WTH are ZKPs? Making blockchain transactions private

Distributed ledger technology (DLT) underpins 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 nascent technology include dragging opaque and complex supply chains into the light of day, plugging 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.

When the internet as an infrastructure was still in its infancy, many futurists foresaw e-mail and e-commerce. But nobody predicted the profound effect social media as a whole would have on the free democracies of the world. In particular, concerns around privacy and the sharing of personal data have never been more relevant.

Similarly, blockchain technology is still in its early stages and the range of applications of such a technology are still yet to be fully determined. For many, there’s no doubt it will have a big impact on the future of financial services. But there is still much work to be done before the technology is ready for primetime.

Nothing to fear

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

Anoma founder Adrian Brink

Brink describes Anoma as a “fabric of protocols and mechanisms for self-contained and self-sovereign coordination”.

Built on the backbone of advanced cryptography, programming language theory and research, this “internet of blockchains” is designed to address the growing problem where every decentralised blockchain resides in its own silo, much like the early days of the internet.

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

This is where ZKPs come in. “Mainly, they enable computational scalability, and they enable computational privacy,” Brink says.

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

This issue of privacy is being promoted by both customers as well as big corporations and financial institutions.

“Neither my parents want their neighbours to know how much money they’re making, or what they specifically own. Neither does any company want all their competitors to know exactly what transactions are executing,” Brink states.

Privacy is a good thing, and the digital world needs more of it. But as we march towards Web3, could nefarious or bad actors utilise ZKPs to hide transactions that enable money laundering and drug dealing on the dark web, for example?

“Yes, but I think if anyone 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 way better at it and can do it at a much bigger scale,” Brink says.

3 > 2

Brink believes the reality of Web3 differs from what many people might expect. The general notion that people have when using so-called Web2 services — that transactions with your bank, or dealings with the financial system, for example, are between you and the relevant party — “simply doesn’t match the reality in Web3 where all your information is public”, Brink says.

ZKPs therefore make mainstream adoption of decentralised finance more palatable to the public and financial institutions. In order to gain or have mainstream adoption of blockchain tech, it needs to be private.

If the world’s financial system was to migrate to a transparent blockchain tomorrow, Brink says, every single government and country around the world would immediately ban these systems on the grounds of national security concerns.

“If the US financial system was a transparent system, foreign adversaries could use that data to target US interests,” Brink says.

Making transactions private on the blockchain will not only make the technology useable for big players in the system, but also has rather obvious benefits to individuals using financial services on the blockchain.

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

Web2, our current iteration of the internet, is built on a foundation of individual data being hoovered up and sold to third parties. Brink believes building privacy into Web3, the blockchain, would refashion our relationship not just with our own data, but the entities that capitalise on said data.

People power

The non-consensual usage of sensitive data by third parties, where you are the product, is rampant. Therefore, Brink says ZKPs are “an absolute requirement – a necessity”.

“No single financial regulator or government in their 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 surveillance programme, “any random dude with an internet connection can run the same kind of financial analysis and microtargeting that the NSA can currently do”.

Transaction data is up there with health records in terms of sensitivity as well as monetary value to companies and governments. As we enter this new world, where everyone and everything is on the public ledger, ZKPs are a way to address some of the mistakes 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 with regards to the ways in which individuals’ data is harvested and monetised on the internet, effectively putting more power back in the hands of the people.