What every trader needs to know about Zero Knowledge Proofs (ZKP)

01 Dec, 2021
What every trader needs to know about Zero Knowledge Proofs (ZKP)

One of the unique features of blockchain technology is that every transaction is transparent, meaning whatever you buy, or sell is recorded on the blockchain for all to see. Your personal information (name, age, location) is private. Your transaction is public, and maybe you don’t want it to be.

So, what if there was a way for you to buy, sell or trade crypto without either party knowing who they are buying, selling, and trading with?

You can if you’re on a network that uses Zero Knowledge Proofs (ZKP).

Let’s start off by saying that if you googled Zero Knowledge Proofs right now, you’d be awash in some very technical articles that attempt to describe the process in mathematical detail. There is a science to it and equations are complicated. However, all you really need to know about ZKP is this:

The identify of you and the person you are transacting with is verified without your personal information (public key) being revealed. Once the information is proven to be correct, the transaction is validated and recorded on the blockchain.

Or, as HackerNoon explains: “Zero Knowledge Protocol (or Zero Knowledge Password Proof, ZKP) is a way of doing authentication where no passwords are exchanged, which means they cannot be stolen.”

That’s all a retail trader needs to know.

Why is the crypto universe moving toward Zero Knowledge Proofs

There are a lot of reasons to use ZKP. First and foremost, not everyone wants the digital world to know their crypto transactions. For one, you don’t want your key or coins stolen. And two, the digital currency world is very competitive and like chess, everyone has their own strategy. For example, if you’re a crypto whale, do you want everyone else to know your address is  moving millions of Bitcoins? Probably not, because then everyone else may jump on the bandwagon and move it too.

And there’s another big reason ZKP is so important – adoption of blockchain by businesses will depend a lot on keeping data private.

Blockchains offer tremendous potential for businesses to streamline their operations by moving to this emerging technology. However, scalability and privacy are not as robust as they could be.

“The primary hurdle for the blockchain industry to overcome in order to achieve widespread adoption is that enterprise-grade businesses must be able to use the technology,” explains Horizen (ZEN) and Horizen Labs co-founder, Rob Viglione. Horizen’s blockchain uses ZK SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) to provide elective privacy.

“For this process to be feasible in business is to overcome the current challenges of privacy. In many cases, user’s data on the blockchain is public or minimally obfuscated,” he said. “Zero-knowledge proofs enable blockchains to overcome this hurdle. Including this technology will be the most important technology in the next couple of years.”

And still another reason: ZKP increases blockchain efficiency.

If you’re holding Ethereum (ETH) you know about high “gas” fees and mempool delays associated with congestion on the number two blockchain network.  Developers have been working to solve this problem using “roll ups” which basically “chunk” transactions to speed up the verification process.  One of those roll ups is called “Optimistic Rollups.” Another “ZK Rollups.”

“With optimistic rollups, Ethereum treats the bundled transactions as legitimate by default, while withholding withdrawals for several days to allow participants in the network time to prove if the batch was fraudulent and should be rejected,” TechCrunch explains.  “Meanwhile ZK rollups leverage complex mathematical proofs, which allow the Ethereum network to quickly verify and accept the legitimacy of a given transaction batch.”

One ZK Rollup, called zkSync, is already operating on the Ethereum mainnet. In November, Matter Labs, creator of zkSync, announced it secured another $50 million in funding for further development of the technology.

“The new cash injection will be channeled into further developing zkSync v2, the firm’s second-layer rollups solution for Ethereum that is currently focused on facilitating low-cost payments,” Cointelegraph reported.

What’s the future for ZKP?

It’s bright according to Ethereum Founder Vitalik Buterin, who writes:

“In general, my own view is that in the short term, optimistic rollups are likely to win out for general-purpose EVM computation and ZK rollups are likely to win out for simple payments, exchange and other application-specific use cases, but in the medium to long term ZK rollups will win out in all use cases as ZK-SNARK technology improves.”

Knowing about ZKP is a smart move for retail traders. As adoption of crypto and blockchains accelerates, watch for more to move toward this emerging technology that can add value to your portfolio.

Joyce Pavia Hanson