In the digital world, data security and privacy are very important issues. We want to be sure that our information is secure. At the same time, we expect companies to be completely transparent. It would seem that these requirements contradict each other.

New crypto solutions based on zero-knowledge proof help to achieve the right balance between openness and privacy. This technology makes it possible to verify the reliability of information without revealing its content. For example, an exchange can confirm that it has sufficient reserves to cover its obligations to customers. At the same time, the amount of each individual balance will remain secret.

In this article, we will go into detail about what zero-knowledge proof is and how it works.

How does zero-knowledge proof work?

Zero-knowledge proofs (ZKP) are cryptographic protocols that allow one party, called the «prover», to convince another party, the «verifier», of the truth of some assertion without revealing any details related to that assertion. It sounds confusing, but in reality it is quite simple.

Imagine that you want to prove that you know a secret password, but you can’t give it. Normally, you would have to reveal the password to the reviewer. With zero-knowledge proof, you can demonstrate knowledge of the password without providing it. The verifier will be convinced that you know the password, but will never know what it is.

The technology works as follows. You generate a cryptographic «proof» using a special algorithm that confirms the accuracy of your claim (in this case, knowledge of the password). The verifying party applies another algorithm to verify this proof. If it is correct, the checker can be completely confident in your knowledge of the password without getting the text of the password.

ZKPs are very useful for protecting personal and financial data. For example, a crypto exchange can prove full reserves to cover customer balances without disclosing details of individual accounts. This is how transparency is ensured while maintaining confidentiality.

The credibility of the proof is very high, the risk of forgery is completely eliminated. At the same time, it requires far fewer resources to verify its correctness than to create the proof itself. Zero-knowledge systems are therefore ideally suited for public data audits where the secrecy of individual facts must be maintained.

Criteria to be met by zero-knowledge proof

For a zero-disclosure proof system to work correctly and effectively, it must meet a number of clear criteria. Let’s look at the main requirements for these:

• Credibility. This is perhaps the most important condition for any type of proof. The verifier must be absolutely sure that if the statement is true, the proof provided will certainly confirm this fact. Otherwise, if the statement is false, the proof won’t be able to mislead the verifier.
• Completeness of information. The verifier shouldn’t need additional information to confirm the truth of the assertion being proved. The evidence provided should be sufficient to form a final conclusion.
• Zero disclosure. This is a unique and extremely important property of ZKP. When a proof successfully verifies the truth of an assertion, the believer receives absolutely no additional information other than the very fact of that truth.

Compliance with all three of these criteria guarantees the reliability and effectiveness of a zero-knowledge proof system.

zk-SNARK and the Merkle tree: what is it?

Zero-knowledge proof technology is based on two key components — the zk-SNARK protocol and a data structure called the Merkle tree. Let’s look at each of them in more detail.

zk-SNARK

The zk-SNARK is a cryptographic protocol for generating and verifying ZKP proofs. Its main role is to allow the proving party to convince the verifier of the veracity of some assertion without communicating the actual information associated with that assertion.

The zk-SNARK protocol is also used to prove the correctness of various computational tasks and operations. In the crypto sphere, it allows verifying transactions without disclosing details such as sender/recipient addresses or amounts transferred.

An important property of zk-SNARK is its non-interactivity. Once the proof itself is generated, the verifier doesn’t need to further interact with the proving party — it is enough to check the provided proof with the corresponding algorithm.

Merkle tree

Another component, the Merkle tree, is also required to implement ZKP systems.

Merkle trees are a special hash structure in which information is organized in the form of a tree. At the lowest level are leaf nodes, each of which contains the hash value of a separate transaction or data set. These leaf nodes are the foundation of the entire structure.

The next level contains nodes that are obtained by combining and re-hashing pairs of lower-level nodes. For example, if there are four leaf nodes (A, B, C, D) at the lower level, the next level will have two nodes, one containing the hash value obtained by combining and hashing A and B and the other containing the hash value obtained by combining and hashing C and D.

This process is repeated at each successive level until eventually a single node, called the root hash, remains at the topmost level. This root hash cryptographically represents all the original data that was included in the leaf nodes at the lowest level.

