How Exactly Do Privacy Coins and zk-SNARKs Work?

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Privacy currencies such as Zcash are powered by zk-SNARKs, a “zero-knowledge” kind of encryption. Everything you need to know is right here.

So-called “privacy coins,” which offer extremely anonymous transactions, are a significant part of the crypto market. Zcash (ZEC) and other privacy coins rely on a mechanism known as zk-SNARKs, which stands for Zero-Knowledge Succinct Non-Interactive Argument of Knowledge. This is also known as zero-knowledge cryptography.

The concept of “zero knowledge” can be somewhat mind-melding, and zk-SNARKs get complicated quickly, so let’s start at the beginning.

Cryptography

Cryptography, in a nutshell, is the study of secure communication mechanisms. When only the sender and recipient of a communication need to see the contents of a communication, cryptography is frequently used.

Cryptography has been around for centuries. One of the earliest examples of cryptography arose in Ancient Egypt where followers of Khumhotep II inscribed his tomb with encrypted symbols that marked a departure from traditional Egyptian hieroglyphics.

A traditional form of cryptography
A traditional form of cryptography. Image: Shutterstock

Hash functions, the backbone of any blockchain, are one of the most common parts of cryptography in the cryptocurrency sector. Hash functions, notably SHA-256, which is present in the majority of blockchains, simply convert an input such as a word phrase or a number into an encrypted piece of information of a defined length that looks like this:

77077b1f4c3ad44c83dc0bdb8d937e9b71c0ef07a35c2664bb7da85be738eacf

Hash functions (more on this here) enable blockchains such as Bitcoin to process transactions, link blocks to one another, and secure the integrity of blockchain data.

zk-SNARKs, like hash functions, are a kind of encryption. They are used to provide consumers with greater anonymity than they would otherwise receive on a blockchain.

 

Zcash: zk-SNARKs in action

zk-SNARKs are a form of “zero-knowledge” cryptography—hence the zk.

zk-SNARKs allow crypto users to send transactions on a blockchain in a totally encrypted way—meaning no one can read them—while at the same time signifying the transactions took place in a legitimate manner. But how is that possible?

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Person A can use zero knowledge proofs to show to person B that statement X is true without providing any information other than the correctness of statement X itself. Consider telling someone you’re above the age of 21 without revealing your birthday or the fact that you’re 25. That’s a good way to think about how zk-SNARKs work.

This is exactly what happens when two people deal in Zcash, one of the cryptocurrency industry’s premier privacy currencies. The purpose of Zcash is to anonymize as much information as possible about users and transactions.

“The strong privacy guarantee of Zcash is derived from the fact that shielded transactions in Zcash can be fully encrypted on the blockchain, yet still be verified as valid under the network’s consensus rules by using zk-SNARK proofs,” the Zcash website reads.

Fundamentally, this type of shielded transaction is the inverse of what we see in, say, the Bitcoin blockchain, where sender and recipient addresses, as well as transaction value, are visible to everyone.

In a shielded transaction, Zcash employs zk-SNARKs to demonstrate that a sender has the funds he or she desires to convey and that the transaction cannot be manipulated by a third party.

 

Zcash
Zcash (ZEC) is a privacy-focused cryptocurrency. Image: Shutterstock

Certain requirements must be met for these shielded transactions to function. In Zcash, this entails users posting a “commitment” and exposing a “nullifier.”

On the Zcash blockchain, a commitment is an unspent balance. Nodes on the Zcash network, like Bitcoin, keep a record of such balances, indicating that money are truly accessible.

A person who wants to transmit Zcash makes a commitment to say, “See, I have this amount of money” (albeit without revealing how much). In turn, the nullifier helps to indicate that “the same amount of money has been spoken for—it has been transferred to someone else.”

Nullifiers, in other words, are linked to commitments—they are numbers that must be revealed before a commitment may be spent. If Alice wishes to send Bob Zcash, she must use a commitment to demonstrate that she has the power to spend the funds, as well as a nullifier to demonstrate that the required amount has been reserved solely for Bob (without, of course, revealing Bob is the recipient).

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Each new shielded payment generates three sorts of records on the blockchain—records secured by a hash. The hashes in question reflect the transaction recipient’s address, the amount transferred, and a number unique to the transaction itself.

The end result is that shielded transactions, like Bitcoin, rely on hash functions, but it is the zk-SNARKs that offer a new layer of anonymity.

Because the crypto sector is made up of many libertarians, coins like Zcash and Monero—another famous privacy currency in the crypto sphere—are popular among some users. Both coins attempt to distinguish themselves from more famous cryptocurrencies such as Bitcoin by stating that if you use their coins, no one would be able to pry into your private financial lives.

However, because to worries that cryptocurrencies in general, and privacy coins in particular, might be used as tools by criminals, these initiatives are unpopular with law enforcement and regulatory organizations.

 

The future of zk-SNARKs

zk-SNARKs are a handy technique for making crypto transactions anonymous. However, they are also assisting in the powering of an increasing variety of other applications other from privacy coins. Celo, for example, is a cryptocurrency system that focuses on mobile payments and seeks to make the financial world more accessible.

Decrypt talked with Pranay Mohan, a Celo product and engineering manager. He speculated that while Zcash may be where people first learn about zk-SNARKs, the technology’s potential stretches well beyond privacy advocates. Mohan focuses on how zk-SNARKs might benefit people in impoverished countries.

“If we think about how these people are able to use cryptocurrency now it’s near impossible, they’re not using Metamask and throwing $10,000 into a random DeFi project,” he said. Using zk-SNARKs, Mohan adds, mobile phone users can sync instantly with a blockchain—retaining the same trustless properties of crypto but on devices that don’t have a high degree of technical capacity.

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Despite their promise, zk-SNARKs remain very niche. Even in a highly technical industry like crypto, many people aren’t aware of what they are. But that may be changing as more companies begin embracing the technology.

Aleo, for example, recently secured $28 million from blue chip venture capital companies to develop tools that would allow web developers to incorporate zero knowledge proofs in a broad variety of Internet applications—a project that promises to allow people to access the online without disclosing a wealth of personal data.

However, EY, one of the world’s top accounting organizations, has not been deterred from testing with this sophisticated cryptography.

According to Paul Brody, global blockchain leader at EY, the company is employing zero knowledge proofs such as zk-SNARKs to enable consumers to embrace blockchain’s potential while protecting user privacy.

According to Brody, the accounting firm’s own Nightfall solution allows for total secrecy while dealing on the Ethereum network, while also giving these benefits to corporations, not just individuals.

While there are regulatory issues about very private financial transactions, Brody believes zk-SNARKs will gain widespread traction in the future.

“Privacy is essential for business users,” he said, adding, “For enterprises, some of their most sensitive information is about what they buy, from whom, how much they pay and how much they are buying in volume.”

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