Can zero-knowledge proof save cryptocurrency?
Blockchain has transformed many industries, from healthcare to real estate to banking. But despite the “unhackable” hype, flaws in Blockchain technology undeniably undermine the goals of bringing greater security, transparency and privacy to the world.
Between January and November 2022, hackers stole $4.3 billion worth of cryptocurrency – marking a 37% increase from 2021. It was the worst year for crypto fraud, and the outlook remains grim.
For years, experts have touted zero-knowledge encryption as a potential game changer for Blockchain applications. In 2023, that theory will be put to the test – but will it be enough?
How the crypto industry crumbled in 2022
Blockchain technology aims to solve problems related to digital currencies. The immutable ledger of transactions is linked together with digital cryptography and shared publicly across a decentralized network of computers around the world. It must be unbeatable.
That’s the theory. But in reality Blockchain is an imperfect system. Despite the system’s promise of virtually impenetrable security, hackers routinely steal millions from users of decentralized finance (DeFi) platforms through phishing scams, routine attacks and endpoint vulnerabilities.
Ironically, cybercriminals defraud lenders and investors by using the very anonymity that gave investors more control over their finances. The Federal Trade Commission (FTC) reports that cryptocurrency accounts for one in four dollars lost to online fraud – more than any other payment method.
While Blockchain involves much more than digital coins, the technology’s failure in the cryptocurrency market does not inspire public confidence. In 2022, three of the biggest Blockchain hacks in history happened.
Back-to-back blockchain attacks
Wormhole leaves the back door open
In February 2022, hackers struck after an upgrade to Wormhole’s GitHub repository was not deployed to the live project. The $320 million theft included $47 million worth of Solana (SOL) – a major rival to Ethereum in the DeFi and NFT space.
A record-breaking hack hits Ronin Network
The largest cryptocurrency hack in history occurred in March 2022. Hackers stole $625 million worth of Ethereum and USDC stablecoin from the gaming-focused Ronin network. US officials say a North Korean state-backed hacking collective, the Lazarus Group, was responsible.
The long awaited Binance Hack
As the world’s largest cryptocurrency exchange by daily trading volume, the crypto industry feared a hack on Binance for years. In October 2022, the day finally came when hackers exploited a vulnerability to swipe 2 million BNB tokens worth $570 million.
Blockchain’s Darkest Hour: The Collapse of FTX
While Binance is the largest exchange, FTX was arguably the most important in bringing cryptocurrency and Blockchain technologies to mainstream consciousness.
Alameda Research founder Sam Bankman-Fried spearheaded a relentless marketing machine promoting FTX as the safe, easy way to start crypto investing. Flashy TV ads and celebrity endorsements captured the trust—and money—of millions. But in November 2022, the $8 billion empire imploded.
The revelation began with revelations that Alameda’s balance sheet was made up of the exchange’s own token, FTT. When Binance co-founder and CEO CZ Zhao announced that he was selling $500 million worth of FTT, the market panicked into a massive selloff.
Within days, FTT’s value plummeted, Bankman-Fried resigned and the company filed for bankruptcy. To rub salt in the wounds, hackers hit the exchange the next day, compromising another $415 million.
Can Blockchain Rise From Crypto Winter?
Forbes reported that the crypto market’s value lost 60% since November 2021, plunging from over $3 trillion to under $1 trillion.
The global market for hardware wallets is projected to grow from $245 million in 2021 to more than $1.7 billion by 2030, indicating the growing caution surrounding online exchanges. With prices cooling, consumer confidence in the security and privacy of digital currencies is at an all-time low.
If Blockchain is to live up to its billing as the technology that offers greater transparency, security and privacy, security teams and software developers need to look back at the underlying technologies.
Somewhat ironically, the savior that can secure the future of one of the most innovative technologies in the world may come from an ancient cryptographic method that predates the modern internet: zero-knowledge proofs.
What is Zero-Knowledge Proof?
