Zero-knowledge Payments Achieving Privacy, Scalability, and Case Studies Introduction

Zero-knowledge Payments Privacy, Scalability, and Case Studies

ZKLianGuaiyments is committed to compliance and user-centric principles, paving the way for a decentralized future, prioritizing privacy, fostering trust, and responsibly reshaping the digital financial landscape.

Original Title: ZKLianGuaiyments: Achieving Privacy and Scalability

Author: Satyam Kulkarni

Source: Fetcch

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Translation: Lynn

The main use cases of zero-knowledge payments include confidential personal transactions, privacy-preserving token swaps, private crowdfunding campaigns, private salaries, audit rewards for contributors, open-source fundraising and donations.

Introduction

In the rapidly developing Web3 world, two key challenges have emerged: privacy and scalability. The immutability of blockchain has raised concerns about user and corporate data privacy, while the increasing popularity of central bank digital currencies (CBDCs) has raised concerns about surveillance.

At the same time, achieving scalability in blockchain networks is crucial for handling the growing volume of transactions. In the face of these challenges, zero-knowledge (ZK) payments offer a promising solution that addresses the issues of privacy and scalability. This blog explores how ZK payments bridge the gap between transaction confidentiality and transparency in Web3, providing users with the desired privacy without compromising the fundamental functionality of blockchain. Additionally, it delves into the potential of ZK-based protocols to enhance scalability, making decentralized applications more practical and accessible.

Understanding the Privacy Challenges in Web3 Transactions

Web3 has given rise to a multitude of decentralized applications, DeFi platforms, and NFT markets. However, the transparency of blockchain transactions means that wallet addresses and transaction histories are visible to anyone with access to the network.

Imagine if your traditional bank account was public, and anyone could access detailed information about your financial transactions, including where your money was spent and how much money you received. This situation would be shocking and unacceptable to most people, as it would compromise their privacy and security.

Several reasons highlight the importance of privacy in Web3 transactions:

1. Security and Protection: Privacy is crucial for protecting users from potential hacker attacks, phishing attempts, doxxing, and other malicious activities. Shielding financial data ensures that users are less susceptible to targeted threats.

2. Business Confidentiality: For companies operating in the Web3 space, maintaining the confidentiality of transaction details is crucial for maintaining a competitive edge and protecting sensitive business information.

3. Individual Rights: Just like in traditional finance, individuals have the right to financial privacy. Web3 should respect and uphold these rights, enabling users to have control over their own data.

The Rise of Zero-Knowledge Payments

The concept of zero-knowledge proofs can be traced back to the original paper on zero-knowledge proofs [GMR85] in 1985. Subsequently, a simplified ZK proof [K92] was proposed in 1992. By 2013, zero-knowledge proofs could be used in real-life applications, although they were slow. In 2016, Groth introduced the Groth 16 algorithm, which significantly reduced the computational complexity. Since then, zero-knowledge proofs have gradually been deployed for real-world commercial purposes.

In the field of cryptocurrencies, Monero and Zcash are pioneers in prioritizing blockchain transaction privacy. Monero (XMR) introduced ring signatures and stealth addresses in 2014, providing a higher level of privacy than traditional blockchains. Zcash (ZEC) appeared in 2016 with zk-SNARK, offering users the choice between transparent transactions and shielded transactions to strike a balance between privacy and transparency.

Now, Zero-Knowledge (ZK) rollups and protocols have emerged as promising solutions to address privacy and scalability issues in Web3 transactions. ZK payments use encryption protocols called zero-knowledge proofs, allowing one party to prove the validity of a statement to another party without revealing any sensitive information.

How does ZK achieve scalability and privacy?

Imagine you have a magic box that can perform computations secretly. This box can prove to anyone that a certain statement is true without revealing any details about how that conclusion was reached. This is the basic idea behind zero-knowledge proofs.

Now, let’s relate this to blockchain payments. When you want to make a payment using a blockchain, you typically need to prove that you have enough funds to cover the transaction. In traditional blockchains like Bitcoin, this involves revealing your account balance.

In its basic form, a zero-knowledge proof consists of three elements: witness (confidential information), challenge, and response.

