Zero-knowledge (ZK) proofs make it possible

Cryptocurrencies such as Bitcoin, Ethereum, Cardano or Solana use blockchains on which transactions are publicly visible to everyone. Once you have verified yourself as a user on a stock exchange using a know-your-customer (KYC) procedure, you leave traces on blockchains for the rest of your life.

Zero-knowledge technology wants to solve exactly this problem and offer users of blockchains more privacy. This could be of great interest, especially for users of DeFi protocols. Because it is obvious that as an investor you do not want the whole world to be able to see how much capital you have in your bank account (wallet). For this reason, below we look at how ZK technology solves this problem.

With the help of ZK technology, transactions can be verified while at the same time ensuring that no details about the transaction other than the date and time are left on a blockchain. Only the two transaction partners can access the detailed information on a specific transaction.

For example, zero-knowledge technology enables private individuals, companies and governments to check and verify transactions that contain personal information (credit, age, gender …) without leaving them on a blockchain for everyone to see have to. This is a more secure method of verifying information and relieves data traffic on blockchains immensely, since all transactions no longer have to be stored on the main chain of a blockchain.

Early pioneers of using zero-knowledge proofs in the context of blockchain include Zcash and later JP Morgan, who use the technology to verify remittances.

Zero-knowledge technology is on the rise

ZK-Proof-based protocols are now widespread in the DeFi space, but are currently used primarily for scaling purposes and only rarely for privacy functions. DeFi experts assume that this could change in the future and that more and more protocols will also implement privacy functions. In addition, there are in the DeFi community manywho are convinced that ZK Proofs are fundamentally superior to other privacy and scaling technologies in the long term.

DeFi applications in particular are currently using ZK technology – but in theory the technology can be used for transactions of any kind.

For example, it would also be possible to send a non-fungible token (NFT) anonymously using ZK technology. A project dedicated to this task, among others, is Immutable X.

Scaling Decentralized Finance with ZK Technology

As already mentioned, ZK technology allows not only more privacy, but also more efficient and faster transmission of transactions.

The Ethereum scaling solution Polygon even goes so far and claimsthat ZK technology is critical to their goal of one billion users.

Thanks to zero-knowledge technology, DeFi protocols do not have to write every token transfer that is processed via their protocol as a single transaction on the blockchain. Namely, with the ZK technology, hundreds or even thousands of transactions can be rolled up into a single transaction. This bundled transaction can then be transmitted to the main chain of a blockchain as a single bundled transaction in a so-called ZK rollup.

For example, the zero-knowledge technology-based scaling solution Hermez bundles Ethereum transactions:

ZK technology is about to fundamentally change the DeFi space. On the one hand, it can help to scale blockchains effectively and securely. On the other hand, it can provide its users with an increased level of privacy.