Pantera Partners: Overview of Current ZK Solutions and Use Cases

Author: Paul Veradittakit, Managing Partner at Pantera Capital

Compiled by: xiaozou, Jinse Finance

Introduction

Blockchain has opened new avenues for secure, decentralized transactions, paving the way for developments such as decentralized finance and digital identity services. However, despite these achievements, a series of limitations continue to hinder the broader adoption of blockchain and cryptocurrencies. Here are some of the main challenges facing blockchain and cryptocurrencies:

• Throughput: As the adoption of blockchain and cryptocurrencies grows, networks become increasingly congested, leading to slower transaction times and rising costs.

• Security: Compromises made for cost and fee reductions lead to vulnerabilities and hacking incidents, putting funds and technological reputations at risk.

• Privacy: Anyone can see transactions on public blockchain networks, exposing sensitive financial information and raising privacy concerns for individuals and businesses.

Zero-Knowledge (ZK) technology has emerged and developed to address these issues. The idea first appeared in the late 1980s, originating from computer science and cryptography. Two parties can independently confirm the truth of a statement using zero-knowledge without revealing any further information. In simple terms, a prover can demonstrate to a verifier that a statement is true without needing to disclose any underlying details through other simple proofs. This technology promises to significantly enhance the privacy, security, and scalability of blockchain and cryptocurrency transactions.

Zero-Knowledge Proofs must adhere to three fundamental properties:

• Completeness: If a statement can be verified as true, an honest verifier following the established protocol will be convinced of its truth by an honest prover.

• Soundness: If the statement being proved is false, a lying prover cannot convince an honest verifier of its truth, and if they could, the probability would be negligible.

• Zero-Knowledge: If a statement is proven to be true, the verifier gains no additional information beyond what is proven.

Let’s delve into this issue through a simple scenario.

Suppose you want to buy a property and need to apply for a mortgage. You must send sensitive information to the bank for verification, but you want to keep it confidential. Additionally, you do not want the bank to retain any data access after the verification is complete.

The bank will require various forms of documentation to assess the loan application, including:

• Personal identification, such as a driver's license.

• Proof of income to ensure financial stability.

• Employer information.

• Proof of residence.

With the adoption of zero-knowledge technology, the loan provider can verify all this information without seeing it. The relevant documents can be sent as encrypted hash values, and then the loan provider can verify them using a zero-knowledge proof scheme. With this approach, the loan provider can verify the accuracy of the data without compromising the applicant's confidentiality and privacy. Furthermore, the process can be repeated, allowing information to be verified by multiple parties without jeopardizing privacy.

ZK's Key Innovations in the Crypto Space

For cryptocurrencies, zero-knowledge is a game-changing key technology that offers significant privacy and compression advantages. To ensure privacy, ZKP (Zero-Knowledge Proof) uses mathematical techniques that allow information to be verified without disclosing actual data. Additionally, ZKP provides compression benefits by storing large amounts of information in compact proofs.

The reduction in the amount of data required for this verification enhances efficiency, which is particularly important in blockchain applications with limited storage and processing capabilities. This proof can be used to verify bulk transactions or state transitions in a single update. Implementing ZKP in these applications helps protect sensitive information's security and privacy while also improving efficiency by reducing the amount of data needed for verification.

ZK Can Unlock Industry Potential

The potential of ZK to address key challenges is crucial for the growth and widespread adoption of cryptocurrencies. Let’s take a closer look at some issues and their impact on industry development.

Interoperability Security Issues: In the fast-paced DeFi world, interoperability is crucial for seamless and efficient transactions. On the other hand, current solutions often suffer from significant delays, which can lead to lagging and unreliable transactions. Since traders must be able to place orders quickly and effectively, delays can have a significant impact on user experience.

Moreover, existing solutions may lack sufficient security measures, making them vulnerable to large-scale network attacks and other types of breaches. To address these issues, new solutions must provide low latency, high security, and decentralized features, allowing traders to operate confidently within the DeFi ecosystem.

Scalability Issues: If cryptocurrencies are to reach their full potential, scalability is a fundamental issue that must be addressed. Currently, the fastest blockchains can only handle a few hundred transactions per second. This falls far short of the scalability needed to reach a global scale and attract hundreds of millions of users. Scalability is defined not only by the number of transactions per second but also by access patterns. If people want to use cryptocurrencies as they do the internet, greater scalability is required.

Privacy Issues: Many in the crypto industry are concerned about their privacy. Currently, everything done in decentralized finance (DeFi) is publicly visible, violating basic privacy norms. People want to transact securely and confidentially, but the existing transparency in DeFi makes this desire challenging. The difficulty lies in finding a technology that ensures privacy while maintaining the auditability required for DeFi to function properly.

