Reimagining Digital Trust: An Exploration of Zero-Knowledge Proofs in Cryptocurrencies

As the digital world seeks secure ways of interaction, Zero-Knowledge Proofs (ZKPs) emerge as a game-changer. Transitioning from encryption to digital signatures, ZKPs offer an innovative solution for guaranteeing truth without revealing sensitive information. Within the context of cryptocurrencies, this has monumental implications for privacy and security. For instance, when executing a transaction on a blockchain, ZKPs can enable a user to prove they possess sufficient funds to complete the transaction without ever disclosing the exact amount or its origin. This marriage of verification and privacy ensures that cryptocurrency networks remain transparent and trustworthy while still protecting sensitive user information.

Authors: Gaurav Shrivastav

Zero-Knowledge Proofs:

1. Ensures Authenticity: ZKPs separate knowledge from the actual data, allowing verification without disclosing the facts themselves.
2. Drives Blockchain Adoption: ZKPs play a vital role in two impactful applications — Scaling, moving computations off-chain in a verifiable manner, and privacy, keeping data hidden while ensuring public verifiability.

Image courtesy: CartoonStock

With ZKPs, we unlock the potential for secure and private interactions on the internet, even with unknown or untrusted parties, paving the way for a new era of trust and integrity in the digital landscape.

Before ZKP, doubts arose about the prover’s legitimacy or the proof system’s soundness. However, ZKP shifts the focus to the verifier’s morality. What if the verifier attempts to leak information?

Zero Knowledge Proof with a secret color combination lock

“In a historical context, we can compare where zero-knowledge technology is today to the development of Public Key Infrastructure (PKI) cryptography in the 1990s. Prior to the launch of the early commercial-use browser, Netscape Navigator, PKI had very limited use cases, although it showed promising potential. With the launch of Netscape, public key cryptography found a ready mainstream use case as Netscape implemented SSL — a Secure Socket Layer protocol that underlies the core of internet security today — using RSA public key cryptography. Today, zeroknowledge is in the pre-Netscape era of adoption and is at the cusp of tooling development.”

Zooko Wilcox — Founder / CEO of Electric Coin Co., that launched privacy focused cryptocurrency Zcash in 2016. Zcash is the first widespread commercial application of zk-SNARKs. The cryptocurrency was built to empower economic freedom and was created from the original Bitcoin code base with several key improvements, namely privacy-preserving shielded addresses and a community development fund.

Source: Money, Token & Games, Citi GPS: Global Perspectives & Solutions March 2023

Zero Knowledge vs. Zero Trust: Securing Data and Access

“Zero knowledge” refers to a cryptographic method known as zero-knowledge proofs, while “zero trust” is a cybersecurity model used by organizations to protect their data and resources.

Zero trust assumes that every person and device, both internal and external, could pose a threat. To counter risks, zero-trust systems require authentication, authorization, and continuous validation before granting resource access.

Zero-knowledge proofs can complement zero-trust frameworks, enabling secure access without revealing personal details. For instance, zero-knowledge authentication solutions empower employees to access networks confidentially.

Beyond Encryption: Unleashing Privacy with zk-proofs?

While encryption safeguards data, it falls short when it comes to transactions involving tokenized assets. Encrypted assets on the chain can’t be safely utilized since their exact location remains uncertain, rendering them unusable.

The Need for zk-proofs: Validating encrypted data becomes crucial for certain scenarios. While encryption suffices when no examination is required, zk-proofs offers assurance and verification for encrypted data.

The Zcash use case: Zcash, a privacy-focused cryptocurrency, encrypts sender, receiver, transaction amount, and reference fields. However, zk-proofs step in to prevent “double spend” situations without revealing the underlying unencrypted data.

With zk-proofs, privacy and trust are redefined, ensuring confidential transactions on the blockchain without compromising security.

Striking the Balance: Liquidity & Privacy in Blockchain

Privacy is non-negotiable in the digital era, making it crucial to preserve while leveraging blockchain’s potential. Banks and financial institutions seek blockchain benefits for trading and payments but exposing on-chain data poses privacy risks.

Zero-Knowledge Proofs (ZKPs) offer a solution: Masking sensitive information while confirming payments, ensuring confidentiality. With ZKPs, no specifics like payment amount or terms are disclosed publicly, driving mass adoption of enterprise blockchain with enhanced privacy.

