Zero-knowledge proof (ZKP) is an encryption scheme where party A can prove the truth of specific information to party B without having the need to disclose any additional information. ZKPs offer both flexibility and choice to users who wish to have control and freedom over their information. If we were to combine both blockchain and ZKP technology, there will be multiple use cases to be discussed.

Context

Every day, users across the world browse the internet, accept cookies and share our particulars in order to access certain digital services and products. The multiple transactions that we engage in require divulging personal, financial, health and other information. All these are private details that we of course do not wish to be shared publicly but the likelihood of security breaches and illicit use of our personal data has still been gradually increasing. Whether we like it or not, we still tend to forego our privacy in exchange for services that digital platforms offer - such as recommendations, consultations, personalised assistance and so on. This is because these are services we cannot access if we were to utilize private browsing.

While the emergence of blockchain technology has helped to bring us towards greater transparency, immutability and decentralization, there have been several major drawbacks facing them. One prominent issue is the loss of privacy and anonymity in a heavily decentralized world. For instance, as the Bitcoin blockchain grows, it becomes harder for Bitcoin miners as it is only a matter of time that cryptocurrencies like Bitcoin will become so large that only a handful of nodes and miners will be able to store their transaction histories.

The services on blockchains today are pseudonymous, which means that they expose the state of accounts to all network participants. As such, while users can take back control of their assets, their personal privacy could be at risk when some of these private details are released into the world. This gradual centralization means that cryptocurrencies would become vulnerable to attack and manipulation, or even become so centralized that there would be no difference from traditional financial systems.

Thankfully, Zero-knowledge technology is found to have the capability to compress the size of a cryptocurrency blockchain into the size of a few tweets. The concept of ZKPs was first started by researchers at MIT in the 1980s. Think about providing verification of private information without the need to reveal the information itself at all, ZKPs can do just that. Although it has been a few decades since the development of ZKPs started, their time may have arrived as they now become easier to implement and more efficient computationally. We are likely to see a significant growth in interest and applications of ZKPs across industries and services before we know it.

Introduction

ZKPs can be used in the validation of crypto transactions managed on a blockchain and fight against fraud without the need to reveal data like which wallet did the payment come from, where it was sent, etc. In comparison, digital currency that does not incorporate ZKPs, such as Bitcoin, reveals all of these information.

ZKPs must have the following properties:

  • Completeness: If the statement made is true, the verifier will be convinced of it.
  • Soundness: If the statement made is false, nothing can convince the verifier that it is true.
  • Zero-knowledge: The verifier will learn nothing more than the validity of the statement.

ZKPs are advantageous in a myriad of application, which includes the following:

  • Proving statement on private data
  • Anonymous authorization
  • Anonymous payments
  • Outsourcing computation

ZKPs bring about the following benefits to blockchains:

  1. Make web services more secure

With ZKPs, users can now hash their password on-device, without having to send their password to any web service. No web service has achieved this so far as there is simply no way to confirm that a user has correctly hashed their password on the client-side.

However, by introducing the ZKP technology, services can verify the correctness of all computations on the user’s device without the need to go through another’s server. With a tested and proven algorithm, web services can be assured that their password was hashed.

2. Increase compliance and fairness

With ZKPs, exchanges can facilitate and validate users’ trades privately. This means that only the users can see the contents of the trade, not even the exchange. From this, we would think that another potential set of problems would arise: the non-disclosure of necessary information that complies with the important know-your-customer and anti-money laundering compliance laws (KYC/AML).

Thankfully, with ZKPs, an audit trail would be produced at the time of use. This audit trail allows users (and regulators) to verify the honesty and correctness of each trade that takes place on an exchange, which displays the beauty of ZKPs.

All in all, ZKPs will redefine the privacy guarantees that web services offer, and invert the model to allow users to truly control their financial assets and personal data, without involving third parties. Just as smart devices grew to become essential in our lives, a privacy layer for the web will set the grounds for how we interact and share in the future.

Secret Network Privacy VS. ZK-Snark Privacy

Secret Network is the first blockchain with privacy-preserving smart contracts.

The key difference between Secret Network and ZK Protocols is that $SECRET performs computations in Trusted Execution Environments (TEE) to achieve privacy, which is better for general purpose computation. On the other hand, ZK-snarks cannot achieve general purpose computation.