Current ZK Solutions

Here are some examples of how ZK can be applied to solve various problems:

ZK Bridges: ZK bridges are changing our perception of asset transfers between blockchains. These bridges utilize zk-SNARKs technology, allowing for efficient data or asset transmission across multiple blockchain networks without the need for a central authority. A proof system is used in these systems to quickly demonstrate to a blockchain that a specific state transition has occurred on another blockchain.

The blockchain retains a summary of the latest block from another blockchain and can synchronize new blocks by creating and sending a zk-SNARK that verifies the tip of the other blockchain has progressed from a previous state to the current state. ZK bridging is also a step toward the future, where blockchains will be more interoperable and can work together seamlessly.

zk-EVM: The Zero-Knowledge EVM (zkEVM) is a virtual machine that executes Ethereum smart contracts and uses zero-knowledge proofs to ensure their accuracy. It is part of Ethereum's zero-knowledge rollup scaling solution, which enhances network throughput through off-chain computation and storage. zkEVM generates proofs to ensure that bytecode access, read/write operations, and computations are executed correctly.

It consists of three parts: execution engine, proof generation, and proof verification. zkEVM is significant because it can check execution correctness through zero-knowledge proofs and protect confidential information, providing privacy and security for Ethereum smart contracts. This enables the creation of secure, privacy-focused decentralized applications (dApps) in fields such as DeFi, healthcare, and supply chain.

Authentication: Authentication is a key component of many online services and applications, but earlier technologies often required the disclosure of personal information. By using ZK proofs to confirm a person's identity without providing any information, ZK technology offers a new, more secure method of authentication. This provides a more privacy-focused alternative to existing programs and opens new avenues for secure online transactions. ZK-based authentication systems are particularly beneficial for organizations and consumers concerned with privacy and security, and they have the potential to revolutionize industries such as online banking and e-commerce.

ZK DEX: Zero-Knowledge Decentralized Exchanges (ZK DEX) are a new and promising type of decentralized exchange that uses zero-knowledge proof technology, allowing users to trade cryptocurrencies and other digital assets in a completely private and secure manner. Unlike traditional decentralized exchanges (where anyone can access and monitor public ledgers), ZK DEX allows users to trade anonymously without disclosing sensitive information about themselves or their transactions.

This privacy feature is achieved through ZK algorithms that enable users to prove the validity of their transactions without revealing any additional information, helping to mitigate issues such as front-running. In addition to the benefits of privacy and security, ZK DEX also offers the potential for increased scalability and throughput, as it supports more efficient order matching and settlement. Therefore, ZK DEX is seen as a promising alternative to centralized exchanges, providing the best of both worlds—security and privacy of decentralized trading, along with the efficiency and speed of centralized trading.

Exciting Infrastructure/Drivers

Given the current boom in zero-knowledge technology, several innovative projects have been developed to address various challenges across many industries and fields. These projects include novel second-layer (L2) solutions, private wallets, ZK-based cross-chain asset transfers, privacy-focused transactions, and more, leveraging zero-knowledge cryptography to achieve secure and confidential verification of sensitive information. Let’s look at a few examples:

Zcash: Zcash is a decentralized payment network focused on privacy, using zero-knowledge proofs (ZKP) to securely and anonymously send transactions on a public blockchain. This cryptographic mechanism allows both parties to verify information without disclosing underlying data, enabling Zcash users to protect their financial privacy. The network offers two types of addresses: transparent t-addresses, which can be monitored on the blockchain, and shielded z-addresses, which are fully encrypted and untraceable. Users can ensure their transactions are completely private by using z-addresses, making Zcash one of the most secure and confidential cryptocurrencies.

Over time, the network has continued to evolve, introducing features such as Halo ZKP and shielded-first Zcash wallets, attracting increasing institutional support. The creative use of ZKP by the network has made it a leader in the privacy coin space, with a loyal following among users who value financial privacy.

StarkWare: StarkWare is a portfolio company of Pantera, founded in 2018, with the mission of enhancing blockchain scalability and privacy. Its flagship products, StarkNet and StarkEx, aim to address the challenges of current blockchain systems by harnessing the power of zk-STARK proof technology. StarkNet is a decentralized ZK-rollup based on Ethereum that uses ZK-STARK proof methods to confirm off-chain transactions, reducing the computational pressure on the Ethereum network.

On the other hand, StarkEx is a centralized version of StarkNet, created specifically for DeFi trading applications. It has achieved great success, locking in a total value of $696 million, with a cumulative trading volume of $635 billion and the issuance of 60.5 million NFTs. Both StarkNet and StarkEx leverage zk-rollup technology with Shared Prover, driven by STARK proofs, allowing for low-cost transactions. Additionally, StarkWare's cryptographic proofs provide zero-knowledge, transparency, simplicity, and post-quantum security, making it a robust blockchain choice.

