Will Zero-Knowledge Proofs Build the Future of Blockchain Payments?

If there’s one cryptography term you need to know to see if blockchain can change the payments industry, it’s zero-knowledge proofs.

The applications are straightforward: Using a zero-knowledge proof (ZKP) key, a payments app can query your bank to see if you have enough money in your account to cover a transaction without telling the inquirer anything about your account balance. Or the app can prove that your household income meets a credit card issuer’s requirements without revealing what it is.

It is an authenticating mechanism that can do so without a trusted intermediary having to access that data and being relied upon to keep it safe.

Instead of your mother’s maiden name and the make of your first car, you can send cryptographic proof of your identity without having to reveal any private information. Instead of handing the nightclub door bouncer a driver’s license with your name and address, you could just show an app with access to the state DMV that simply bounces back an over-or-under-21 response.

Medicine is another key field rich with ZKP uses. An employer could be given enough access to employees’ medical records to determine how many employees have diabetes or high blood pressure, for example, without gaining any knowledge of which ones. Equally, a health insurer wouldn’t necessarily need to know why a doctor is prescribing a medicine, just that it is for a condition that is covered.

Blockchain Uses

All you really need to know about the mathematics and cryptography behind ZKPs is that they are important enough that Algorand blockchain creator and MIT professor Silvio Micali and two colleagues won the 2012 A.M. Turing Award — computing’s most prestigious honor — for a body of work it containing it.

Read more: What’s Algorand? The Blockchain Securing Transactions by Spreading the Wealth

ZKPs are also useful enough for the technology to be spreading far and wide.

In June, several dozen companies with an interest in cryptocurrency joined to sponsor the new ZPrize, which seeks to make practical applications of ZKPs more efficient, scalable and industry-friendly and to “ensure that the innovations discovered to do so are ‘locked-open under fully open-source licenses.”

Its backers include not just the Algorand Foundation but competing smart-contract blockchain Polygon, along with Samsung, chip-maker AMD, the Ethereum Foundation, Bain Capital and Protocol Labs — which is building the actual technology that a Web3 next-generation internet would use.

In the crypto world, one high-profile user of zero-knowledge is Electric Coin Company, issuer of Zcash, a privacy coin. It added a wrinkle to ZKPs that you might come across: zk-SNARKs, a technology that allows blockchain consensus mechanisms to verify the validity of transactions despite their being fully encrypted before being added to the blockchain.

See also: Privacy Coins: Blow for Freedom — or Boon for Crime?

And while privacy coins are a type of cryptocurrency with a lot of baggage, zk-SNARKs have a lot of uses. For one thing, it is fast. SNARKs is an acronym in which the “S” stands for “succinct” as it can complete verification within milliseconds — that is to say, in real time.

The Next Level

Another spinoff is zk-Rollups, a scaling solution used by Ethereum smart contracts to process transactions more efficiently. It is key to the Layer 2 solutions that seek to make Ethereum faster and cheaper by taking the work of a transaction off the main blockchain onto a second layer sitting on top of it, and then rolling a batch of them up into a single transaction to be sent back down and written onto the blockchain — for a single transaction fee.

An offshoot of that is Nightfall 3, professional services giant EY’s ZK Optimistic Rollups — a Layer 2 toolset for privately, quickly and inexpensively managing transactions on Ethereum.

Among the tools EY is developing are “verifying identities and tracking stolen NFTs (and insuring, canceling and replacing them, all under privacy),” EY global blockchain lead Paul Brody wrote in a CoinDesk column in September.

While it currently “unlocks several business cases like inventory management” and more advanced tools that can handle more complex business logic but it doesn’t yet support complex business logic, Brody wrote.

Once those tools are built and Nightfall 3 can handle things like “volume discounts and rebates, we can start to implement typical enterprise business agreements in procurement, for example,” he added. “Then it will be possible to not only capture the movement of assets but also the smart contracts that govern ordering and payment as well.”

For all PYMNTS crypto coverage, subscribe to the daily Crypto Newsletter.