by Nick DiPrinzio
The Problem
Aleo is the first Layer-1 blockchain to offer fully private applications by leveraging zero-knowledge cryptography. “By architecting Aleo as a blockchain that is private-by-default, open-source, and built for the web, we believe Aleo is uniquely positioned to address the shortcomings of blockchain adoption” according to Aleo CEO & founder Howard Wu. For non-developers, this can be quite a mouthful and difficult to comprehend. So what does this all mean and what does zero-knowledge cryptography solve?
When addressing blockchain protocols, such as Bitcoin or Ethereum, the general population often refers to them as “decentralized networks” that “hide” any and all information. Contrary to this popular belief, these protocols are not private by default and nearly all of the data (including public addresses and transaction hash/ids) is stored, collected, and can be identified on their respective networks. In essence, this means that the type of transaction, the transaction amount, and transaction timestamps can be precisely linked to a public wallet address (check out Ethereum’s block explorer https://etherscan.io/). While these protocols serve an important function within the development of the Web3 ecosystem, privacy and personal transparency is not offered on these networks. This is where zero-knowledge comes into play.
Zero-Knowledge Adoption
Crypto in itself is a niche industry. If you compare it to the world of Web2, Web3 is still in its preliminary development stage (despite all the hype). Inside this niche Web3 industry are projects leveraging zero-knowledge cryptography, which today is a niche within a niche. But blockchain technology has gained tremendous traction due to the underlying issues it solves. Whether thats data storage and security, transactions processing and intermediaries, or improving financial access, billions of dollars have been invested into blockchain companies for these reasons.
Zero-knowledge has been at the forefront of advancing privacy and security solutions for blockchains and Web3, as it allows individuals to access a world of personalized web services without giving up control of their private data. While all this sounds great, there is a huge disconnect between theoretical idea and actual adoption.
One reason for this is due to the industry’s inability to provide educational resources for non-developers. Most protocols, including Aleo, publish whitepapers (pages upon pages of information) for anyone to educate themselves. These are usually long, confusing, and require a proficient mathematical background in order to fully understand. That being said, practical zero-knowledge use cases can eliminate this education barrier and demonstrate how zero-knowledge applications can be used in our daily lives.
If Aleo is solving the problem of privacy for real-world applications, how does it work? Those who aren’t developers or intellectuals with a deep understanding of blockchain still find it hard to explain how blockchain technology can be applied to everyday applications. So this begs the questions: If ZKPs (zero-knowledge proofs) enable privacy as a feature of Web3, what are their real world applications? Let’s take a deep dive into some of those use cases.
Traditional/Practical Use Cases
One example that many can relate to is applying for a loan. Whether that is a debt consolidation loan, home improvement loan, medical loan, or wedding loan, you will be required to provide asset documentation to get over these financial humps. Some of this documentation includes:
- Personal identification, such as a driver’s license, Social Security card or passport
- Proof of income, such as W-2s, paystubs or filed tax returns
- Employer’s information, including the company name, your manager’s name and the phone number
- Proof of residence, such as a utility bill with your name and address or a lease agreement
Additionally, most lenders will run a credit check to determine how likely you are to repay your loan. While some online lenders have started to look at alternative credit data, they will still typically look at your credit score. While these financial requirements are obligatory, it does incriminate some of your data. Your credit score alone looks into how far behind you are on a bill payment, the number of accounts that show late payments, and whether you’ve brought the accounts current. For example, take a look into what common assets mortgage lenders use when considering a mortgage loan application:
- Stocks, bonds, mutual funds, 401(K) and retirement accounts
- Life insurance cash value
- Other real estate or property
Does it seem reasonable that these third party lenders should have access to all of an individual’s current and past financial history? Institutions, enterprises, and individuals have to reveal this information at their expense without knowing how this information is used in the future. Zero-knowledge helps to solve this problem.
Let’s say that a loan creditor is able to verify your financial history (e.g. credit score, proof of residence, account payments, and real estate) without knowing any specific data about those assets. Aleo’s zero-knowledge applications would allow debtors to conceal their information using zero-knowledge proofs. At the same time, creditors are able to verify that an individual’s application meets the financial criterion without revealing any quantitative-specific information. This represents of a best-of-both worlds scenario that not only has many applications in traditional finance, but in the world of decentralized networks as well.
Web3 Use Cases
DAOs (Decentralized Autonomous Organization) have been extremely popular in Web3 ecosystems. Think of DAOs like an internet-native business that’s collectively owned and managed by its members. They have built-in treasuries that no one has the authority to access without the approval of the group (approvals are executed through voting). Thus, DAOs are fully autonomous and transparent: smart contracts lay the foundational rules, execute the agreed upon decisions, and at any point, proposal, voting, and even the very code itself can be publicly audited. However, there have been recent concerns with DAOs.
Front running is the prohibited practice of entering into an equity trade, option, futures contract, derivative, or security-based swap to capitalize on advance, nonpublic knowledge of a large pending transaction that will influence the price of the underlying asset. The issue with DAOs in their current state is that there is no regard for privacy around account data or potential bid prices for an investment. On Ethereum, for example, miners (who collect transaction fees & mining rewards) add transactions publicly to the blockchain. Thus, miners have the ability to see all incoming transactions on the blockchain. This gives them the ability to see “whales” (individuals or entities that hold large amounts of a certain cryptocurrency) or large quantities of cryptocurrencies being deployed on the blockchain. These miners can swap tokens, add their transactions first, and benefit from the arbitrage, knowing the price variations that will result from the future transactions. Think of it as DeFi insider trading.
DAO’s need a privacy centric, auditable, and programmable base layer protocol for a community funding platform. No joint partnership, syndicate, or C-corp ever publicly displays their data or potential bid prices (without their choice) as this prevents being front-run on their bids or investments. Using a zero-knowledge stack, such as Aleo, will allow DAOs to fundraise privately, issue DAO assets (tokens or equivalent) privately, and manage a private DAO treasury, eliminating the problem of front running. It’s sounds elementary but miners would only have the ability to see the zero-knowledge proof, again not knowing what quantitative-specific data is encrypted in those proofs.
In Short
Zero-knowledge cryptography will change the way we think about the personal data privacy by enabling us to have our cake and eat it too. As more businesses and individuals around the world transition into a world integrated alongside cloud based solutions, the more imminent security breaches become and the greater need for privacy preserving solutions. With zero-knowledge powered application platforms such as Aleo, users can enjoy personalized online experiences without fearing privacy breaches in both the Web2 or Web3 setting.
Want to learn more about Aleo and how zero-knowledge cryptography will change the world? You can:
- Learn more about who we are and what we do at aleo.org
- Try writing a zero-knowledge application yourself at leo-lang.org
- Follow us for the latest updates on Twitter: https://twitter.com/AleoHQ
- Join our community on Discord: aleo.org/discord
