While the blockchain industry has correctly pointed out key issues in the worlds of legacy tech, finance, art, and culture, the revolution promised is yet to materialize, with the tools being designed to address those challenges are not yet at the required standard.
Technical inefficiencies have stifled the development of truly decentralized systems, and decentralized finance (DeFi) platforms have shown vulnerabilities to data breaches of their own. From January to November 2023, over $1.7M in assets was lost due to hacks, with nearly 300 specific incidents.
As we begin 2024, things are looking brighter due to ongoing developments in zero knowledge (ZK) technology, which could be the key to unlocking the benefits of truly decentralized digital platforms. After gaining momentum in 2023, primarily through innovation in scaling solutions, the continued growth of the ZK industry this year should see a diversification and proliferation of use cases including important advancements in the areas of data protection, privacy, and compliance.
In bringing more secure and efficient tools to blockchain developers, the widespread benefits of ZK technology will start to be felt, with 2024 seeing a broader range of applications across different industries. Rather than being deployed within isolated Web3-native use cases aiming to compete with traditional finance and tech, ZK tech can be integrated into legacy systems and platforms, imbuing them with the benefits of the decentralized values of crypto, significantly enhancing user empowerment. It achieves this by ensuring robust data control and privacy preservation, thereby facilitating a more liberated and secure usage experience without compromising the users’ peace of mind.
Zero Knowledge Scalability Continues to Advance
Simply put, zero knowledge proofs (ZKPs) allow one party, the prover, to validate a statement to a verifier without revealing anything other than this specific truth. In practice, ZKPs allow complex computations to be performed off-chain, reducing congestion on the blockchain.
This has proved revolutionary to the Ethereum ecosystem, where rising demand for blockspace has led to an increasingly congested network with high fees, creating barriers to mass adoption. Scaling solutions like sharding, sidechains, state channels, and rollups have helped tackle scalability issues to improve developer and user experience while maintaining Ethereum’s well-regarded security and transparency values.
The same properties that make ZK ideal for reducing congestion on decentralized networks also bring greater data protection benefits. Looking ahead, we can expect to see more projects harnessing ZK tech for a variety of use cases, not just for scaling but also for data protection and compliance, which will lay the groundwork for major changes in Web2 and Web3.
ZKPs Broaden the Scope for User Data Protection
Putting aside all the benefits of scalability, it will be data protection that proves to be the killer use case for ZKPs, underpinning all other functions in blockchain applications. For context, data protection is a broader term than privacy as it encompasses security, integrity, and accessibility.
Data protection and privacy are often afterthoughts for people interacting online. This is by design – traditional digital platforms lure users in with free access and services, hiding the true cost in the fine print to collect and utilize valuable user data for analytics, targeting, and advertisement purposes.
However, recent surveys reveal that consumers are increasingly worried about the risk of data breaches and privacy infringements from their tech devices, with up to three-quarters of survey respondents agreeing they should do more to protect themselves.
As data breaches get more costly – amounting to 4.45 million U.S. dollars on average in 2023 – projects across various industries are seeking innovative solutions to prevent and reduce the impact of hacks and exploits. By empowering users to store personal information off-chain and enabling secure sensitive data disclosure, ZKPs can reduce vulnerabilities caused by the collective storage of data, which has been a prime target for hackers.
In 2024, the industry can expect a number of ZK-based privacy tools to advance and become user-ready, for example, ZK-login tools to streamline access to DeFi platforms, and ZK-based decentralized voting mechanisms to balance integrity and anonymity.
ZK Use Cases Outside of the Blockchain Space
ZK technology can also address key data management problems in other sectors, proving to be a breakthrough tool for the mass adoption of blockchain technology.
With increasing concerns about data breaches from users, traditional social media and Web2 platforms, which are often built on a data mining model, could integrate privacy-enhancing features for users powered by ZK technology, such as secure end-to-end messaging.
In other cases, it may be institutions required to safeguard sensitive data sets that are the first adopters of ZKPs for privacy. For example, in supply chain management, logistics, and telemetry, ZKPs can be used to verify activity while disclosing the least amount of data necessary between two parties. Not only is this efficient, but it can also be important for maintaining intellectual property rights and reducing the data management burden of any one party.
Likewise, governments and other institutions that deal with sensitive data can adopt decentralized identifiers (DiDs) which can be used to verify identity and other information while optimizing for privacy. Since 2014, residents in Estonia have been granted a state-issued digital identity for access to public services, a model that the European Union is seeking and several countries are on the path to emulate.
ZKPs Enable DeFi With a Path Towards Compliance
Collaboration with traditional financial institutions could bring much-needed liquidity to DeFi, but integrations have previously been stifled by contradictions between the principles of anonymity and privacy associated with DeFi and the KYC requirements banks and large-scale investment corporations must abide by in many jurisdictions. By the same measure, traditional businesses may be put off by the transparent properties of the blockchain, not wishing to have the details of every transaction documented on a public ledger.
With the use of ZKPs, DeFi platforms can verify that a user meets KYC requirements and also verify transactions without revealing identifying information or other superfluous information, striking a balance between DeFi values and TradFi responsibilities. For example, a report by Etonec demonstrates how ZKPs can be used for compliance in a privacy-preserving fiat stablecoin system.
Similar to privacy-optimizing solutions, ZKPs can offer more customizable compliance options, tailored to user needs. This is important because individuals have unique preferences when it comes to convenience and data protection. To deliver financial freedom to the masses, DeFi platforms need to offer a wide range of options for users.
Developer-Friendly Tools Accelerate Innovation On All Fronts
ZKPs support the modular evolution of blockchain, providing the building blocks to enable key functions like scaling, privacy, compliance, and importantly, interoperability.
In contrast to a monolithic blockchain like Bitcoin where all transactions are executed on a single layer, modular blockchains delegate functions to specific modules that make up an interoperable system. By reducing the workload of any specific component, modular blockchains reduce the likelihood of bugs and enable more efficient development.
In the current landscape, layer-1 protocols are seen as competing, but with the modular evolution of blockchain, the notion of the blockchain layer will morph into more of a notion of modular building blocks. As small attestations of data that can be cheaply verified and bridged across chains, ZKPs will become the glue holding this interconnected system together.
With the specialization of tasks, each module will be able to advance faster – developers can focus on improving compliance, for example, because scaling is already being taken care of, leading to increased experimentation and innovation on all fronts.
What’s On the Horizon in 2024
In a constantly changing industry landscape and macroeconomic environment, adaptability is the key to the survival of any technology. Zero knowledge proofs have proven to be just that – an infinitely adaptable tool for addressing a wide range of challenges. Harnessing the power of ZK, this coming year we will begin to see the expansion of use cases beyond scaling, with a primary focus on data management, attestations, and applications across various sectors.