TEEs are basically a portion of the computer that can run computations and store data that are inaccessible to even the owner of the machine. This allows the nodes on the network to perform the computations while keeping the inputs, outputs, and state fully encrypted. This means ZK-Snarks can only do a computation that returns a “true” or “false” value, but they cannot return other values or store information.

Secret is fast but it relies on the TEEs, a piece of hardware that allows the network to perform calculations on encrypted values. There are some risks to doing things in hardware but it is really fast.

Meanwhile, ZK-technology enables projects like Dusk that have ZK-Snark primitives baked in, making them cheaper and faster than on chains that do not have ZK-snark. ZK-Snarks used to be slow but in the last few years, they have become fast. ZK-Snarks are proofs, not calculations. Dusk can do calculations on private numbers and generate cheap proofs that it happened correctly.

Industry Outlook

Although the concept of ZK-Rollups has been a topic of discussion for many months and years now, the time for them has finally come as the rollout of the first fully functional ZK-Rollups is imminent.

With Ethereum’s L1 being practically unusable for now, alternatives such as Solana, Avalanche, Fantom, and BSC have been all the hype this year. There has also been the rise of hot gaming projects that require a highly scalable, cheap and decentralized blockchain network to run on.

However, there are enough points to prove that the current L1s will not be scalable enough (and sufficiently decentralized) for mass adoption, especially since blockchain gaming requires 0 fee transactions. Essentially, L1s should serve the function as the settlement layer that focuses on maximum security and decentralization while L2s should focus on specialized use cases like gaming.

While optimistic rollups such as Optimism and Arbitrum have been rolled out recently, they have yet to gain significant traction. This is mainly because of their 7-day withdrawal period and the lack of token incentives. This is where ZK-Rollups will come into play, which will change everything. This is made possible with the leading projects in the space, such as StarkWare’s StarkNet and StarkEx (utilised by Immutable X, dYdX, and Sorare) and MatterLabs with zkSync 1.0 and 2.0.

Current Players

$ZEC

One of the hottest strategies in the space is zk-SNARKS (zero knowledge – Succinct Non-Interactive Argument of Knowledge). It can be used to define a quadratic equation which takes public data and private data (only known to prover) and inputs to generate proof, which can then be validated. For instance, ZCash network is the first crypto project to implement zk-SNARKS. There are many other use cases, such as proving one’s age without sharing date-of-birth or proving one’s identity without sharing details of their identity proof, etc.

$IMX

Immutable X is one of the best-known ZK-Rollup-powered protocols that is live. Although $IMX has only been launched for a short period of time, the NFT activity on this lightning-fast L2 network has experienced pleasant growths in the past few weeks. However, there is still a lot of room for improvements for $IMX, as their $30 million trading volume is still much lower than that of OpenSea, which averages between $50 and $100 million daily.

However, while $IMX could benefit tremendously from the increased ZK-Rollup hype and the increasing adoption of the protocol in the near future, we should also take into account their tokenomics, as highlighted in the following twitter thread: https://twitter.com/cryptoMaxi420/status/1457127205511655425?s=20


Hence, $IMX might not be the best bet to put our money in unless we are looking for a shorter term play.

$DYDX

dYdX is another ZK-Rollup-powered protocol that has been gaining traction. With over $1 billion in TVL, the derivatives’ trading protocol built on StarkWare’s StarkEx (same as Immutable X), is one of the best early demonstrations of the power of ZK-Rollups.

Rising Plays

If we want to bet on the emerging ZK-Rollup trend, especially since we have missed $IMX and $DYDX, we should capture the next rising plays as quickly as possible and increase our chances of getting rewarded with a retrospective airdrop. We can do so by:

  • Trying to identify early adopters of these L2s and speculate on their success or
  • Using and trying out the different L2s once they roll out (or even before on testnet).

Safer Plays

$MATIC:

Polygon is also another key player in the ZK-Rollup space. The team has been working hard towards transitioning Polygon from its current sidechain model (with certain security and decentralization trade-offs) to a fully-fledged ZK-Rollup L2.

In August 2021, the team successfully acquired the ZK-Rollup solution Hermez Network for $250 million. The following month, it launched Nightfall, a separate privacy-focused rollup built in collaboration with EY. Last week on 16th November 2021, they also introduced the ZK-Rollup solution Miden to scale Ethereum and support dApps focusing on use cases like gaming, NFTs, and social media.