Eli Ben-Sasson, the founder of StarkWare, is a renowned computer science professor and co-inventor of STARK proofs. He has also made significant contributions to Zcash, enhancing the expertise of the StarkWare team. The project has integrated Uniswap V3 into its platform, marking an important step toward achieving Ethereum scalability and addressing some of the fundamental challenges faced by existing blockchain systems.

Braavos: Braavos is a portfolio company of Pantera, offering a complete crypto asset management solution based on StarkNet (second-layer ZK Rollup). It provides a smart contract-based wallet that enhances security and user experience features. The wallet consists of two parts: an application and an on-chain account smart contract, known as account abstraction. This allows arbitrary logic to be applied to transactions before they are processed, increasing security and improving user experience.

Account abstraction supports features such as multi-call, multi-factor authentication, account splitting, and paymaster. The built-in Hardware Signer protects the wallet and prevents theft by utilizing account abstraction and biometric authentication, rendering dedicated hardware wallets obsolete in all practical use cases. With these features and advanced security measures, Braavos aims to enable anyone seeking control over their cryptocurrency independence to use cryptocurrencies easily and worry-free.

Succinct Labs: Succinct Labs is developing a trustless interoperability solution that securely connects Ethereum and Gnosis chains using on-chain light clients and zk-SNARK technology. The company is committed to achieving a future of permissionless interoperability and has created a trust-minimized cross-chain bridge using consensus proofs. The protocol uses on-chain light clients to verify the consensus of the source chain in the execution environment of the target chain, tracking the block headers of each pair of communicating chains and relying on the economic security provided by the underlying L1 chain's consensus without making any additional trust assumptions.

Brine: Brine is a portfolio company of Pantera, offering a unique DeFi platform that provides a complete solution for cryptocurrency traders and investors. It combines the benefits of trading, DeFi, and spot trading in a risk-free, gas-free, fast, and low-fee environment. This technology eliminates the trade-offs between trust, cost, speed, experience, and liquidity, resulting in a more seamless user experience. Brine benefits from the scalability, security, and reliability of this technology, as it is built on Starkware's robust and secure infrastructure.

The platform's matching engine has a capacity of 600,000 tps, capable of handling high-volume trading periods and providing instant order execution. This makes it an excellent avenue for high-speed trading. It is an order-based platform that provides a transparent and orderly market for buying and selling cryptocurrency assets. Brine offers cryptocurrency traders and investors a viable alternative, with trading fees of only 0.1% and no gas fees. Additionally, the platform's cross-chain functionality allows traders to manage their funds from a single dashboard, making it easier to manage their portfolios and make informed trading decisions. With the added security and reliability of Starkware technology, Brine is positioned as a significant competitor in the DeFi space.

Axiom: New advancements in crypto programmability have achieved trustless computation, but barriers still exist for smart contract developers. Axiom addresses this issue by providing smart contracts that access all on-chain data and perform complex computations through a three-step process (read, compute, and verify).

This will produce ZK-verified outputs that can be used by any downstream smart contracts, resulting in more expressive and trustworthy decentralized applications. It has many potential applications, including decentralized identity, trustless accounting, and secure voting. As smart contracts gain access to all on-chain data and can perform arbitrary computations, Axiom is revolutionizing the way blockchain scales and paving the way for robust and trustworthy decentralized applications in the future.

Mina: Mina Protocol is a portfolio company of Pantera, developed by O(1) Labs, emphasizing security, accessibility, and decentralization. Unlike other blockchains, Mina adopts a "lightweight" infrastructure, using proof of stake (PoS) consensus and zk-SNARKs to reduce the computational power required for network consensus.

zk-SNARKs are used as a summary of the blockchain, containing metadata-based proofs of the blockchain's validity, allowing smaller data to be processed and facilitating a more democratic and decentralized network. Mina Protocol's small data set allows users to view and verify the entire blockchain and is compatible with decentralized applications (dApps), supporting snark-compatible applications or "Snapps" that use data from various chains without disclosing user information. With its innovative technology, the Mina Protocol is a significant competitor in the decentralized finance (DeFi) space, as it securely brings real-world data onto the blockchain and creates opportunities to transform various industries.

Conclusion

The development of zero-knowledge proof technology is driving significant advancements in blockchain operations. This system addresses several of the most pressing issues facing blockchain, including scalability, privacy, and security. With the application of ZK, the Ethereum network can handle more transactions, and user data is protected through encryption. The ongoing improvement of this technology offers great hope for the future of blockchain and disrupts various industries by providing secure and efficient solutions. Over time, it will be interesting to witness how ZK technology influences and shapes the blockchain ecosystem.