Zero-knowledge (ZK)-based platforms and initiatives are currently proving to be among the most investable and adoptable in the Web3 sphere. Following a notable slump in Web3 VC investing during 2023, a slew of ZK-centric projects pulled over $45 million in funding over a single week in January.
So why is ZK technology proving so alluring to investors? Since the first practical applications of ZK cryptography only emerged in the context of blockchain, the full range of use cases is still emerging. However, based on current developments, there are a range of ways in which ZK tech is enhancing the usability of Web3 through applications that foster user privacy, improve blockchain scalability, and enable self-sovereignty of personal data.
The first practical application of ZK proofs was in Zcash, which used a variation called ZK-SNARKs. These enable a prover and verifier to authenticate information without any personal interaction, and Zcash deployed this to enable private transactions on its network.
Now, privacy coins are largely frowned upon by regulators due to their ability to obfuscate financial activity. However, research has shown that ZK proofs could be a feasible way to protect citizens’ privacy when using a central bank digital currency (CBDC), and the European Central Bank has also previously suggested such a solution.
But, the need for private transactions extends far beyond financial use cases and is far more pressing in some cases. For instance, users have long had to tolerate the fact that their online browsing privacy has been sacrificed at the altar of online advertising. Although some progress is being made with Google’s planned deprecation of third-party cookies, advertisers are likely to see revenues suffer as a result.
But ZK-focused solutions could be the answer. AdEx, a Web3 advertising platform, has just announced it will introduce ZK-based ad targeting into its platform in 2024. Users can choose which types of ads they see via an opt-in arrangement, where all data is retained privately on the individual’s device.
There are all-round benefits to such a solution – advertisers and publishers avoid all the headaches of GDPR compliance since no data ever changes hands, while serving up targeted ads at a lower cost. Meanwhile, users benefit from a curated ad feed and the opportunity to earn rewards, which further supports engagement and reduces the risk of “ad fatigue.”
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Rollups for scalable blockchains and dApps
ZK verifications are also addressing the inherent inefficiencies of a blockchain network. ZkEVM Layer 2 platforms, such as Linea, take transactions off the Ethereum main chain and batch them for processing using a single ZK proof for each batch. The proof tells validators on the main Ethereum chain that the transactions are valid.
However, the true utility of scalable blockchains is that they can attract dApp development user activity. BBO Exchange is among the latest to join the Linea ecosystem, having just announced a successful pre-seed round led by prominent early-stage investors Hashed and Arrington Capital. The project has raised $2.7 million to develop the first perpetual DEX to use Oracle Extractable Value (OEV) in its liquidation process. LPs can concentrate liquidity around a dynamic price range, significantly enhancing trading capital efficiency. This feature is only possible thanks to the scalability offered by a zkEVM platform.
BBOX is currently gearing up to launch its signal-driven AMM on Linea, and registration has opened for the BBOX private testnet.
Online self-sovereign identity has long been an area of promise for Web3 technologies, but in the transparent environment of a public blockchain, effective solutions that balance user privacy against the need for verification have been difficult to implement. However, ZK proofs offer a means by which a verifier could receive a confirmation of the identity element they need to know, but without the individual needing to publish their personal data to prove the fact.
A straightforward example could be proof of age to make a purchase. It typically isn’t necessary for someone to prove their actual age, only that they are over a minimum age. Using a ZK-based identity system, the purchaser would only need to generate proof that they are of a legal age based on information they’ve provided within that system. They also don’t need to show a passport or driver’s license, which discloses far more information than is needed by the merchant. As with AdEx, this setup also benefits the merchant since they aren’t handling personal data.
One example of a Web3 identity solution is zPass, an experimental protocol that launched on the Aleo zero-knowledge privacy network late last year. Users upload their identity documents offline, enabling them to generate on-chain proofs based on the information they’ve provided. Crucially, this solution also masks the public nature of the verifications themselves, meaning nobody can track the process of the user giving verifications.
These applications represent only the first developed use cases for ZK technology; however, even at this early stage, they are showing enough promise to spark investor interest after a prolonged downturn. If investment and innovation continue at this rate, we are likely to see more use cases emerge as ZK solutions become more embedded into the Web3 ecosystem.