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In recent months we have witnessed a rapid diffusion of solutions based on Zero Knowledge and Layer 2 by several blockchains, including Polygon, Binance and Ethereum. But what is it exactly? Let's go in order and start from the basics.

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What is Layer 2

As we know, every blockchain has intrinsic scalability limits, that is, it can only process a certain number of transactions per second. As a network becomes more used, these limits can create congestion and slowdowns.

To solve this problem, second level solutions, called Layer 2, have been created which operate in parallel to the main blockchain (Layer 1). Simply put, it is as if they are a fast lane for transactions, which relieves traffic on the main lane.

Layer 2 therefore allows a blockchain to be scaled in horizontal mode, moving part of the computational load to a parallel chain and reducing the work of the main chain. Among the best-known Layer 2 projects are Lightning Network on Bitcoin and solutions such as Optimism and ZK Rollups on Ethereum.

What is Zero Knowledge

Zero Knowledge, on the other hand, is a technology with more distant roots, dating back to the 1980s, when the cryptographers Goldwasser, Micali and Rackoff coined this term to describe a mathematical method that allowed one to demonstrate possession of a certain knowledge without revealing the knowledge itself.

Today Zero Knowledge is used in blockchains mainly in two ways:

  • To create private transactions, where details are visible only to users and not to the network.
  • To scale transactions on Layer 2. In this case we talk about Zero Knowledge Succinct Non-interactive Arguments of Knowledge (ZK-SNARKs).

ZK-SNARKs are an evolution of Zero Knowledge cryptography which makes it more efficient and suitable for verifying large quantities of transactions on Layer 2. The advantage is that fast, economical and private transactions can be carried out, with the security of Layer 1 of the blockchain principal.

ZK-Rollups: Scalability and Efficiency for Ethereum

ZK-Rollups apply ZK-SNARK technology to Ethereum, with huge potential benefits given network congestion. These Zero Knowledge-based second-layer rollups are expected to scale Ethereum 100x, up to 2000 transactions per second.

In addition to providing scalability, ZK-Rollups also enable new use cases with a greater level of privacy. For example, in a recent paper Vitalik Buterin proposed a system called “Privacy Pools” that leverages ZK-SNARKs to balance privacy needs and regulatory compliance in financial transactions.

Users can prove that their funds do not come from illicit sources, while remaining anonymous. In this way, authorities can identify illegal capital, while users maintain a certain degree of confidentiality.

According to Buterin, this approach could enable private but legal financial services even in the traditional banking system. ZK trials therefore offer interesting possibilities for regulated innovation.

Towards a balance between technology and regulation

More generally, the relationship between blockchain and privacy regulations remains an open challenge. Blockchain technology aims for transparency, often in conflict with laws such as GDPR. At the same time, tools like Zero Knowledge provide ways to ensure confidentiality on a public, immutable record.

Regulators are still evaluating how to apply existing regulatory frameworks to cryptocurrencies and decentralization. Finding the right balance between transparency and privacy will be key to not stifling innovation and at the same time protecting user rights.

Joint efforts between developers, communities and institutions will probably be needed to produce a regulatory model tailored for the crypto world. Blockchain technology and regulation will need to work together to enable solutions that reflect decentralized values and protect user privacy.

Further information:

Examples of Zero Knowledge solutions:

  • Zcash – privacy-focused blockchain (ZK-SNARKs)
  • Aztec – privacy solution on Ethereum (ZK-Rollups)
  • StarkNet – L2 for Ethereum based on STARK
  • MobileCoin – private mobile cryptocurrency (STARK)
  • zkSync – ZK Rollup for payments and exchanges on Ethereum
  • Loopring – Decentralized Exchange on Ethereum (ZK-Rollups)
  • Polygon Hermez – ZK-Rollups for Ethereum scaling
  • Polygon Miden – Validium ZK-STARK for Ethereum
  • Matter Labs – ZK Sync with ZK-Rollups on Ethereum
  • Mysten Labs – Sirius, blockchain layer 1 with ZK-STARKs
  • Espresso Systems – Blockchain embedded systems with ZK-STARKs
  • SuperZK – Framework for ZK-Rollups on Ethereum

Resources for further reading:

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