Although the blockchain industry has rightly identified key issues in the world of old technology, finance, art and culture, the promised revolution has yet to materialize as the tools being designed to address these challenges are not yet at the required level are.
Technical inefficiencies have hindered the development of truly decentralized systems, and decentralized finance (DeFi) platforms have shown vulnerabilities to their own data breaches. From January to November 2023, more than $1.7 million in assets was lost due to hacks, with almost 300 specific incidents.
As we enter 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 ZK industry’s continued growth should see a diversification and proliferation of use cases this year, including major improvements in data protection, privacy and compliance.
By providing more secure and efficient tools to blockchain developers, the widespread benefits of ZK technology will be felt, with a wider range of applications across industries by 2024. Rather than being deployed within isolated Web3-native use cases intended to compete with traditional finance and technology, ZK technology can be integrated into legacy systems and platforms, infusing them with the benefits of crypto’s decentralized values . thus significantly increasing user empowerment. It achieves this by ensuring robust data management and privacy preservation, enabling a more liberated and secure user experience without compromising user peace of mind.
The scalability of zero knowledge continues to increase
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 proven revolutionary for the Ethereum ecosystem, where rising demand for blockspace has led to an increasingly crowded network with high fees, creating barriers to mass adoption. Scaling solutions such as sharding, sidechains, state channels, and rollups have helped address scalability issues to improve the developer and user experience, while maintaining Ethereum’s highly regarded security and transparency values.
The same features 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 deploying ZK technology for a variety of use cases, not only for scaling, but also for data protection and compliance, which will lay the foundation for major changes in Web2 and Web3.
ZKPs broaden the scope of user data protection
Apart from all the benefits of scalability, it is data protection that will prove to be the killer use case for ZKPs, supporting 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 side issues for people who communicate online. This is by design: traditional digital platforms lure users with free access and services, leaving the true costs of collecting and using valuable user data for analytics, targeting and advertising purposes hidden in the fine print.
However, recent surveys show that consumers are increasingly concerned about the risk of data and privacy breaches via their tech devices, with up to three quarters of survey respondents agree they need to do more to protect themselves.
As data breaches become more expensive – increasing to 4.45 million Average US dollars in 2023 – projects across industries seek innovative solutions to prevent and reduce the impact of hacks and exploits. By allowing users to store personal information off-chain and enabling secure disclosure of sensitive data, ZKPs can reduce the vulnerabilities caused by the collective storage of data, which is a prime target for hackers.
In 2024, the industry can expect to see a number of ZK-based privacy tools evolve and become ready for use, 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 the Blockchain space
ZK technology can also address key data management challenges in other industries, proving to be a game-changer for the mass adoption of blockchain technology.
With users’ growing concerns about data breaches, traditional social media and Web2 platforms, which are often built on a data mining model, could integrate user privacy-enhancing features powered by ZK technology, such as secure end-to-end messaging.
In other cases, it may be institutions that need to protect sensitive data sets and are the first to apply ZKPs for privacy reasons. For example, in the areas of supply chain management, logistics and telemetry, ZKPs can be used to verify activities while releasing the least amount of data needed between two parties. Not only is this efficient, but it can also be important for preserving intellectual property rights and reducing one party’s data management burden.
Similarly, governments and other institutions that handle sensitive data can adopt decentralized identifiers (DiDs) that can be used to verify identity and other information while optimizing privacy. Residents have been living there since 2014 Estonia have been given a state-issued digital identity to access public services, a model that the European Union is looking and several countries are on their way to pursuing this.
ZKPs enable DeFi with a path to 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 that banks and large-scale investment firms must adhere to in many jurisdictions. Likewise, traditional businesses may be put off by the transparent properties of the blockchain, as they may not want the details of every transaction documented in a 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 unnecessary information, striking a balance between DeFi values and TradFi responsibilities. For example a report from Etonec shows how ZKPs can be used for compliance in a privacy-preserving fiat stablecoin system.
Like privacy-optimizing solutions, ZKPs can provide 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 bring financial freedom to the masses, DeFi platforms must offer users a wide range of options.
Developer-friendly tools accelerate innovation on all fronts
ZKPs support the modular evolution of blockchain and provide the building blocks to enable key functions such as scaling, privacy, compliance and, most importantly, interoperability.
Unlike a monolithic blockchain like Bitcoin, where all transactions are executed on a single layer, modular blockchains delegate functions to specific modules that together form an interoperable system. By reducing the workload of a specific component, modular blockchains reduce the chance of bugs and enable more efficient development.
In the current landscape, layer 1 protocols are seen as competitive, but with the modular evolution of blockchain, the idea of the blockchain layer will change to one of modular building blocks. As small attestations of data that can be cheaply verified and bridged across chains, ZKPs will become the glue that holds this interconnected system together.
The specialization of tasks allows each module to progress more quickly. For example, developers can focus on improving compliance because scale is already being taken care of, leading to more experimentation and innovation on all fronts.
What’s on the horizon in 2024?
In a constantly changing industry landscape and macroeconomic environment, adaptability is key to the survival of any technology. Zero Knowledge Proofs have proven to be just that: an infinitely adaptable tool for tackling a wide range of challenges. Leveraging the power of ZK, we will see an expansion of use cases in the coming year beyond scale, with a primary focus on data management, attestations and applications across industries.