Essentially, these 3 roll ups will serve the various purposes:

  • Polygon Hermez (ZK Rollup)
  • Polygon Nightfall (privacy focused Rollup, collab with  Ernst & Young)
  • Polygon Miden (STARK-based, EVM Rollup)

Although they have already launched a prototype, they will require more time than StarkWare to rollout the ZK-Rollup. As of now, the Polygon team has already sanctioned $1 billion for ZK-based rollups and plans to continue growing their suite of solutions.

With the ZK-Rollup narrative set to heat up in the coming weeks and months, it would not be surprising to see the light shining on $MATIC. With a market cap of $17,605,993,034, their price action has been doing well in the past week. Today, one $MATIC is worth $2.57, more than 10,500% increase in the last 365 days.

$MINA

Formerly known as Coda protocol, Mina protocol was founded by computer scientists Evan Shapiro and Izaac Meckler. After nearly 3 years of development, the Mina mainnet was launched in mid-march of 2021, sponsored by one of the biggest VCs in crypto, including Multi-coin Capital, Polychain Capital and Coinbase Ventures.

Mina protocol is the world’s lightest and smart contract compatible PoS blockchain that is designed to have a constant blockchain size of 22kb, the size of a couple tweets, even though more data is constantly being added into the blockchain. This is possible thanks to Mina’s use of ZKPs.

There are 3 key participants on the Mina blockchain:

  1. Verifiers: Similar to nodes on Bitcoin, they add security to the blockchain by holding that 22kb ZKP. Since this is such a small size, it makes it possible for everyone on the blockchain to become a verifier.
  2. Block Producers: Similar to miners on Bitcoin, they create blocks containing transactions and earn $MINA from transaction fees and block rewards. The key difference is that these block producers only store the current state of the blockchain and send a snapshot of this state to verifiers. There are no limits to the number of block producers and there is no minimum stake to become a block producer.
  3. Snarkers: They are tasked with taking snapshots of all the transactions taking place on the blockchain, without having to stake any $MINA to do so. Block producers pay snarkers for this service using a cut of their block rewards.

Mina’s technology makes it possible for multiple use cases such as proving that one has a high credit score to dApps without revealing his/her identity or credit score. Furthermore, they do not require a data oracle like other blockchains. They are even working to turn email accounts into ZKPs which means that we can log into applications with our email without actually revealing that address. Essentially, Mina aims to build a private gateway between the real world and crypto — and work towards the secure, democratic future that we all deserve.

As the world's lightest blockchain, Mina enables an entirely new category of Snarkified applications, also known as Snapps. Snapps are similar to how dApps operates, with 3 key differences in properties. With Snapps, users can:

  • Verify the integrity of a piece of data without disclosing what it is.
  • Verify correct execution of expensive computations.
  • Enjoy significant scalability benefits.

Mina will be run on top of Pickles SNARK, and there will be no need for a trusted set up and it is tailor-made to enable smart contract based Snapps on top of Mina.

In short, Snapps = Dapps + Privacy + Off-Chain Data + Scalability.

$MINA serves as the native currency of the Mina blockchain, which can be used to stake and produce blocks. It is also the exclusive currency of the Snarketplace, a place for block producers and SNARK producers to buy and sell SNARK proofs. $MINA is an inflationary token with no supply cap. A total of 1 billion $MINA, excluding future block rewards, will be distributed at launch. All tokens will be fully unlocked in 8 years.

MINA's annual inflation rate is 12% and this will drop to 7% after two years.

As of 27th November 2021, Mina’s testnet for Snapps has been completed. News for the mainnet launch should be expected soon and this is extremely bullish for $MINA’s price. With a current market cap of $1,221,726,563, there is still room for $MINA’s price to go up since the price has been consolidating around the range of $4-$6.

$DUSK

Dusk Network is a privacy blockchain for financial applications, using ZKPs as a basis for their smart contracts. They are essentially trying to automate costly processes and offer an open-sourced and secure blockchain infrastructure.

