How Zero-Knowledge Proofs Ensure Compliance for DeFi . Adoption

The debate in the decentralized financial (DeFi) community is raging after US Treasury sanctions against a popular crypto mixer, but the real progress is taking place beneath the surface. Technologies that support privacy-protecting protocols, such as zero-knowledge proofs, have found new compliant use cases that go well beyond finance itself. Zero-knowledge proofs are a tool that can transform the way we interact with sensitive data, enabling information to be verified without disclosing the underlying content itself, providing value and protection at a time when individuals are underfunded.

Zero-knowledge proofs are not so new; they have been around for decades. Their mathematical logic can be applied to any number of data exchanges and to any area that can benefit from decentralization and additional security.

For example, imagine having 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 large scale. When applied to our banking system and credit scores, zero knowledge can and will revolutionize financial access for discriminated populations, and the same could apply to tax auditing or a privacy-preserving voting system.

Real-world use cases have already arrived as zero-knowledge proofs have been proposed to help the Danish Red Cross humanitarian efforts in Somalia. Given the patients’ sensitive circumstances, the organization was able to prove patients eligibility for specific medical care without revealing their names or personal information.

Security against evolving threats

With as many scams and successful hacks as we’ve seen in Web3 so far, the number of vulnerabilities is likely to grow as new, and perhaps less knowledgeable, users onboard. Precedents have been found in an overwhelming number of previous technological breakthroughs, and there’s no reason to believe our industry will behave any differently — just look at all the spam mail you receive in your inbox every day, or the robocalls you receive on your phone. . That’s where the limited disclosure of zero knowledge plays a decisive role in protecting the user as hackers won’t find anything to hack into. Over time, using blockchain without zero-knowledge protocols will be like using Windows 95 in 2022 – leaving you incredibly vulnerable to modern day attacks.

In theory, using just cryptocurrency would remove the need for central authorities to create such convenient and large targets. Although in practice this is not always the case. Zero-knowledge proofs provide security against threats we can’t even imagine. As with storing your belongings in a personal safe, there’s a significant difference between a fireproof, stainless steel, UL-tested safe for $30,000, and one you can buy on Amazon for $200.

More than ever, protocols must implement a rigorous approach to compliance. Regulators, on the other hand, must continue to focus on the right actors in the Web3 space, because reaching too much destroys economic value that would otherwise be available. Both have to 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.