How zero-knowledge proofs will guarantee compliance for DeFi adoption
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The debate in the decentralized finance (DeFi) community rages following sanctions from the U.S. Treasury against a popular crypto mixer, but the real progress is happening below the surface. Technologies underpinning privacy-preserving protocols, like zero-knowledge proofs, have found new compliant use cases that go far beyond finance itself. Zero-knowledge proofs are a tool that can transform the way we handle sensitive data, allowing information to be verified without disclosing the underlying contents themselves, providing value and protection in an age where individuals have too little.
Zero-knowledge proofs are not that new; they have been around for decades. Their mathematical logic can be applied to any number of data exchanges and any realm that can benefit from decentralization and added security.
Imagine, for example, that you need to verify your age with a driver’s license, but without sharing other irrelevant data like your address, height and weight — that’s what zero-knowledge technology can do on a massive scale. When applied to our banking system and credit scoring, zero knowledge can and will revolutionize financial access for populations that suffer discrimination, and the same can apply to tax verification or a privacy-preserving voting system.
Real-world use cases have already arrived, as zero-knowledge proofs have been proposed to aid the Danish Red Cross’s humanitarian efforts in Somalia. Given the patients’ sensitive circumstances, the organization was able to prove that patients are eligible to receive specific medical care without revealing their names or personal information.
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Securing against evolving threats
With as many scams and successful hacks as we’ve seen in Web3 to date, the number of vulnerabilities is likely to grow as new, and perhaps less informed, users are onboarded. There are precedents found in an overwhelming number of previous technological breakthroughs and there’s no reason to believe our industry will behave differently — just look at all the spam mail you get in your inbox daily, or the robocalls you receive on your phone. That’s where the limited disclosure of zero knowledge plays a decisive part in protecting the user because hackers will find nothing to hack. In due time, using blockchain without zero-knowledge protocols will be like using Windows 95 in 2022 — leaving yourself incredibly vulnerable to modern attacks.
In theory, the use of cryptocurrency alone should remove the need for central authorities that make such convenient and large targets. Although in practice, that’s not always the case. Zero-knowledge proofs allow for security against threats we can’t even imagine. As with putting your belongings in a personal safe, there’s a significant difference between a fire-proof, stainless steel, UL-tested safe for $30,000, and one you might buy on Amazon for $200.
More than ever, protocols need to implement a rigorous approach to compliance. Regulators, on the other hand, must keep focus on the appropriate actors in the Web3 space, as overreaching destroys the economic value otherwise available. Both need to put in the work. Then a bright future for DeFi, traditional finance and identity management in general, is just a few steps away.
Oliver Gale, is founder and CEO of Panther Protocol.
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