Zero-knowledge (ZK)-based platforms and initiatives are proving to be among the most investable and adoptable in the Web3 space today. After a notable decline in Web3 VC investment in 2023, a slew of ZK-focused projects raised more than $45 million in funding in a single week in January.
So why is ZK technology proving so attractive to investors? Because 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 number of ways in which ZK technology improves the usability of Web3 through applications that promote user privacy, improve blockchain scalability, and enable self-sovereignty of personal data.
Private transactions
The first practical application of ZK proofs was in Zcash, which used a variant called ZK-SNARKs. These allow a prover and verifier to authenticate information without any personal interaction, and Zcash has leveraged this to enable private transactions on its network.
Now, privacy coins are largely frowned upon by regulators due to their ability to obscure financial activities. However, research has shown that ZK certificates can be a viable way to protect citizens’ privacy when using a central bank digital currency (CBDC), and the European Central Bank has previously proposed such a solution as well.
But the need for private transactions extends far beyond financial use cases and in some cases is much more urgent. For example, users have long had to tolerate having their online browsing privacy sacrificed at the expense of online advertising. While some progress is being made with Google’s planned phase-out of third-party cookies, advertisers will likely experience revenue losses.
But ZK-focused solutions could be the answer. AdEx, a Web3 advertising platform, just announced that it will introduce ZK-based ad targeting to its platform in 2024. Users can choose which types of advertisements they see through an opt-in scheme, with all data kept privately on the individual’s device. .
Such a solution has overall benefits: advertisers and publishers avoid all the hassles of GDPR compliance because data never changes hands, while delivering targeted ads at a lower cost. Meanwhile, users benefit from a curated ad feed and the ability to earn rewards, further supporting engagement and reducing the risk of ‘ad fatigue’.
Rollups for scalable blockchains and dApps
ZK verifications also address the inherent inefficiencies of a blockchain network. ZkEVM Layer 2 platforms, such as Linea, pull transactions from the Ethereum main chain and bundle them for processing using one ZK proof for each batch. The proof tells validators on the main Ethereum chain that the transactions are valid.
However, the real utility of scalable blockchains is that they can attract user activity for dApp development. BBO Exchange is one of the latest to join the Linea ecosystem and has 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 that uses Oracle Extractable Value (OEV) in the liquidation process. LPs can concentrate liquidity around a dynamic price range, significantly improving trading capital efficiency. This feature is only possible due to the scalability that a zkEVM platform offers.
BBOX is currently preparing to launch its signal-driven AMM on Linea, and registration is open for BBOX’s private testnet.
Identity verification
Online self-sovereign identity has long been a promising area for Web3 technologies, but in the transparent environment of a public blockchain, effective solutions that balance user privacy with the need for authentication are difficult to implement. However, ZK proofs provide a means by which a verifier can obtain confirmation of the identity element they need to know, but without the individual having to publish their personal data to prove the fact.
A simple example could be proof of age to make a purchase. It is usually not necessary for someone to prove their actual age, only that they are older than a minimum age. Using a ZK-based identity system, all the buyer needs to do is generate proof that he or she is of legal age based on the information provided within that system. They also don’t have to show a passport or driver’s license, which reveals much more information than the trader needs. As with AdEx, this setup also benefits the seller, as they do not process any personal data.
An example of a Web3 identity solution is zPass, an experimental protocol launched late last year on the Aleo zero-knowledge privacy network. Users upload their identity documents offline, allowing them to generate on-chain proofs based on the information they provided. Crucially, this solution also masks the public nature of the verifications themselves, meaning no one can track the process of the user performing verifications.
These applications represent only the first developed use cases for ZK technology; But even at this early stage, they show enough promise to capture investor interest after a prolonged downturn. If investment and innovation continue at this pace, more use cases will likely emerge as ZK solutions become more embedded in the Web3 ecosystem.
