Zero-Knowledge Proofs is a Defi way to answer regulatory compliance in a decentralized way. Since 2021 crazy runs of Defi and the hype to replace the current financial system, regulators are urgently working to put up bank regulations to pressure Defi to comply. Unfortunately, the result is not looking great. Some Defi products will surrender to comply; others will examine a new path to answer regulations differently - Zero-Knowledge Proofs you mother f**k.

TL;DR

Zero-Knowledge Proofs gain more attraction because the government will intensify regulations of Defi. Regulators think Defi is Disneyland of the finance system, and they want them to become banks. Crypto has its way to making its place viable to all users through Zero-Knowledge Proofs technology.

Here is a 1 min summary of the article if you want to skip the reading.

Why Zero-Knowledge Proofs

The billion-dollar question is, do we need to know someone’s identification to verify them before trading with them so our transactions can be safely executed? The answer is, of course not! They want you to think this is the only and safest way to approach the question in the centralized system. Unfortunately, it is not the case in the technology world, particularly in crypto. Alternative routes are plenty to explore, only the lazy one will surrender their imagination to follow the leader. You will follow people’s paths and cannot get out of your way. Others will then lay out the future, and you have to follow them. A crypto way to answer Know-Your-Customer (KYC) regulation is ZKPs.

What is Zero-Knowledge Proofs

I wrote an article to explain the details here. The method allows one to know something without showing you what they have. Pretty cool! Like playing a card, both parties have their cards and try to understand what they got. There is a way to use the verification process to know what your cards have without letting people know what your cards are.

Proof of Knowledge

Bitcoin used Proof of Work not because it has to use but rather because at the time, Proof of Knowledge was patterned it. Few people knew that Bitcoin was intended to use a better version of Proof of Work as Proof of Knowledge. It is better because Proof of Knowledge achieves the truly anonymously transaction rather than Proof of Work only reached to Pseudo-anonymity and left a trace mark for others to track. The critical technique behind Proof of Knowledge is the Schorr Signature algorithm. Compared to Bitcoin’s Elliptic Curve Digital Signature Algorithm or ECDSA, the Schorr Signature algorithm is way better in terms of security.

Scalability Concerns

Despite all the benefits of security the Schorr Signature algorithm can provide, it is difficult to scale up the transaction with high speed since the algorithm spends more power on playing guess games rather than transact payments later. Speed up the process will trade off security and jeopardize the failure of the system to be prone to attack. Bitcoin’s Lightning Network has borrowed the idea of the Schorr Signature algorithm in shell and operated on the side chain without directly impacting the blockchain. Such side chain operation or Ethereum Layer 2 operation provides security features while speeding up the transaction as a current idea solution for layer 2 operations. Of course, there are many downsides when more users transaction with a large amount of data processing and highly changed imperfect information will share around parties.

2022 Is ZKPs Testing Year

ZKPs is one of many viable solutions for future crypto projects to test and run for. It provides a perfect current optimization solution on security and privacy issues (decentralization) but needs to trade-off from scalability and result of slower platform operations. Therefore, projects will need to test out their goals and what trade-off is required to implement the technology. One of the projects worthies keeping your eyes on is Polygon Zero. The project wants scalability and security together, while Ethereum is a path to sacrifice its decentralization to trade-off with its scalability.

In Conclusion

ZKPs may be a game-changer of Bitcoin standards since Bitcoin’s domination rate continues falling. It is crypto’s way to answer crypto regulations, and yet keeping crypto decentralized is a future way to evolve crypto projects.

Stay tuned for the 2022 Prediction #4: Regulated Defi On-Chain KYC