WHAT are ZKPs? Make blockchain transactions private

Distributed Ledger (DLT) technology supports many fintech applications, from cryptocurrencies and other digital assets such as non-fungible tokens (NFTs) to central bank digital currencies (CBDCs).

Other applications for this emerging technology include pulling opaque and complex supply chains into the light of day, connecting underbanked and financially underserved individuals into the financial ecosystem via digital IDs, retail CBDCs, smart contracts and payment on delivery, P2P- transactions and much, much more.

As the Internet as an infrastructure was still in its infancy, many futurists predicted e-mail and e-commerce. But no one foresaw the profound effect social media as a whole would have on the world’s free democracies. In particular, concerns about privacy and the sharing of personal information have never been more relevant.

Similarly, blockchain technology is still in its early stages, and the scope of applications of such technology has not yet been fully determined. For many, there is no doubt that it will have a major impact on the future of financial services. But there is still a lot of work to be done before the technology is ready for prime time.

Nothing to fear

When we talk about blockchain, there is another initialism you should be aware of: ZKPs, or proofs of zero knowledge. “ZKPs let you show that you know something without revealing how you know what you know,” says Anoma founder Adrian Brink FinTech Futures.

Anoma founder Adrian Brink

Brink describes Anoma as a “substance of protocols and mechanisms for independent and self-supreme coordination”.

Built on the backbone of advanced cryptography, programming language theory and research, this “internet of blockchains” is designed to solve the growing problem where each decentralized blockchain lies in its own silo, much like the first days of the internet.

But Anoma’s main goal is to facilitate private transactions on the blockchain.

This is where ZKPs come in. “They mainly enable computational scalability, and they enable data protection,” says Brink.

Transparent public blockchains have many benefits, but are obviously open to all to see. “Everyone wants to hide their transactions on the blockchain, just like in real life,” says Brink. And that, of course, is how the world works today. Transactions with your bank are open to the bank, but not open to the world, with all current interactions private except the counterparty to which they relate.

This issue of privacy is promoted by both customers as well as large companies and financial institutions.

“Neither do my parents want their neighbors to know how much money they are making or what they specifically own. Nor does any company want all their competitors to know exactly which transactions are being carried out, says Brink.

Privacy is a good thing, and the digital world needs more of it. But when we march towards Web3, can cruel or bad actors use ZKPs to hide transactions that enable money laundering and drug trafficking on the dark web, for example?

“Yes, but I think that if someone actually wants to commit a crime, they should use the traditional banking system. The best place to commit crimes is the traditional financial system.

“They are much better at it and can do it on a much larger scale,” says Brink.

3> 2

Brink believes that the reality of Web3 is different from what many people might expect. The general perception that people have when they use so-called Web2 services – that transactions with your bank, or trading with the financial system, for example, are between you and the party in question – “simply does not match the reality in Web3 where all the information yours is public, says Brink.

ZKPs therefore make mainstream adoption of decentralized finance more palatable to the public and financial institutions. To get or get mainstream adoption of blockchain technology, it must be private.

If the world’s financial system were to migrate to a transparent blockchain tomorrow, Brink says, every single government and country around the world would immediately ban these systems for national security reasons.

“If the US financial system was a transparent system, foreign opponents could use this data to target US interests,” Brink said.

Making transactions private on the blockchain will not only make the technology usable for major players in the system, but also have fairly obvious benefits for individuals using financial services on the blockchain.

If the utopian promises of Web3 are to be fulfilled, privacy is crucial

Web2, our current iteration of the internet, is built on the basis of individual data collected and sold to third parties. Brink believes that building privacy into Web3, the blockchain, will transform our relationship, not just with our own data, but the devices that exploit that data.

The power of the people

The non-consensual use of sensitive data by third parties, where you are the product, is widespread. That is why Brink says that ZKPs are “an absolute requirement – a necessity”.

“No single financial regulator or government in its right mind will ever allow the financial system to be transparent to the world,” Brink concludes.

What would that world look like? Instead of the NSA running a global financial monitoring program, “any random guy with an internet connection can run the same type of financial analysis and micro-targeting that the NSA can do at the moment.”

Transaction data is up with health records in terms of sensitivity as well as monetary value for companies and authorities. As we enter this new world, where everyone and everything is on the public ledger, ZKPs are a way to solve some of the errors around privacy and data that were made in previous iterations of the web.

What ZKPs really have to offer is nothing less than a paradigm shift in the ways in which individuals’ data is collected and monetized on the Internet, effectively putting more power back in the hands of the people.