ELI5:50 – What is a Zk-proof and why it matters for the future of finance

From securing blockchain transactions to enhancing privacy, Zero-Knowledge Proofs (zk-proofs) is a transformative technology reshaping the future of finance.

Let’s peel back the layers of this complex concept, from a five-year-old’s perspective to a fifty-year-old’s, and explore what it means for our emerging web3 economy. Spoiler: The words security and privacy come up a lot.

ELI5: Zk-proofs

Imagine you have a secret treasure chest. You can convince your friend you know what’s inside without revealing the treasure. That’s what zk-proofs do: they let you prove you know something without revealing the information. In the world of computers, this can help keep our financial transactions safe and private.

ELI50: Zk-proofs

Say you want to convince a friend that you’ve solved a complex puzzle, but you don’t want to give away your solution. So, you perform a series of actions that only someone with the solution could do. Your friend doesn’t get to see the solution itself, but they’re convinced you have it because they’ve seen you perform the trick that only a solver could execute. They gain the assurance without gaining the knowledge of the solution.

In computer science, zk-proofs perform a similar role. They’re a cryptographic method allowing someone to prove they know a specific piece of information (like a password or a private key) without revealing that information.

For instance, if Alice wants to prove to Bob that she knows the password to a system, she could use zk-proofs to prove she knows the password without actually telling Bob what the password is. Bob would be convinced that Alice has the correct password, but he wouldn’t learn anything about the password itself.

This concept, first introduced in 1985, is now crucial in the world of blockchain and finance, where it’s important to validate transactions and identities without exposing any sensitive information. It’s like showing you can unlock a door with a key without ever showing the key.

Zk-proofs and the Future of Finance

Ultimately, zk-proofs bring security and transparency to the world of public blockchains. Zk-proofs found their first widespread application in the cryptocurrency Zcash, setting a precedent for their use in finance. With the ability to validate transactions without revealing all transaction details, zk-proofs enhance finance’s security and privacy.

Zk-proofs transform finance by enabling efficient, privacy-preserving transactions globally. For example, zk-proofs are already being used in ‘ZK-rollups’ for Ethereum, dramatically improving scalability while ensuring secure transactions.

As we move towards a ‘connected’ web3 economy, a decentralized digital ecosystem where all devices are linked, zk-proofs will become increasingly crucial, ensuring that all transactions are secure and private, a critical requirement in a world where financial transactions can be conducted from any connected device.

Zero Knowledge in action.

Take Loopring as an example. This protocol utilizes zk-proofs to facilitate lightning-fast trades, all while ensuring high security and lowering costs. Zk-proofs enable Loopring to process transactions off-chain, significantly increasing the network’s speed and reducing the congestion on the Ethereum blockchain.

Similarly, zkSync, developed by Matter Labs, leverages zk-proofs to deliver a scalable and secure layer 2 solution. By adopting ZK-rollups, zkSync offers low gas fees, quick finality, and cryptographic security equivalent to Ethereum, thus aligning with the overarching goals of the web3 economy.

StarkWare and Matter Labs also employ zk-proofs in their layer 2 solutions to enhance transaction scalability. StarkWare utilizes zk-STARKs, a variation of zk-proofs, to increase throughput and reduce on-chain storage. Matter Labs, on the other hand, uses zk-rollups to batch multiple transactions into a single proof that can be verified quickly.

The adoption of zk-proofs by these prominent Ethereum scaling solutions not only enhances their performance but also collectively drives the potential of the web3 economy.

In this context, zk-proofs are an advanced cryptographic tool and a driving force propelling the web3 economy forward.

Thus, from an idea in an MIT paper to a cornerstone of the web3 economy, zk-proofs have come a long way. While we’re still in the early stages of understanding their full potential, one thing is clear: Zk-proofs will play a pivotal role in shaping the future of finance, paving the way for a more secure, private, and efficient digital financial world.