• Witness: Through a zero-knowledge proof, the prover wants to prove knowledge of some hidden information. The secret information is the “witness” of the proof, and the prover establishes a series of questions based on their hypothetical knowledge of the witness, questions that can only be answered by someone who knows the information. Thus, the prover initiates the proof process by randomly selecting a question, computing the answer, and sending it to the verifier.

• Challenge: The verifier randomly selects another question from a set and asks the prover to answer it.

• Response: The prover accepts the question, computes the answer, and returns it to the verifier. The prover’s response allows the verifier to check if the prover truly has access to the witness. To ensure that the prover cannot simply guess and accidentally obtain the correct answer, the verifier will choose more questions to ask. By repeating this interaction multiple times, the probability of the prover fabricating knowledge of the witness significantly decreases until the verifier is satisfied.

There are currently several popular ZK-based protocols, including zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge), zk-STARKs (Zero-Knowledge Scalable Transparent Argument of Knowledge), and Bulletproofs.

In the context of blockchain, they allow users to prove the validity of transactions without revealing the sender’s real address. This feature enables multiple transactions to be batched into a single proof, reducing computational costs and significantly improving scalability. By aggregating multiple transactions into one proof, ZK payments can lighten the burden on the blockchain network and increase transaction throughput. This enhanced scalability can lead to faster confirmation times and lower transaction fees, making decentralized applications more practical and accessible for users.

What are Zero-Knowledge Proofs (ZKPs)? https://ethereum.org/en/zero-knowledge-proofs/

Zero-Knowledge Rollup? https://ethereum.org/en/developers/docs/scaling/zk-rollups/

Case Study – ZkBob

zkBob is a privacy-focused application that utilizes Zero-Knowledge Proofs (zkSNARK) and stablecoins for confidential transactions. Its core components include the zkBob contract for processing transactions, the BOB token with privacy features, the Relayer for secure transmission and abstracting gas fees, the AccessManager for access control, and the UI for user interaction. It ensures private transactions and neutrality at the underlying layer.

Let’s take a look at the scenario where Alice and Carl use zkBob for private transactions.

Scenario: Alice wants to send a transaction to Carl without revealing transaction details such as the amount, sender, or receiver information. They decide to use zkBob to achieve this privacy.

Transaction Process

1. Create Accounts:

• Alice and Carl each create their zkBob accounts using their private keys.

• These private keys are used for generating proofs, accessing balances, and executing transactions.

1. Generate Address:

• Alice generates a new private zkBob address through the application’s UI to receive incoming transactions.

• This address is unique for this transaction and cannot be linked to Alice’s main account.

2. Deposit:

• Alice initiates a deposit transaction from her regular Ethereum wallet to the zkBob Pool contract.

• She approves the contract to receive funds and completes the deposit.

3. Transfer Request:

• Alice wants to send a private transaction to Carl.

• She generates a zk proof for this transaction using her private key and the zkBob application.

4. Relayer Interaction:

• Alice anonymously sends the zk proof to a relayer (a trusted intermediary).

• The relayer receives the proof and processes it without knowing the details of the transaction.

5. Transaction Publishing:

• The relayer publishes the transaction to the zkBob contract without revealing the details of the transaction.

• The zkBob contract verifies the zk proof and updates the transaction details without revealing the amount or participants.

6. Transaction Reception:

• Carl generates a new private zkBob address on the receiving end through the UI of the application to receive incoming transactions.

• This ensures that his receiving address is not linked to his main account.

7. Transaction Completion:

• The zkBob contract updates the balances of Alice and Carl without revealing the transaction details.

• Carl can now see that he has received a transaction, but the transaction details remain confidential.

8. Withdrawal Option:

• If Carl wants to use the received transaction in public, he can initiate a withdrawal transaction.

• This withdrawal will generate a zk-proof showing ownership of the transaction, allowing him to convert it into a publicly usable form.

Throughout the process, the use of zero-knowledge proofs (zkSNARKs) ensures that transaction details, senders, and recipients’ information remain private. The relayer handles the transactions without revealing sensitive details, and the zkBob contract maintains the integrity of the transactions while preserving the privacy of the involved users.