Zero Knowledge Proof: Key Properties

1. Zero-Knowledge: The verifier remains unaware of the actual statement’s value or nature if it is true. The statement may involve an absolute value or an algorithm.
2. Completeness: When the statement is true, an honest verifier can eventually be convinced of its truth.
3. Soundness: Dishonest provers cannot convince the verifier of the proof’s validity, ensuring security and reliability

Types of Zero Knowledge Proof: Interactive vs. Non-Interactive

1. Interactive Zero Knowledge Proof:

In this type, the verifier constantly asks questions to validate the prover’s knowledge. It uses interactive actions between the prover and the verifier to establish knowledge soundness.

2. Non-Interactive Zero Knowledge Proof:

To overcome scalability issues in real-world applications, non-interactive zero-knowledge proof was introduced. It eliminates the need for real-time interaction between the prover and verifier, preventing collusion risks. A hash function is used to randomly pick a challenge by the verifier. The Fiat-Shamir heuristic, invented in 1986, successfully transformed interactive proofs into non-interactive ones.

Implementation of ZKP

ZKPs come in various implementations, each with its own trade-offs in size, prover time, and verification time:

1. zk-SNARKs: Succinct Non-Interactive Argument of Knowledge. Small and easy to verify, using elliptic curves for gas efficiency.
2. zk-STARKs: Scalable Transparent Argument of Knowledge. Minimal interaction between prover and verifier for faster processing.
3. PLONK: Permutations over Lagrange-bases for Oecumenical Noninteractive Arguments of Knowledge. Offers universal trusted setup and supports multiple participants.
4. iBulletproofs: Short non-interactive proofs with no trusted setup, enabling private transactions for cryptocurrencies.

Discovering zk-SNARKS: Fast, Secure, and Private for Blockchain

“Perhaps the most powerful cryptographic technology to come out of the last decade is general-purpose succinct zero-knowledge proofs, usually called zkSNARKs”.

- Vitalik Buterin, Co-founder of Ethereum

zk-SNARKS is a popular technique for blockchains, ensuring fast and easy verification with small proof sizes. SNARK stands for Succinct Non-Interactive Argument of Knowledge, providing computationally sound arguments. Unlike regular proofs, zk-SNARKS don’t need back-and-forth communication, keeping interactions efficient. By posting ‘commitments’ instead of transaction data, zk-SNARKS preserves privacy while retaining public verifiability.

Imagine solving a puzzle without seeing the pieces; zk-SNARKS validates information without revealing secrets, safeguarding privacy on the blockchain.

Use Case of Zero Knowledge Proofs (ZKPs) — Empowering Privacy & Trust

• Voting Systems: Ensuring the legitimacy of a vote without revealing the voter’s choice, thus maintaining the privacy of the ballot.
• Transaction Privacy: ZKPs can be used to validate the legitimacy of a transaction without revealing its specifics, thus ensuring that details like transaction amounts and sender/receiver addresses remain private.
• Decentralized Identity: Individuals can prove they meet specific criteria (e.g., age or nationality) without revealing the underlying personal data.
• Smart Contract Privacy: Execution of smart contracts can be verified without exposing their internal logic or sensitive data inputs.
• Scalability Solutions: zkRollups and zkSNARKs can aggregate multiple transactions into a single proof, reducing the data stored on-chain and enhancing transaction throughput.

Cutting-Edge ZKP projects to watch

Apart from Zcash, here a few more noteworthy projects which use ZKPS

• Metis: Offering privacy and scalability, Metis solves blockchain’s scalability challenge with an off-chain solution while maintaining security. It empowers developers to create DApps effortlessly and facilitates token economies, crowdfunding, and community management.
• zkSync: A layer-2 scaling solution for Ethereum that uses zkRollups to improve scalability while maintaining security.
• StarkWare: Developing zk-STARKs, which aim to provide fast, scalable, and transparent privacy without the need for a trusted setup.
• Polygon Zero: Ensuring secure and anonymous transactions, Polygon Zero addresses the limitations of conventional blockchains. With a strategic partnership with Polkadex, it showcases interoperability and attracts industries seeking top-notch security.
• Polygon Hermez: As a scalable zk-rollup, Polygon Hermez compresses multiple transactions for efficient and secure Ethereum network operations. Its cross-chain capabilities make it ideal for businesses venturing into blockchain projects.
• QED-it: Providing proof without revealing confidential data, QED-it enhances data management in enterprises. Notable clients include Deloitte and BNP Paribas.
• Nuggets: Nuggets simplify user transactions with a single biometric tool while preserving privacy and security through zero-knowledge blockchain storage and encryption. Currently undergoing testing, it shows promise in protecting consumers’ personal data.

