Zero-Knowledge Proof (ZKP)

ZKPs involve two separate parties. The first is called the prover, who generates evidence that a given statement is true. This evidence is then checked by a verifier. However, the verifier does not require access to the original information to do so. Instead, it makes use of cryptographic verification to check the statement while keeping the information confidential.

ZKPs have had major implications for blockchain privacy, giving users a means to transact without revealing their transfer history, balances and addresses — all of which is usually public information on a conventional blockchain. Cryptocurrencies such as Zcash use zero-knowledge proofs to selectively shield transactions, keeping the data private.

The privacy question is becoming increasingly relevant as more institutions enter the blockchain space. Most major financial firms prefer to keep their trading positions, balances and strategies confidential. If anyone could copy trade a major firm’s onchain positions, their competitive advantage would be undermined. Privacy-enabled blockchains offer a solution to this problem.

Another important application is blockchain scalability. Zero-knowledge rollups, or ZK-rollups, are networks that process large batches of transactions outside an underlying blockchain such as Ethereum. They then submit cryptographic proofs so that the main network can confirm that transactions have been executed correctly without having to process each one individually. This reduces the processing load on these base L1 chains.

ZKPs are also being utilized in emerging use cases across digital identity, regulatory compliance and data sharing. These could allow companies to verify their digital asset holdings with regulators — for example, a crypto exchange proving it holds sufficient reserves to cover user deposits — without publicly disclosing the underlying financial data.