In 2015, the Ethereum protocol proposed a vision for a decentralized world computer capable of rearchitecting a free and open internet – removed from the whims and constraints of centralized entities. While Ethereum has become the foundation for Web3 as we know it, its growth was underscored by the upgrades that would be required to realize its full potential. As a result, layer 2 has emerged as clear frontrunners in the race to scale the network for mass adoption. Systems using zero-knowledge (ZK) technologies are among the most promising – and their potential isn’t limited to scaling.
Mihailo Bjelic is the co-founder of Polygon. This article is part of Crypto 2023.
ZK-powered technology is expected to revolutionize myriad sectors from gaming to payments, and from digital identity to enterprise solutions. Looking ahead, 2023 promises to be the year ZK tech truly starts to take off.
What is zero-knowledge technology?
Zero-knowledge technology refers to tools that use cryptography to prove that something is true without revealing any additional information other than the fact that it is true. The value of such a tool for crypto is that it greatly reduces the costs of processing data (such as transaction data on a blockchain) without compromising the security or decentralization that make these monetary networks unique.
The application of ZK tech allows blockchain networks to prove the authenticity of their operations in the most efficient way, using the fewest possible steps. This has the power to be transformational for Web3 development by reducing costs, increasing throughput capacity, and expanding potential use cases far beyond what is currently possible.
There is little doubt among blockchain developers that ZK technology represents the ultimate solution to blockchain scaling. For many, it’s the most crucial development in ensuring a fair internet environment for the free exchange of value and digital ownership of assets and data, all without being subjugated to centralized control.
Until recently, ZK-based scaling was limited by its incompatibility with the Ethereum Virtual Machine (EVM). It’s not strictly incompatible, of course, but perhaps unfriendly. In fact, many industry participants projected that it would take more than a decade to build a performant, EVM-compatible ZK rollup. Fortunately, it took considerably less time than that.
While the Ethereum Merge in 2022 was instrumental in transitioning the network from proof-of-work (PoW) to the more efficient proof-of-stake (PoS), it represents just the first step in the broader Ethereum road map, with improvements to how on-chain data is stored likely to be the next step.
The realization of this road map may take years, though it’s clear that ZK technology is a part of Ethereum’s long-term vision. Indeed, Ethereum co-founder Vitalik Buterin has stated outright that ZK rollups are the solution to scaling Ethereum. Given this, it's critical that the development and application of ZK tech adhere to the core ideals of Web3, with transparency chief among them.
Users cannot truly trust the outputs of a ZK-powered tool if they cannot independently verify its inputs. In this way, transparency requires proving systems that have source-available code for every component.
How will ZK tech benefit crypto?
As mentioned, ZK has a wide range of applications but there are several where there is value in the near term.
With ZK’s ability to increase throughput and security and reduce fees, ZK rollups will also be a meaningful tool for the decentralized finance sector. Leveraging Ethereum's robust security and decentralization while providing scale in a trustless way could take DeFi to the next level.
Similarly, zero knowledge tech could have a knock-on effect on the payments industry. Crypto has failed to become a widely accepted channel for business and consumer payments, largely a consequence of limited scalability and high fees (and taxes, but that’s a separate issue with a less-technical solution). Breakthroughs such as zkEVM look to challenge this, allowing robust payment stacks to be realized on Ethereum.
Additionally, for blockchain gaming applications to match the volume of users seen in the mainstream gaming sector, ZK rollups will be essential for processing the hundreds of thousands, if not millions, of micro-transactions that a typical blockchain game would require.
Another area rife for the kinds of innovation that zkEVM can bring is enterprise blockchain solutions. Until now, enterprise users have been wary of the security issues presented by decentralized networks and their perceived lack of oversight and accountability.
Zero-knowledge technology is the very thing that will deliver accountability to decentralized networks without submitting to arbitrary oversight. Its implementation will provide the kind of security that enterprises need to interact with decentralized blockchains.
ZK tech is also being applied to digital identity, providing a decentralized, privacy-first means for users to verify their credentials and identity without ever revealing personal information. Such an ID offers a decentralized solution for users to comply with know-your-customer (KYC) and anti-money laundering (AML) checks without relying on third parties to store and process their data.
In response to the collapse of the FTX exchange, Vitalik proposed a ZK-based solution for preventing future FTXs. A cryptocurrency exchange could use Zero-Knowledge proofs to demonstrate solvency by publishing a proof of reserves. This would allow an exchange to confirm it has the liquidity to cover customer withdrawals without revealing the sensitive business information contained therein.
With so much potential coming from a single technological breakthrough, it's increasingly difficult to argue that ZK rollups won't play a central role in the broad adoption of cryptocurrency. While this list of possible use cases is by no means comprehensive, what is more likely is that the most useful, groundbreaking application of ZK doesn’t yet exist.
As a helpful analog, consider that the explosion of social media was in part the consequence of its being an application that could only exist on the internet – it had no real world antecedent. Somewhere there is a young dev with a nascent idea for something that can only be built on a blockchain.
ZK rollups and zkEVMs are bringing Ethereum's vision of a decentralized web into focus.