A zero-knowledge proof (ZKP) is a cryptographic verification method where one party proves to another party that specific information is true without sharing any of the information itself. MIT researchers invented this protocol in the 1980s.
This is how it works:
- Zero knowledge proof involves two main parties: a prover and a verifier
- A proof person is a person or entity who wants to prove that the information is accurate and true – without revealing any underlying information
- A verifier is a person or entity who verifies whether the information is accurate – without ever accessing the underlying data
- To confirm the validity of the information, the verifier must perform a specific action repeatedly. As the prover continues to deliver the correct result every time, the verifier gains confidence that the data is accurate.
- When enough repetitions have convinced the verifier beyond any doubt that the data is accurate, the zero-knowledge protocol is complete.
How can zero-knowledge proof improve the blockchain?
With the integrity of Blockchain technology in question, cryptocurrency platforms and other Web3 applications can use ZKP to win the trust of investors and customers.
Here are five advantages of zero-knowledge proof of blockchain:
Privacy
The most pressing problem for Blockchain is the large number of people who fall victim to financial fraud. With ZKP, users can prove their identity on public applications without revealing any sensitive data, such as bank account credentials or social security numbers (SSN).
Simplicity
ZKP technology allows individuals, businesses and public bodies to verify data without the need for complicated encryption methods. Non-technical users can quickly and easily verify their identity to access apps.
Safety
Instead of using two-factor authentication that asks people to reveal their SSN, a ZKP algorithm can analyze and connect segments of the user’s information to verify their identity. By replacing ineffective authentication methods, ZKP protects sensitive user data and creates applications that are more resilient in the face of advanced cyber attacks.
Verifiable coincidence
Zero-knowledge protocols can generate randomness that is backed by cryptographic proof – delivered and verified entirely on the Blockchain. This innovation helps Blockchain games create unpredictable gameplay and allows NFT platforms to create provably fair coins.
Scalability
While Visa can process 24,000 transactions per second, Bitcoin can only do seven. ZK-Rollups can solve the Blockchain bottleneck by aggregating hundreds or thousands of token transfers into a single off-chain transaction. A team of Stanford researchers is working on Espresso, a program that uses rollups to improve privacy and scalability.
Use instances of zero-knowledge proof on the blockchain
In an age of mobile apps and digital banking, ZKP provides increased opportunities to improve the systems. Here are four use cases:
Electoral voting systems
One of the best applications for Blockchain is solving the problem of electoral fraud. ZKP and Blockchain will ensure that each registered voter can only vote once and provide immutable, mathematical proof that their vote will be included in the final tally.
Private transactions
The principle of transparency means that everyone can see every transaction that happens on public blockchains like Bitcoin and Ethereum. Naturally, many people have privacy concerns about this openness. ZKP allows people to conduct private transactions on public blockchains, giving them greater confidentiality as a result.
Private messaging applications
With traditional messaging applications like Facebook or WhatsApp, you have to verify your identity to a server. The end-to-end encryption of ZKP enables decentralized platforms to verify users without accessing any of the user’s personal information.
Document sharing
As the zero-knowledge protocol encrypts data in pieces, users can further control the visibility of their information. By combining ZKP and Blockchain, users can securely share confidential data, giving access to some and limiting visibility to others.
ZKP can restore trust in Blockchain
If Blockchain aims to shape the world’s future, the ailing health of its first major initiative is a worrying barometer. But while cryptocurrency is still a volatile project, Blockchain will prevail.
However, changes are needed if we are to unlock the full potential of this revolutionary technology. The transformation starts with rebuilding the basic principle of Blockchain: reliable transactions.
Zero-knowledge proof can introduce greater privacy to public blockchains without sacrificing their decentralized nature. As developers and security experts work together, industries can look forward to more secure digital ecosystems that provide users with a proven guarantee of trust in every transaction.
Learn more about the future of Blockchain and cryptocurrency on the Security Intelligence blog.
