Privacy for DeFi – Zero-Knowledge (ZK) proof make it possible

When it comes to blockchain privacy and scaling, zero-knowledge (ZK) proof have become indispensable. But what exactly is behind the technology and how could it take DeFi space to the next level?

Cryptocurrencies such as BTC, ETH, Cardano or Solana use blockchains on which transactions can be publicly viewed by everyone. Once you have verified yourself as a user on an exchange using a know-your-customer procedure (KYC), you leave traces on blockchains for a lifetime.

Zero-knowledge technology aims to solve precisely this problem and offer blockchain users more privacy. This could be of great interest, especially for users of DeFi protocols. Because it is obvious that as an investor you don’t want the whole world to see how much capital you have in your bank account (wallet). For this reason, let’s take a look at how ZK technology solves this problem below.

With the help of ZK technology, transactions can be verified, while at the same time ensuring that, apart from the date and time, no details about the transaction are left on a blockchain. Only the two transaction partners can access the detailed information on a specific transaction.

The zero-knowledge technology enables, for example, private individuals, companies and governments to check and verify transactions that contain personal information (credit, age, gender …) without leaving them on a blockchain for everyone to see have to. This is a safer method for checking information and takes a lot of load off the data traffic on blockchains, as not all transactions have to be stored on the mainchain of a blockchain.

Early pioneers of the use of zero-knowledge proof in the context of blockchain include Zcash and, later, JP Morgan, who used the technology to verify money transfers.

Zero knowledge technology is on the rise

In the DeFi-Space, ZK-Proof-based protocols are now widespread, but are currently mainly used for scaling purposes and only rarely for privacy functions. DeFi experts assume that this could change in the future and that more and more protocols also implement privacy functions. There are also in the DeFi community many who are convinced that ZK Proofs are fundamentally superior to other privacy and scaling technologies in the long term.

At the moment, DeFi applications in particular use ZK technology – theoretically, however, the technology can be used for transactions of any kind.

For example, it would also be possible to send a non-fungible token (NFT) anonymously using ZK technology. One project that has dedicated itself to this task, among other things, is Immutable X.

Decentralized finance scale with ZK technology

As already mentioned, the ZK technology enables not only more privacy, but also a more efficient and faster transmission of transactions.

The ETH scaling solution Polygon even goes as far as asserts that ZK technology is critical to their goal of one billion users.

Thanks to zero-knowledge technology, DeFi protocols do not have to write every token transfer that is processed via their protocol as a single transaction on the blockchain. With ZK technology, hundreds or even thousands of transactions can be combined into a single transaction (rollup). This bundled transaction can then be transmitted to the main chain of a blockchain as a single bundled transaction in a so-called ZK rollup.

For example, the scaling solution Hermez, based on zero-knowledge technology, bundles ETH transactions:

ZK-Technology is in the process of fundamentally changing the DeFi space. On the one hand, it can help to scale blockchains effectively and securely. On the other hand, it can give its users a higher degree of privacy.