Dusk aims to become the first layer 1 with ZK smart contracts, allowing parties to reap the benefits of public blockchain technology while keeping their personal data private. With Dusk, developers can deploy financial applications with the peace of mind that user- and transaction related data remain private and anonymous. They will be utilizing the ZKP technology PLONK, the latest and most recent advancement in zero-knowledge cryptography. PLONK brings about the following benefits:

  1. It is safe, thanks to an updatable reference string.
  2. It is fast where it matters, both prover and verification time.
  3. It is scalable thanks to its universal reference string.

By adopting ZK cryptography and advanced encryption methods, Dusk is empowering businesses to comply with the GDPR and financial market directives, which allows them to safely engage in global alternative finance such as crypto.

The testnet date is set at 1st February 2022 for now and every 2 weeks, the team will be rolling out more features. Once all has been tested and successful, the Mainnet will be released. Note that the testnet date has been delayed a few times.

With Dusk, we can send and add something to the blockchain but the others will not be able to see where the transaction came from, where it went, what was sent or how much of it was sent. Essentially, Dusk ensures:

  • Hidden sender address
  • Hidden sent amount
  • Hidden recipient address

They are also coming up with a new hash function called “Reinforced concrete”, which is potentially up to 17x faster than “Poseidon” which $MINA is using.

The Dusk team has been fully doxxed and is a pretty strong team, moving at a steady pace of development. Looking at their price action, the price of $DUSK more than 4x in less than a month, amidst the sea of reds in the market. They have a current market cap of $300,158,410.

Dusk token emission schedule:

Dusk also provides a myriad of use cases that different companies can benefit from their privacy-protecting blockchain technology: https://dusk.network/pages/usecases.

$UBR

Unibright is another network that utilizes ZK-Rollups in their technology that are doing something similar to $DUSK. What makes Unibright different is that they can integrate business processes into blockchain, without a single line of code. This makes it way more accessible for users.

Unibright currently offers the following products and services, powered by ZK technology:

Some of their key partners include Microsoft, Provide Technologies, SAP, Lufthansa and so on:

The total supply of 150,000,000 $UBR is already in full circulation now. $UBR serves as the utility token for all products and services offered by Unibright.

Unibright has a current market cap of $224,380,489. Prices have gone down quite a bit during the recent crash and it seems to be consolidating around the current price of $1.50. @elliotrades has set his focus on ZK Rollups and he has his eyes on $UBR as well, which is a bullish case. Hence, it might be a good entry point now.


$SYS

Syscoin offers the best of both worlds by introducing a network to build the most secure, reliable, and fastest Web 3.0 applications. It is essentially a Proof-of-Work blockchain, merged-mined with Bitcoin. As a fork of the Ethereum Virtual Machine (EVM) layer, Syscoin introduces the NEVM (Network-Enhanced Virtual Machine), which provides smart contract functionality. They also provide the necessary toolset for dApps to be developed. Besides all these, Syscoin is also primarily focused on the adoption of ZK-Rollups.

Syscoin is the perfect choice when we are thinking about the general direction that the EVM-based blockchain ecosystem is heading. Instead of attempting everything (scaling, being decentralized and being secure) on one base layer, they intend to bring in multiple layers for the coming blockchain future:

  1. Execution layer: The layer that all the day-to-day transactions take place on.
  2. Settlement layer: The layer that secures the ecosystem, as such it should be highly secure such as through being merged-mined with Bitcoin. Highly scalable ZK-Rollups operating as the execution layer for Syscoin will, at regular intervals, post proofs of the transactions that took place on them to the NEVM blockchain in order to securely and immutably store what has taken place within the ZK-Rollup.
  3. Data availability layer: The layer where the data involved in smart contract executions is stored. With ZK-Rollups expected in Q1 2022, this data will be stored on-chain, scaling up to 210,000 transactions per second. When Validium arrives in Q3 2022, scaling would go up to 4,000,000 transactions per second. Validium is essentially a ZK-Rollup that stores its data off-chain, this could either be using decentralized storage or nominated entities that would be trusted to store the data that will be used by the ZK-Rollups.

ZK-Rollups will be coming to Syscoin as early as Q1 2022 and will allow up to an astounding 210,000 transactions per second throughput. Validium will then be expected to be rolled out by Q3 2022, allowing up to 4,000,000 transactions per second throughput.

The key difference between Validium and the usual ZK-Rollup is where data is stored. With a regular ZK-Rollup, the data involved in the smart contract execution is stored on-chain. With Validiums, data is stored off-chain, either using decentralized storage or a Data Availability Committee that has selected, trusted data safekeepers. This will undoubtedly increase the level of scalability.