Advantages of Zero-Knowledge Proofs in Blockchains

Zero-knowledge proofs offer the key advantage of preserving privacy in transparent systems like public blockchains (e.g., Ethereum). By utilizing ZKP technology, users and businesses can execute smart contracts with private datasets while concealing the underlying data.

For traditional institutions, such as supply chain companies, enterprises, and banks, privacy is crucial to protect trade secrets and comply with data protection regulations like GDPR and HIPAA. While permissioned blockchains provide transaction privacy, ZKPs enable secure interactions with public blockchains, unlocking a range of institutional use cases and fostering innovation in the global economy.

Disadvantages of Zero-Knowledge Proofs

While ZK-proofs offer privacy and security advantages, they have some drawbacks to consider:

• Computational Intensity: Developing and verifying ZK-proofs can be resource-intensive and lead to longer transaction processing times, potentially affecting blockchain scalability.
• Complexity and Security: Implementing ZK-proofs may add complexity to protocols, making auditing and verification more challenging, raising concerns about security flaws.
• Regulatory Compliance: While ZK-proofs enhance privacy, they may enable illegal activity, raising compliance issues in certain situations.
• Specialized Implementation: ZK-proofs require specific expertise, limiting their widespread adoption in various fields.

Though ZK-proofs provide valuable features, careful evaluation of trade-offs is necessary before adopting them into specific systems or applications

Conclusion

Zero-Knowledge Proofs (ZKP) offer a groundbreaking method to verify data authenticity without revealing it to third parties. The potential for enhanced data privacy and security spans across various industries and applications. While currently in early adoption stages, ZKP technology faces challenges, such as the lack of standardized systems and languages for broad implementation. Additionally, scalability and high computing demands are areas that require further attention. As international actors explore this innovative technology, its true potential will unfold, paving the way for a more secure and privacy-conscious future.

The International Token Standardization Association (ITSA) e.V.

The International Token Standardization Association (ITSA) e.V. is a not-for-profit association of German law that aims at promoting the development and implementation of comprehensive market standards for the identification, classification, and analysis of DLT- and blockchain-based cryptographic tokens. As an independent industry membership body, ITSA unites over 100 international associated founding members from various interest groups. In order to increase transparency and safety on global token markets, ITSA currently develops and implements the International Token Identification Number (ITIN) as a market standard for the identification of cryptographic tokens, the International Token Classification (ITC) as a standard framework for the classification of cryptographic tokens according to their inherent characteristics. ITSA then adds the identified and classified token to the world’s largest register for tokens in our Tokenbase.

• The International Token Identification Number (ITIN) is a 9-digit alphanumeric technical identifier for both fungible and non-fungible DLT-based tokens. Thanks to its underlying Uniform Token Locator (UTL), ITIN presents a unique and fork-resilient identification of tokens. The ITIN also allows for the connecting and matching of other media and data to the token, such as legal contracts or price data, and increases safety and operational transparency when handling these tokens.
• The International Token Classification (ITC) is a multi-dimensional, expandable framework for the classification of tokens. Current dimensions include technological, economic, legal, and regulatory dimensions with multiple sub-dimensions. By mid-2021, there will be at least two new dimensions added, including a tax dimension. So far, our classification framework has been applied to 99% of the token market according to the market capitalization of classified tokens.
• ITSA’s Tokenbase currently holds data on over 4000 tokens. Tokenbase is a holistic database for the analysis of tokens and combines our identification and classification data with market and blockchain data from external providers. Third-party data of several partners is already integrated, and API access is also in development.

Remarks

If you like this article, we would be happy if you forward it to your colleagues or share it on social networks. More information about the International Token Standardization Association can be found on the Internet, on Twitter, or on LinkedIn.

Gratitude:

With deep sense of gratitude, I present this article, which I created during my participation in the DeFi Talents Program. This transformative 18-week mentoring initiative, organized by Web3 Talents (https://web3-talents.io/defi-talents), has empowered me to make impact in the exciting world of Decentralized Finance. I am truly thankful for the opportunity and support provided by the program.

References

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