Privacy, Transparency and Auditability — How the New Generation of Blockchains Are Spurring Adoption
On Bitcoin and Ethereum, every transaction is visible to anyone using block explorers, but zero-knowledge proofs change that.
During the second half of the last decade, enterprises began to sit up and take notice of blockchain technology. The promise of streamlining the turgid financial sector, revolutionizing supply chains and enabling peer-to-peer trustless transactions proved to be alluring.
However, certain challenges immediately became apparent. The Ethereum-generation blockchains left enterprises with several tradeoffs, most notably around scalability and privacy. Public blockchains were often slow and clunky, and the prospect of having all transactions visible to the public was understandably offputting to many businesses. Not to be deterred, they turned to private and permissioned platforms, such as Hyperledger, or developed their own in-house solutions.
However, developments in blockchain technology now mean that public blockchains are once again an option for businesses. Privacy-preserving technologies, along with high-performance networks, both offer all the benefits of public blockchains without the tradeoffs. In the area of privacy, zero-knowledge proofs offer an assurance of confidential transactions, but with a provable audit trail behind them. For high-volume enterprises, directed acyclic graphs are a form of distributed ledger that can handle ultra-fast processing at an impressive scale.
What are zero-knowledge proofs?
A zero-knowledge proof, or ZKP, enables someone to demonstrate that a particular fact is true without giving away how they know it is true. Imagine two kids, Alice and Bobby, are playing "Where's Waldo?" Alice wants to prove that she has found Waldo, but she doesn't want Bobby to know where Waldo is on the page. So she takes a big piece of paper and cuts out a small hole. She then covers the page and shows Bobby the illustration of Waldo without revealing his whereabouts.
In blockchain terms, rather than Waldo's location, it could be an identity document or a financial transaction that someone wants to keep secure without any risk of it being exposed. Applying ZKPs means that users can transact on the blockchain with an assurance of privacy, but still be able to prove that the private data is present and correct.
The importance of this technology in the context of blockchain can't be overstated. In a public blockchain like Bitcoin or Ethereum, every transaction is visible and can be viewed by anyone using block explorers. Although blockchain addresses aren't assigned to names, if someone knows the person behind an address, they can trace all of their transactions.
For this reason, public blockchains are often referred to as "pseudonymous" rather than anonymous, and they offer little in the way of genuine user privacy. While the DeFi craze has prompted speculation about potential institutional involvement in the future, this lack of confidentiality could ultimately prove to be a major sticking point. A study conducted by Forrester found that around half of firms cited privacy as one of their foremost concerns around adopting blockchain solutions.
But a critical feature of blockchain is its ability to demonstrate transparency between parties. ZKPs offer an essential means of helping to preserve user privacy while protecting this transparency for audit purposes.
One of the earliest implementations of ZKPs was in privacy coins, which evolved from the challenge of transacting on public blockchains. Zcash, for instance, allowed transactions to be verified without identifying the sender, receiver or transaction amount. Unfortunately, from a business perspective, this doesn't really work due to audit-compliance obligations, so completely cloaking a transaction means that they can't demonstrate later on that the transaction took place.
The next generation of ZKP implementation, fit for adoption by enterprises and financial institutions, addresses privacy from the infrastructure level. Findora, developed by entrepreneurs and academics from Stanford, is an example of a public decentralized blockchain platform tailored specifically for financial applications.
The idea is to achieve an optimal balance between users' need to transact with confidentiality while being fully traceable for compliance purposes.
What are directed acyclic graphs, and who's using them?
Without getting too technical, a directed acyclic graph (DAG) is a non-linear form of distributed ledger technology. If you consider a blockchain as a literal chain of blocks containing transactions, then you can think of a directed acyclic graph DAG as a series of transaction sequences that are interconnected and cannot be reversed, but don't necessarily have a linear sequence.
DAGs are used to handle high volumes of potentially very low-value transactions that would simply be unmanageable on a traditional linear blockchain like Bitcoin or Ethereum. One of the best-known projects using a DAG structure is IOTA, which is geared towards Internet of Things transactions.
Another project also using the innovative DAG chain topology is Taraxa. Rather than applying DAGs to the existing technologies and apps, the Silicon Valley-based start-p is targeting offline and off-chain transactions. This kind of immutable audit trail comes very handy for a whole slew of use cases, from explicitly recording the parties' consent in complex transactions (construction change orders, insurance claims and many more) to more trivial remote works communication and approvals.
Thanks to their ability to demonstrate auditability without compromising on elements like fast throughput and privacy, these kinds of platforms offer vast potential to scale up enterprise adoption.
Ultimately, the new generation of public platforms look like they're set to see blockchain fulfill its original revolutionary promise. It's a very interesting time to be in blockchain and watch how these innovative technologies make way for the next wave of entrepreneurs to contribute to the growing ecosystems.
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