Cryptocurrencies like Bitcoin, Ethereum, Cardano or Solana use blockchains where transactions are visible to everyone. Once you verify yourself as a user on an exchange using the Know Your Customer (KYC) process, you will leave footprints on blockchains for the rest of your life.
Zero-knowledge technology aims to solve exactly this problem and offer blockchain users more privacy. This could be of great interest, especially for users of DeFi protocols. Because obviously as an investor you don’t want the whole world to see how much capital you have in your bank account (wallet). For this reason, below we will look at how ZK technology solves this problem.
With ZK technology, transactions can be verified, ensuring that no transaction details other than the date and time remain on the blockchain. Only two transaction partners can access detailed information about a particular transaction.
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For example, zero-knowledge technology allows individuals, companies and governments to control and verify transactions containing personal information (credit, age, gender…) without leaving them on the blockchain for all to see. This is a more secure method of verifying information and greatly reduces data traffic on blockchains, since all transactions no longer need to be stored on the main blockchain.
The first pioneers in the use of zero-knowledge proofs in the context of blockchain are Zcash and then JP Morgan, who use this technology to verify money transfers.
Ignorant technology on the rise
ZK-Proof based protocols currently dominate the DeFi space but are currently used mainly for scaling purposes and rarely for privacy features. DeFi experts suggest that this may change in the future and that more and more protocols will also implement privacy features. In addition, many in the DeFi community believe that ZK Proofs are fundamentally superior to other long-term scaling and privacy technologies.
In particular, DeFi applications currently use ZK technology, but in theory this technology can be used for transactions of all kinds.
For example, it would also be possible to anonymously send a non-fungible token (NFT) 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 provides not only greater privacy, but also more efficient and faster transaction transmission.
Polygon’s Ethereum scaling solution even goes so far as to claim that ZK technology is necessary to reach the one billion user goal.
With zero-knowledge technology, DeFi protocols do not need to record every token transfer processed through their protocol as a single transaction on the blockchain. Namely, with ZK technology, hundreds or even thousands of transactions can be combined into a single transaction. This merged transaction can then be transmitted to the main chain of the blockchain as one merged transaction in a so-called ZK rollup.
For example, the Hermez zero-knowledge scaling solution aggregates Ethereum transactions:
ZK technology has the potential to revolutionize the DeFi space. On the one hand, it can help to efficiently and securely scale blockchains. On the other hand, it can offer its users an increased level of privacy.
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