In less than a month, the market cap of $SYS increased from approximately $390,000,000 to $575,022,787 at the time of writing.

The market cap of $SYS now might seem like a big number until more people start to realize the significance of the coin in unlocking the future of scaling for the whole space. With ZK-Rollups, it can just keep getting bigger and bigger since there will no longer be deterrence from high gas fees and so on.

With a large community of over 100k followers on Twitter at the current market cap, Syscoin is expected to grow even more.

Riskier Plays

$RETH

ZK technology plays a significant role for the NFTs in Blue Monster Games’ new game “Realms of Ethernity”, that will be built on the Polygon Network.

Blue Monster Games Inc. is a Florida-based corporation with a fully-doxxed team dedicated to the development of video games utilizing NFT technology. All of their gaming projects are based on a P2E model, allowing players to earn money in-game. They already have a live game called Kart Racing League, which is a game with a similar concept to Mario Kart.

$RETH is a P2E NFT metaverse, Web 3 and massively multiplayer online simulation game (MMOSG) with multiple ways to earn. Inspired by the game World of Warcraft, the game allows players to complete quests, kill monsters, buy land, build houses, & even gamble in-game.

$RETH introduces the Ethernity Engine, a layer two (L2) scaling solution for Multiple Class Fungible Token (MCFT) on Ethereum. It allows for instant trading, massive scalability and zero gas fees for minting and trading, without having to sacrifice user or asset security.

Essentially, with the ZK-Rollup, users on $RETH can not only trade their NFTs without having to  pay for gas fees, but also enjoy a variety of benefits:

  • Maintaining self-custody of their NFTs with the same level of security as mainchain Ethereum (not possible with other scaling solutions e.g. Matic and xDai).
  • Transactions are instant, and moving back to mainchain Ethereum is trustless and verifiable.
  • Unlike other solutions, users need not own a unique L2 token to buy, sell, send, or receive NFTs.
  • The Ethernity Network supports over 9000 transactions per second.

Currently, $RETH has just ended their pre-sale on 30th November 2021 and the public sale on Sushiswap is expected to be held on 28th December 2021. However, as of 28th December 2021, the public sale has been postponed due to issues with high gas fees from the sale on CopperLaunch.

$RETH will be unlocked in a predetermined schedule which lasts for 44 months from the public sale. The initial circulating supply is set to 21,000,000 $RETH - 21% of the 100,000,000 total supply.‌

$PAPER

The DOPE WARS community is producing one of the first play-to-earn crypto games on the Ethereum and StarkWare blockchain, known as Dope Wars Paper. $PAPER is inspired by the classic TI-83 game, a promising concept with a growing community and investors from GTA and StarkWare. Being deployed on Starknet essentially means that $PAPER will have a play in both the gaming/metaverse and Layer 2 narratives.

ZK-Rollup is crucial in the deployment of Dope Wars as they will provide fast and cheap transactions pointed to the Ethereum L1 without the trust or delay trade offs of side chains or optimistic roll ups.

$PAPER still has a considerably low market cap of $14,321,175 and the price has dipped quite a bit from the recent crash. With the impending launch of StarkNet in the coming weeks, a bullish price action could potentially see the price of $PAPER having a pump.

$MUTE & $VOICE

Mute Network is a layer 2 swap platform running on Ethereum, powered by ZK-Rollups. This makes it fast, cheap, scalable and private. The DEX, also known as Mute Switch, is launching using zkSync 2.0, employing ZK Starks. To put it simply, data is validated by third parties without being revealed, keeping all possible transactions private. Starks improve scalability by allowing developers to move data off chain, validating transactions at a much higher pace.

$MUTE is also looking to introduce more advanced types of orders on their DEX, where users will enjoy the ability to place limit orders and stop losses on Mute switch, providing a more trader-friendly space. They have recently announced their partnership with Syscoin, where Mute will be built on the Syscoin blockchain. This is bullish, especially since there are positive expectations for Syscoin.

We can think about a Robinhood or Cash App for crypto but controlled by its users, as opposed to a central entity. We can also imagine a Uniswap DEX that is significantly cheaper, way scalable and allows for a completely private trading, which means that no one except yourself can peek into your wallet. These are what $MUTE is trying to achieve.