Case Study – WaaS LianGuaiy

WaaS LianGuaiy is a smart contract account deployment platform designed for organizations seeking instant blockchain payments while prioritizing privacy, utilizing the Safe{Core} protocol suite and Safe{Core} Account Abstraction SDK. It provides a user-friendly no-code interface to customize smart contract account functionalities such as social login, fiat on/off-ramp, and gasless transactions for recipients. By facilitating anonymous transactions through zkBob with zero-knowledge proofs (ZKPs), WaaS LianGuaiy ensures that sensitive financial data remains secure and confidential. The platform is supported by Polygon zkEVM for scalability and efficiency, while a self-hosted IPFS node with Helia protects sensitive metadata.

For more information: https://ethglobal.com/showcase/waas-LianGuaiy-br0qs

Advantages of Zero-Knowledge Payments

1. Enhanced Privacy: ZKPayments provide a high level of privacy by keeping transaction details confidential, protecting users from potential privacy breaches and data exploitation.

2. Increased Security: By hiding sensitive transaction data, users can reduce the risk of targeted attacks, ensuring a more secure environment for conducting Web3 transactions. For DeFi, ZKPayments can help mitigate the prevalent issues of frontrunning and maximizing extractable value (MEV).

3. Transparency and Compliance: ZKPayments achieve a balance by providing transaction transparency to relevant parties while protecting user privacy. This helps businesses meet regulatory compliance requirements without sacrificing confidentiality.

4. Enhanced User Experience: The reduced computational requirements of ZKPayments result in lower transaction fees and improved scalability. As demonstrated in the case study mentioned above, these use cases combined with ERC4337 offer a smoother experience for users and businesses, encouraging higher adoption and usage rates.

Main Use Cases

1. Confidential Personal Transactions: These protocols ensure private purchases and payments without revealing financial details to third parties, ensuring maximum privacy.

2. Privacy-Protecting Token Swaps: These protocols support private token swaps, protecting transaction history and holdings to enhance financial privacy.

3. Private Crowdfunding: Through these protocols, crowdfunding activities can maintain donor anonymity while transparently disbursing funds, ensuring a trusted private fundraising process.

4. Private Payroll: These protocols allow businesses to make cautious payments to contractors or employees, protecting payment amounts and recipient details.

5. Auditing Incentives for Contributors: These protocols simplify private multi-party transfers, ensuring confidentiality while auditing contributions.

6. Open Source Fundraising and Grants: These protocols provide secure and private token requests for investors, verifying fund security through proof of solvency while maintaining transaction confidentiality, fostering trust in fundraising and grant management.

Challenges

Zero-Knowledge (ZK) Payments offer private Web3 transactions but come with compliance challenges. Meeting AML/KYC requirements, tax compliance, sanction screening, data retention, cross-border regulations, and addressing illicit use are crucial. Collaboration with regulators, dynamic compliance, and robust security can ensure responsible use. ZKLianGuaiyments reshapes digital finance while protecting user privacy and complying with the law.

How to Address Compliance Issues? Case Study (zk.money)

To ensure compliance with UK laws and regulations, Aztec Network implemented a comprehensive approach to balance privacy and preventing illicit activities on zk.money, a privacy-focused DeFi dApp.

Actual Deterrence Methods:

• Ensure users have access to on-chain privacy while preventing money laundering and illicit activities.

• Current efforts: Deposit limits on each transaction on http://zk.money.

Measures:

• Overall system daily asset deposit limit.

• IP-specific deposit rate limits.

• Individual address pending deposit limit.

• Escape hatch window restrictions.

• Slow deposit and withdrawal speeds.

• Easily identify risky addresses.

• Prevent illicit users from bypassing Aztec’s aggregation falafel.

Conclusion

In summary, ZKLianGuaiyments provides a transformative solution to meet the growing demand for privacy-focused and scalable options in Web3 finance. By seamlessly integrating privacy and transparency through zero-knowledge proofs, users can securely and efficiently transact while preserving sensitive information. ZKLianGuaiyments is committed to compliance and user-centric principles, paving the way for a decentralized future that prioritizes privacy, fosters trust, and responsibly reshapes the digital financial landscape. Embracing ZKLianGuaiyments opens the door to a more secure and user-friendly Web3 ecosystem, bringing a brighter and more inclusive financial future for everyone.

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