The Future of Banking: Ccoin Finance Blends Crypto with Classic Banking

· Introduction
· What is Zero Knowledge Proof?
· How do Zero-knowledge Proofs Work?
· Types of Zero-Knowledge Proof Technology
∘ What is Zero-Knowledge SNARK?
∘ What is Zero-Knowledge STARK?
· Applications of Zero-Knowledge Proof
∘ 1. Privacy
∘ 2. Scalability
∘ 3. ZK RollUps
∘ 4. Financial Industry
∘ 5. Online Voting
· Limitations of Zero-Knowledge Proofs
∘ 1. Hardware Costs
∘ 2. High Gas Rates
∘ 3. Threats of Quantum Computing
∘ 4. Assumptions of Trust
· Conclusion

Introduction

Blockchain is a decentralized system that keeps records in a secure, transparent, and immutable way, making it useful for different purposes, and since transactions on the blockchain are public, anyone can trace some sensitive or confidential information through relevant transaction details.

How can we ensure that transaction information is correct while protecting our privacy? In order to solve these problems, one of the widely used methods in the blockchain ecosystem is known as zero-knowledge proof.

In this article, I will explain to you what zero-knowledge proof is, how it works, and where it can be used. Read on to learn more about zero-knowledge proof, the underlying technology that drives blockchain data protection.

What is Zero Knowledge Proof?

Zero-knowledge Proof (ZKP) is a mathematical protocol first proposed in the 1985 MIT research paper that verifies the authenticity of an information without revealing its content. The innovation lies in the elimination of the need to reveal certain information in order to prove the validity of a claim.

Let me give you an example to help you understand. Let’s say you want to create an account on a social network. Instead of sending your personal data like your email address, age, name, location, and date of birth for verification, you can send a ZK proof with which the social media company can cryptographically verify your identity.

In the example above, you are the prover, and the social media company is the verifier. ZK proof allows you to verify your identity without revealing any personal information. This way, your personal information won’t be leaked in case the social media company suffers a data breach or hack.

ZK proofs provide an effective and nearly risk-free way to share data. Using ZK proofs, we can retain ownership of data, greatly improve privacy protection, and hopefully make data leaks a thing of the past. ZK proof has three characteristics, and they are:

1. Completeness: If a claim is true, honest verifiers will be convinced by honest provers. That is, what is right cannot be wrong.
2. Soundness: If a claim is false, in the vast majority of cases a deceptive prover cannot make an honest verifier believe the false claim. That is, what is wrong cannot be right.
3. Zero-Knowledge: If a claim is true, the verifier cannot obtain any additional information other than knowing that the claim is true.

How do Zero-knowledge Proofs Work?

In the section above, we’ve talked about what ZK proof is; now, let’s talk about how it works. For ZK proof to work, three elements must be put in place, and they are:

1. Witness: The witness is the hidden information of the proof. A ZK proof starts when a verifier sets up a set of questions that can only be answered by someone who knows the hidden information, which is the prover.
2. Challenge: A verifier randomly chooses questions (math problems) and asks the prover to answer them.
3. Answer: The prover calculates the answer and sends it to the verifier. The prover’s answer enables the verifier to check whether the prover knows the witness (the hidden information).

The multiple interactions between the prover and the verifier explain the functioning of an Interactive ZK protocol. Advances in this field have led to Non-Interactive ZK protocols that require the prover and verifier to interact only once. in which the prover and the verifier share the key, and only one round of verification is required to make the ZK proof, and it has proven to be more effective.

The prover calculates the secret information through a special algorithm to generate a ZK proof and sends it to the verifier. The verifier uses another algorithm to check whether the prover knows the secret information. Once the ZK proof is generated, anyone with the shared key and verification algorithm can verify it.

Non-Interactive ZK proof is a major breakthrough in ZK proof technology and promotes the development of today’s ZK proof systems. The main methods are ZK-SNARK and ZK-STARK.

Types of Zero-Knowledge Proof Technology

There are different types of ZK Proofs with different performance and cryptographic assumptions. ZK SNARK and ZK STARK are the most popular proof systems in blockchain.

What is Zero-Knowledge SNARK?