They also have key partnerships with the following:

The much anticipated Beta of $MUTE is estimated to be released in Q1 of 2022, which could possibly turn the DEX AMM industry into a space that serves anyone, just like how it was intended to be.

$MUTE is the gas token that powers growth of the ecosystem via the DAO, funding proposals and benefiting directly through a 'buyback and make' initiative. Users can earn transaction fees by staking $MUTE. There is a max supply of 31,188,934 $MUTE.

$VOICE is the governance token for the entire Mute ecosystem, where holders can participate in the votes to determine the course of the DAO. Participating voters are incentivized with $VOICE rewards. There is a max supply of 44,613 $VOICE.

With the 'buyback and make' initiative, transaction fees will be used to buy native tokens and then transported into a smart treasury. The supply pressure is just like burning, just that a growing treasury is used to add functionality such as integrating vaults or funding the creation of dApps. This will also create an additional buy pressure on both non-inflationary tokens.

  • 70% of all trading fees will market buy MUTE from Uniswap tokens sent to Smart Treasury.
  • 30% of all trading fees will market buy VOICE from Uniswap tokens sent to Smart Treasury.

$MUTE’s current market cap is about $60million while Uniswap’s market cap is about $9 billion. Although it is not certain that the market cap of $MUTE will go as high as that of Uniswap, it still has the potential to play a major role in the crypto ecosystem and it definitely would be a great long term play.

$LRC

LoopRing is a Zk-Rollup L2 that allows for high-throughput, low-cost trading and payment on Ethereum. They are one of the closest competitors of $MUTE, with a market cap of $3,211,087,661. Their objective is to design and engineer the best-in-class zkRollup exchange and payment protocol on Ethereum, to users across the world.

The L2 application is a non-custodial exchange that supports both automated market maker (AMM) and order-book exchange model. It also has a payment platform, allowing users to cross-exchange many digital assets. The Loopring DEX offers secure trading at high speed and with no transaction fees.

Trades made will be grouped in blocks, which are then stored off-chain in the Merkle tree. Any changes in the state of the tree can be verified on-chain by generating a ZK proof with a circuit.

LoopRing depends on the ring miners to fulfill all necessary tasks for order execution, in exchange for rewards. The miners receive rewards from fees paid:

  • Order fee: Traders can set the maximum $LRC to reward the miner
  • Split-margins: Traders can determine the claimable margin for a specific order, allowing the miner to choose the fees and the margins

The native token $LRC was first launched during an ICO in August 2017 and raised $45 million worth of ethereum (ETH). The price of $LRC skyrocketed at the beginning of November 2021, surging to over 180% in value. The Crypto community speculates that this unexpected rise could be a move to support a forthcoming GameStop NFT marketplace. However, this partnership is still not confirmed at the time of writing.

Nonetheless, Loopring can still be a profitable investment. Considering the protocol’s constant developments and updates, it might be a good long-term investment.

Conclusion

All in all, privacy and confidentiality will continue to be a great concern in this digital age. This makes technology like ZKPs crucial in enforcing “honest” behavior and determining transaction “validity” without having to compromise the sensitive details.

ZK Roll-ups might be the next rotation in the crypto space, primarily because the ZK technology has been in R&D long enough and it is the key way that ETH is going to scale with ETH 2.0. The entire industry is significantly undervalued as of now, since many things will eventually be running on the ZK technology. The only problem is that ZKPs are still not EVM compatible, which means that every dApp will have to rewrite their codebase in order to port it over, which will probably take some time.

Once the technology and ease of use catches up, ZKPs will probably be mass adopted and serve as the next-gen tech that offers a lot of benefits to current methods of encryption. Overall, there are still not many tokens in the ZK-Rollup space just yet. Thus, the best thing we can do now is to spot opportunities early and follow all the relevant projects closely.


About Switcheo Labs

Switcheo Labs is a creative and experimental think tank that guides and nurtures decentralized ecosystems in the DeFi space. Founded in 2018, Switcheo Labs was born out of a simple desire to make finance accessible and trust optional. Recognizing the financial challenges that currently exist, Switcheo Labs innovates on robust alternatives to put power back where it rightly belongs, in the hands of the people.

For more information on Switcheo Labs: