Coinbase: A Comprehensive Overview of the Zero-Knowledge Proof Track

Author: Jonathan King

Compiled by: Deep Tide TechFlow

Zero-Knowledge Proof (ZKP) technology has become a significant breakthrough in the field of cryptography. This article will delve into the core principles of zero-knowledge proof technology, its practical applications, and its impact on blockchain scalability, privacy-preserving applications, and trustless interoperability. With increasing investments in this technology in 2023, zero-knowledge proofs have not only developed theoretically but have also demonstrated their vast application prospects in practice. We will conduct an in-depth analysis of the zero-knowledge proof ecosystem from three layers: infrastructure, networks, and applications, revealing how it opens the curtain on a new era of blockchain technology.

Abstract

• Zero-Knowledge Proofs (ZKPs) and their derivative technologies are significant breakthroughs in cryptography and are largely seen as the ultimate goal of blockchain design concepts.

• Today, zero-knowledge proofs are increasingly becoming a promising solution to unresolved issues in web3, including blockchain scalability, privacy-preserving applications, and trustless interoperability.

• In 2023, funding for zero-knowledge technology exceeded $400 million, primarily focused on scalability at the Ethereum L1/L2 protocol layers, emerging infrastructure, and developer tools.

• The zero-knowledge space can be divided into three layers:

• 1) Infrastructure, which refers to the tools/hardware used to build protocols/applications on top of zero-knowledge primitives.

• 2) Networks, which utilize zero-knowledge proof systems in L1/L2 protocols.

• 3) Applications, which are end-user products that leverage zero-knowledge mechanisms.

• Although the zero-knowledge ecosystem is still in its early stages, its rapid development is expected to usher in a new era of secure, private, and scalable blockchain solutions.

Introduction

Zero-Knowledge Proofs (ZKPs) and their derivative technologies are largely viewed as the ultimate goal of blockchain design, particularly in providing solutions that require minimal trust assumptions when verifying information for on-chain applications. The core of zero-knowledge proofs is a cryptographic technique that allows one party (the prover) to demonstrate to another party (the verifier) that a computation is valid without revealing any underlying data used to create that computation. Originating in 1985, zero-knowledge proofs have evolved from theory to practical applications, overcoming decades of lag through recent advancements in software tools and hardware.

Today, zero-knowledge proofs offer promising solutions to some of the biggest challenges facing Web3, including:

• Blockchain scalability: One of the biggest challenges facing Ethereum L1 is scalability. However, the emergence of L2 networks has made transactions faster and cheaper without compromising Ethereum's security or decentralization. While optimistic rollups maintain dominance due to their high compatibility with EVM and developer-friendliness, the adoption of ZK rollups is steadily increasing. Zero-knowledge proofs help summarize complex computations off-chain, enhancing L2 designs for rapid and efficient on-chain verification and settlement.

• Privacy-preserving applications: So far, privacy work in the blockchain space has primarily been limited to hiding transactions. However, researchers are gradually working towards achieving complete transaction anonymity and confidentiality on public blockchains. Importantly, novel privacy concepts utilizing ZKPs are emerging, aiming to break the trade-off between protecting user privacy and achieving compliance (i.e., preventing illicit activities).

• Trustless interoperability: Existing blockchain interoperability protocols rely on trusted systems (e.g., multi-signatures or incentivized validator sets). Zero-knowledge proofs can help replace cryptoeconomic trust assumptions with cryptographic guarantees, paving the way for more secure and robust cross-chain communication. However, interoperability is the latest emerging application of ZKPs.

According to data from Messari, funding for zero-knowledge proofs exceeded $400 million in 2023, emphasizing scalability at the Ethereum L1/L2 layers and emerging zero-knowledge developer infrastructure. Although zero-knowledge proofs are relatively new, their rapidly developing ecosystem suggests that best practices for more secure, private, and scalable blockchain applications will converge. With this framework in mind, let’s take a closer look at the layered zero-knowledge proof space, exploring key players and emerging concepts.

Infrastructure

Any form of zero-knowledge proof must be written in an arithmetic circuit language, which has limited expressive power and makes it very complex to convert most blockchain functions into circuit form. The limitations of developer tools and advanced hardware mean that practical applications of zero-knowledge have only recently begun to develop. Today, we are witnessing the emergence of a range of systems and tools that enable developers to build protocols and applications on top of zero-knowledge cryptographic infrastructure.

Programming frameworks and tools: Domain-specific languages (DSLs) such as Leo, Noir, Cairo, and o1js are programming frameworks used to develop provable zero-knowledge programs within specific L1/L2 ecosystems (e.g., Aleo, Aztec, Starkware, and Mina, respectively). Additionally, general frameworks like Elusiv and Hinkal are emerging, aimed at allowing developers to define specific standards to mask transaction data on-chain while using zero-knowledge proofs for verification. As demand from potential developers and end-users for zero-knowledge-driven applications grows, the adoption of these frameworks is expected to continue increasing.

Zero-knowledge co-processors: Zero-knowledge co-processors provide developers with cost-effective and trustless off-chain computation capabilities while eliminating the need for developers to handle complex zero-knowledge-related components in the tech stack. Teams like RiscZero, Axiom, and Herodotus offer verifiable computing platforms that generate proofs to demonstrate the execution and validity of arbitrary programs or enable smart contracts to store, access, and verify historical on-chain data without adding extra trust assumptions. Over time, zero-knowledge co-processors are expected to become essential for increasingly sophisticated on-chain applications.

Proof networks/markets: Today, most zero-knowledge networks and protocols rely on centralized proof processes. As the adoption of zero-knowledge grows, we expect teams to seek to decentralize their proof layers to enhance their activity and censorship resistance. Emerging proof networks and markets, such as the services provided by=nil; Foundation, RiscZero, Gevulot, and Lumoz, aim to allow applications to outsource their proof mechanisms to third-party operators, thereby reducing the overhead of operating zero-knowledge proof infrastructure.

Hardware acceleration: Generating zero-knowledge proofs requires a significant amount of mathematical computation, making it costly and computationally intensive. However, we have seen significant progress in the use of dedicated hardware (such as Field-Programmable Gate Arrays (FPGAs) and Application-Specific Integrated Circuits (ASICs)), which help improve proof generation and verification times. Specialized hardware providers like Ingonyama, Cysic, and Fabric are at the forefront of providing FPGAs and ASICs for ZK proof systems, and we expect innovation and investment in ZK hardware design to continue to increase in the future.

Application chain infrastructure: Rollup-as-a-Service (RaaS) providers such as Spire, ProtoKit, and Lumoz offer developers low-code tools for building, testing, and deploying general or specific applications that utilize zero-knowledge proof mechanisms on L2/L3 chains. Sorters like Espresso, Radius, and Madara provide the infrastructure to accept user transactions, determine their order, and publish blocks to L1 consensus and data availability layers. We believe the next generation of Ethereum scalability will be driven by modular L2 rollup stacks, which could create demand for these providers in the short to medium term.

Interoperability and bridging: As reliance on trusted systems (e.g., multi-signatures or incentivized validator sets) decreases, bridging systems become more trust-minimized, replacing trust with code (e.g., light clients, relays, and zero-knowledge proofs). Teams like Polyhedra, Lambda Class, and Polymer Labs are exploring this theme. In the primary applications of zero-knowledge proofs, interoperability is the latest emerging area, but as access to zero-knowledge infrastructure accelerates, we expect to see more innovative bridging design concepts.

Zero-Knowledge Machine Learning (ZKML): ZKML is a cutting-edge area of cryptography focused on using zero-knowledge proofs to prove the correctness of on-chain machine learning (ML) model inferences. By enhancing ML capabilities, smart contracts can become more autonomous and dynamic, allowing them to make decisions based on real-time on-chain data and adapt to various scenarios, including those that may not have been anticipated at the time of the contract's initial creation. Teams like Modulus Labs, Giza, and Zama are pioneering unique ZKML use cases, which may provide promising synergies at the intersection of AI and cryptography.

Networks

Some blockchains face limitations in handling high transaction volumes, leading to slower transaction times and increased costs during peak demand. Additionally, popular blockchains like Bitcoin, Ethereum, and Solana are built on public ledgers, but the lack of privacy raises concerns among mainstream participants about complete transaction confidentiality and anonymity. New L1 and L2 networks are emerging that adopt zero-knowledge proof infrastructure to address issues related to blockchain scalability and on-chain privacy.

Privacy-focused L1: Emerging L1 networks like Aleo, Mina, and IronFish offer privacy-first smart contract capabilities based on zero-knowledge proofs, providing application-level privacy for decentralized applications within their respective ecosystems. L1 networks like Fhenix and Inco adopt Fully Homomorphic Encryption (FHE), enabling developers to write private smart contracts and perform computations on encrypted data, achieving complete transaction anonymity and confidentiality. Given that many of these L1s are conducting incentivized testnets and require developers to learn new programming languages, signs of widespread adoption and value capture may take 1-2 years.

ZK-EVM: ZK-EVM utilizes zero-knowledge proofs to provide cryptographic assurances for the execution of Ethereum-like transactions. Different types of ZK-EVMs, such as zkSync Era, Polygon zkEVM, Linea, Scroll, and Taiko, have different design trade-offs between EVM compatibility and performance (i.e., proof generation time). We expect this field to continue innovating to expand Ethereum and Ethereum-based ZK rollups.

ZK-Rollup: Zero-knowledge rollups are an L2 scaling solution that moves computation off-chain and uses zero-knowledge proofs to prove state changes on-chain. ZK-rollups like Aztec provide a "privacy engine on Ethereum," designed to encrypt transaction data while keeping costs low. Zeko is an upcoming ZK-rollup stack built on Mina that allows applications to recursively verify and combine with each other, while ImmutableX and LayerN are application-specific ZK rollups targeting gaming and high-performance DeFi use cases, respectively. While optimistic rollups account for about 90% of the total L2 market share, demand for ZK-rollups is expected to increase as the underlying technology becomes more accessible.

Applications

On top of the ZK infrastructure and network layers, a range of end-user applications utilizing zero-knowledge proofs for on-chain payments, authentication, privacy-preserving yet compliant DeFi, and consumer use cases are emerging.

Teams like Elusiv provide user-friendly interfaces for private payments and DeFi transactions, implementing address masking while employing compliance mechanisms to decrypt transactions of identified illicit actors. In terms of authentication, zCloak, ZKPass, and zkp-ID use zero-knowledge proofs to allow users to prove verifiable data to third parties without exposing personal information.

DeFi protocols like Lumina and Panther focus on building private yet compliant decentralized exchanges. Renegade combines Multi-Party Computation (MPC) and ZK technology to offer dark pool trading, an on-chain trading venue that conceals the order book, allowing large institutions or high-volume traders to execute orders without exposing their activities to the broader market.

Consumer applications like Sealcaster and Dark Forest leverage zero-knowledge proofs in social and gaming applications to mask user identities and game strategies, keeping them hidden from other on-chain participants.

The Future of ZK

The future of ZK involves prioritizing speed, reducing hardware requirements, improving development tools, and supporting new types of zero-knowledge proof designs that enable decentralized proof generation. While both optimistic and zero-knowledge scaling solutions are used to validate rollup transactions, each approach has associated design trade-offs in terms of security, latency, and computational efficiency. We see these two tech stacks converging in the medium to long term to accommodate a diverse range of on-chain applications. Finally, the zero-knowledge application layer is still in its infancy today, but as end-user demand for privacy protection on public blockchains grows, we expect it to expand in the future. Additionally, it is worth noting that zero-knowledge research is primarily explored within the context of Ethereum. However, emerging concepts like Solana's Token22 program with confidential transfers (i.e., a privacy feature that utilizes zero-knowledge proofs to encrypt SPL token balances and transfer amounts) demonstrate the adaptability and potential of zero-knowledge beyond specific ecosystems.

In summary, the transformative potential of zero-knowledge is unfolding, signaling that blockchain solutions will become more significant in terms of security, privacy, and scalability in the future.

Note: Projects invested by Coinbase Ventures appear in the above zero-knowledge proof track: Aleo, Anoma, Aztec, Consensys, Espresso, Elusiv, Mina, Polygon, Polymer Labs, Starkware, Sunscreen, zCloak, zkLink, zkSync.