ZK SNARK is an acronym for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, which is a protocol that generates ZK proofs. ZK SNARK has the following properties:

1. Zero-knowledge (ZK): Here, no information about the statement is revealed during validation. This means that the only knowledge a verifier has is whether the statement is true or false.
2. Succinct (S): This means that the ZK proof is small enough to be verified quickly.
3. Non-Interactive (N): This means that the prover and verifier only interact once, making it faster and more efficient.
4. Argument (AR): This means that the ZK proof is robust and difficult to fool.
5. Knowledge (K): This means that ZK proof of a claim cannot be created without access to the secret information.

What is Zero-Knowledge STARK?

ZK-STARK is the abbreviation for Zero-Knowledge Scalable Transparent Argument of Knowledge. Here is the breakdown of the ZK-STARK concept:

1. Zero-Knowledge (ZK): This refers to the preservation of privacy.
2. Scalable (S): This indicates that the verification time is substantially lower than naive calculations.
3. Transparent (T): This reflects the absence of a trusted configuration requirement.
4. Argument (AR): The ZK proof is robust and difficult to fool.
5. Knowledge (K): This refers to the security and strength of the cryptographic scheme.

Applications of Zero-Knowledge Proof

ZK proof has proven to be a general purpose technology with lots of uses and applications. Let’s take a look at some of it’s applications:

1. Privacy

ZK proofs allow you to securely share only the necessary information to obtain goods and services without revealing personal details, protecting them from hackers and the leakage of personally identifiable information.

For example, the cryptocurrency Zcash uses ZK-SNARKs to hide the sender, receiver, and amount of the transaction. This protects the your identity and property and also prevents transactions from being tracked or analyzed.

2. Scalability

ZK proofs are computationally very small relative to validity proofs for all off-chain transactions, and verification is very fast. This is thanks to an almost magical property: once they create a proof that says, “Yes, these calculations were 100% correct billions of times,” the verifier can confirm that the proof is correct without having to do it themselves by performing billions of calculations.

3. ZK RollUps

One of the main arguments in favor of ZK proof technology is it’s use to scale the Ethereum network through Layer Two (L2) rollups. Rollups process and verify transactions off-chain, aggregate them, and publish them to the main chain.

The main advantage of using L2 rollups is that it lowers gas fees on Layer One (L1) and allows L1 to process higher transaction volumes faster. ZK proofs are used to verify the correctness of off-chain execution. Thus, the L2 will execute off-chain transactions and send the ZK proofs for verification to the L1.

4. Financial Industry

Zero-knowledge proofs enable more secure and efficient information exchange between financial service providers and customers. When you want to get a loan, you can get a digital income certificate from the company to apply for the loan. The legitimacy of this proof can easily be checked cryptographically.

The bank can use a ZK proof to verify that our income reaches the required minimum, but it will not get sensitive, specific information. For example, ING in the Netherlands has adopted a ZK proof method called “Zero-Knowledge Range Proof (ZKRP)” to allow customers applying for home loans to prove that their income falls within a certain range of acceptable loans without telling them their exact revenue figures.

5. Online Voting

ZK proof can make the online voting system more secure and fair, allowing you as a voter to verify your right and obligation to vote without revealing your identity or choices. For example, you can use ZK proof to prove to the online voting system that you are eligible to vote without providing too many other clear documents, and with the blockchain system, you can use ZK proof to prove to the system that you have voted.

Limitations of Zero-Knowledge Proofs

We’ve talked about ZK proofs, types, and their applications, and it’s worth knowing that they also have some limitations, and they are:

1. Hardware Costs

Verifying a ZK proof requires specialized computers to perform complex calculations. These machines are expensive, creating a barrier to adoption and encouraging the centralization of computing power.

2. High Gas Rates

The high cost of the hardware required to perform complex calculations on the ZK protocol is passed on to the end user.

3. Threats of Quantum Computing

Advances in the field of quantum computing pose a threat to the security model of ZK SNARK protocols.

4. Assumptions of Trust

ZK SNARK use a common reference chain that can be reused by parties wishing to participate in the ZK protocol. This common reference chain is created in a trust-based setup where participants are assumed to be honest.

Conclusion

From what we’ve discussed in this article, I believe you now have a deep understanding of the wide applications, types of ZK proofs, development trends, and challenges facing ZK proofs in the blockchain ecosystem.

It is believed that with the development of more technology and cryptography, ZK proofs will achieve more breakthroughs in the future for building faster and more secure application services for the digital world.

Please like, comment, share, and follow me for more insightful explainers in the Web3 and crypto space.

Zero-Knowledge Proofs for Dummies: A Guide to Blockchain Privacy was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.