Zero-knowledge rose to prominence within crypto last year primarily as a tool for enhancing scalability, particularly within the Ethereum ecosystem.
But we are only at the tip of the iceberg for practical implementation of ZK.
In recent months, the impact of Zero Knowledge (ZK) on crypto and decentralized applications is becoming plain to see As 2023 unfolds, expect to see major developments of ZK in terms of bridge security, wallet privacy, KYC compliance, and decentralized identity on social media.
Moving Beyond Phase 1: ZK for Scalability
Why is ZK catching on? In a word, scalability.
Constrained throughput on Ethereum leads to expensive transactions, which hinders a chain’s ability to support applications at any real scale — let alone one competitive with web2. One way to enhance scalability that made major strides last year is deploying zkEVMs, which make it very cheap to fully verify large numbers of EVM transactions.
The DefiantPolygon plans to release its Beta zkEVM on Ethereum this spring while Matter Labs’ solutions zkSync opened up mainnet for deployment in February. These developments alone demonstrate significant progress from testnet announcements of 2022.
Next Step: ZK for Security
It’s inevitable that we will have a multichain future with different networks and layers serving different purposes within the greater crypto economy. Bridges serve as connective highways between blockchains. Unfortunately, bridges are still a nascent development and so lack the same level of security as many Layer 1s. Hackers exploited this weakness as much as possible last year, resulting in $3.1B stolen from bridge hacks—comprising 64% of all DeFi hacks for 2022.
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Connecting chains with a multisig is fine if risk tolerance is high, but ideally, we should have some secure, verifiable way of connecting multiple chains together. ZKPs are starting to be applied here, with zkBridging, with =nil; Foundation making significant progress in this area. But expect others to follow, as crypto prepares to have trusted secure connectivity across all of the L1s.
Addressing MetaMask & Infura Privacy Infractions
It was highly disturbing to many in the crypto community when ConsenSys announced that their self-custody wallet, MetaMask, would collect user IP addresses when used with default Remote Procedure Call (RPC) application Infura.
IP addresses can then be used to identify a user’s location and block transactions from going through if coming from within censored countries or regions with uncertain compliance requirements, which is exactly what MetaMask was caught doing, impacting users in Venezuela.
ZK can also offer a solution to this issue by being leveraged to make running your own wallet client that much more accessible. If users ran their own full node, they would be a participant in the process of verifying transactions settling on-chain, which could mitigate actions by third party providers to censor based on limited information.
The demand for trustless full nodes could kick in during the next bull market as activity ticks up and trust concerns come back up to the surface.
Typically, running a full node is computationally resource-intensive, but by deploying recursive ZKPs for efficient verification, the computational cost for running a node can be dramatically reduced, increasing the feasibility for the everyday user.
The demand for trustless full nodes could kick in during the next bull market as activity ticks up and trust concerns come back up to the surface. The drawbacks of relying on quasi-centralized wallet and data providers have become increasingly apparent, making the need for secure and decentralized node solutions that much more pressing.
Institutional Involvement in Crypto is Putting Pressure on Compliance Needs
With TradFi institutions getting more deeply involved in crypto, the need for regulatory compliance intensifies. In many cases, these demands from financial institutions seem to conflict with the core values of crypto: decentralization and empowerment of users to control their own value.
These two camps do not need to be at odds. ZK can be leveraged to enable users to share a proof that they meet compliance requirements, without revealing personal information that could put them at risk of a hack.
This has use cases for CBDCs and dApps seeking to comply with regulations without jeopardizing user information or the core values of user data privacy. Governance decisions pertaining to KYC can also benefit from ZK, with techniques like zkKYC, private, scalable order books and private voting for key on-chain decisions needed to create environments that are compliant with regulations.
Overall, the involvement of financial institutions will be net-positive for the space, bringing in massive amounts of liquidity and cementing DeFi as the new backbone for global finance. ZK will smooth the path to that transition by making compliance feasible.
Building More User-Aligned Platforms, with Privacy and zkIdentity
The last place where ZK could have a massive impact is in building trustless, user-owned platforms. There is a huge disconnect between the centralized nature of the current, monolithic platform companies, and the users they intend to serve.
Much of the time, individual platforms work as expected – but we increasingly see a higher frequency of platforms living out failures borne out of a lack of inherent alignment with their users.
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Just last year, we saw this danger when FTX was exposed for not managing user funds as promised. The exchange came under investigation by several regulatory agencies, and declared bankruptcy, resulting in the closure of the platform and leaving customers dependent on the courts for recourse. In terms of its corporate structure, FTX was a traditional, centralized platform.
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Building a decentralized exchange with a user experience equal to or better than centralized ones seems now possible within crypto. Advancements in verifiable private identity with zkIdentity, higher throughputs of complex transactions possible on chain with zkRollups, and technology for making sensitive parts of systems private can all help advance DEXs.
These improvements allow the construction of decentralized platforms with user experiences rivaling or superior to those provided by centralized companies, which could be very meaningful to users and institutions in reducing substantial counterparty risks when using these otherwise convenient and useful platforms.
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These counterparty risks are present not just on crypto exchanges like FTX, but also other platforms outside of crypto. Another space that has had visible challenges with platform trust and risk is social media, with users of Twitter and Meta both facing challenges in these areas.
Such is the nature of centralized platforms wherein a small group of executives, or, in this case, a single individual, has the power to upend the entire system.
The acquisition of Twitter by a single stakeholder, Elon Musk, created uncertainty around the platform’s future. Shaking up a system can sometimes yield positive results, but it also risks destroying the value and user benefit that has been created by Twitter so far.
Such is the nature of centralized platforms wherein a small group of executives, or, in this case, a single individual, has the power to upend the entire system. Another example of this would be Meta’s amplification algorithm that optimizes profits over social welfare and their continued poor monitoring and faulty assessment of misinformation.
There is an alternative model, made possible by decentralized systems built on blockchain networks, that empowers users with control over their own data and, ideally with a voice in the governance of the “public square.” ZK will be key to enable shielded, private voting within those governance systems through zk-identities.
User identity is an essential component of many social platforms, given the interactive and communicative nature of social discourse, but the difference in Web3 is that users own their identity data as opposed to the platforms.
ZK as Part of Key Infrastructure for Building a Better Future
We would be remiss if we did not mention the impact of AI, given the rise of ChatGPT and repercussions across content creation for news, entertainment, advertising, marketing, and even healthcare and education.
AI platforms are particularly centrally controlled, due to the high costs of training the most impactful models, and the organizational requirements of building and deploying them.
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Further developments in AI will raise the demand for aligned platforms, as their ability to exploit existing misalignment for profit within existing platforms comes into effect and as the centralized control of powerful AI systems itself becomes suspect.
An increased need for decentralized systems that respect user privacy, integrate zkIdentity, and provide verifiable computation will be more and more useful in this coming environment, and ZK could play a powerful role in that.
Evan Shapiro is the CEO of Mina Foundation & Co-Founder of Mina Protocol.
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