possibility of censorship. By moving the voting process to a public blockchain, eligible voters or shareholders can cast their ballot without revealing their identity, and they can claim verification of their vote to ensure their ballot was counted.
Another field of great potential is computational verification. As mentioned at the beginning of the piece, with more digitalization comes more data breaches. We are in a place where we need fast storing and access to data while maintaining individuals and institutions' right to privacy. Zero-knowledge technology could solve this dilemma by masking identities and using hashes to verify that the information and computations are legitimate.
Last but not least is the issue with data integrity and data availability, which are significant concerns for cloud storage services. Users upload personal data together with authentication information, making them relinquish ownership of their data. Data may face corruption, theft, loss or unauthorized purchase from a third party. Zero-knowledge technology can help with the data auditing process developing schemes to prevent data leakage.
Hopefully, this article will help you explore the potential of zero-knowledge technology. It’s quite a learning curve, and we are more than happy to walk it with you.