The main feature of Merkle trees is that any change in the original data, whether it is a change in one transaction or the addition of a new transaction, results in a complete change of the root hash. This property allows us to efficiently check the integrity of very large data sets by simply computing and comparing the root hash to the expected value.

In ZKP systems, Merkle trees are used in conjunction with the zk-SNARK protocol. They serve for structured storage and verification of information on reserves, balances and other important data. The details of the user records themselves are not disclosed, only their summarized correctness is confirmed.

By combining zk-SNARK and Merkle trees, it becomes possible to realize full-fledged zero-knowledge proof systems. They make it possible to verify the truth of any assertions or the validity of data. In this way, a unique combination of transparency and privacy is achieved, which is crucial for many fields, especially the crypto industry.

What is hashing?

Hashing is a core process in cryptography and is at the heart of many data protection technologies, including zero-knowledge proofs. Let’s take a look at what it is and how it works.

Hashing is the conversion of input data of arbitrary size into a fixed-length output string using a special mathematical function called a hash function. The result of this conversion is called a hash sum or simply a hash.

The main properties of reliable hash functions are:

• Compression of the original data — regardless of the amount of input information, the length of the hash is always the same and smaller than the original size.
• High computation speed — the hashing operation is very fast even for large amounts of data.
• Practical impossibility to find two different input sequences with the same hash.
• Any changes in the input data result in a complete change of the hash sum.

Because of these properties, hashing allows information to be securely protected without leaking its contents. Instead of transmitting or storing the data itself, encrypted hash values can be used.

Hash functions are actively used in the crypto space. For example, in chains of transaction blocks, each new block contains a hash of the previous block. This links all blocks into an unbroken sequence and protects against data spoofing.

Similarly, hashing is used in Merkle trees. The idea is that all information, be it user balances or transactions, is hashed and placed in the tree as hash sums at the bottom level. These hashes are then sequentially combined and hashed again to form the next levels until a single final root hash remains at the top.

The root hash cryptographically represents the entire set of original data, but doesn’t reveal its details. At the same time, any changes to individual records result in a complete replacement of the root hash, which makes it easy to verify the integrity of the information.

Thus, hashing is the basic tool that ensures the operation of complex zero-knowledge protocols.

Why use zero-knowledge proof?

What exactly are the benefits of zero-knowledge proof technology:

• Keeping information private during public audits. In the past, companies had to make a difficult choice — either disclose critical data to prove their accountability or provide no information at all, risking loss of trust. With ZKP, both parties get what everyone wants — credible public proof with complete confidentiality of details.
• Simplifying data protection compliance. More and more industries are subject to strict regulatory guidelines for handling and storing personal and financial information. Zero-knowledge proof allows you to automate audit processes without the risk of leaking sensitive information.
• Increased efficiency of business processes. The need to constantly manually collect, organize and submit data for audits slows down workflows. ZKPs provide automatic verification with minimal resources and time.
• Increased trust from customers and partners. Transparency combined with the guarantee of data privacy is perceived as a significant competitive advantage. The use of ZKP-based solutions demonstrates high security standards to customers.
• Protection against the actions of malicious insiders. With traditional approaches, insiders can gain access to critical data during audits. Zero-knowledge technology eliminates the very possibility of leakage due to human error.
• Applicability in many fields. While ZKPs are particularly in demand in the financial industry and crypto markets, the prospects for their use are much broader. They can be applied anywhere where a combination of openness and privacy is required — healthcare, public sector, business.

Overall, zero-knowledge proof is opening a new chapter in data protection and can be a catalyst for innovation in many industries.

Conclusion

ZKPs offer great prospects for traders and investors.

For traders, the introduction of ZKPs on exchanges reduces the risks associated with possible bankruptcy or fraud by the platform. The regular publication of zero-knowledge proof confirms the financial strength of the exchange and the availability of funds to fulfill obligations to clients. At the same time, the details of the accounts remain confidential.

ZKPs can also be used to protect the privacy of transactions in public blockchains. The technology allows to hide sender/recipient addresses and transfer amounts, while maintaining the ability to verify the correctness of transactions. This is especially important for institutional investors who require confidentiality of transactions.

Overall, zero-knowledge proofs are making a major contribution to the crypto security industry by simplifying auditing and regulatory compliance procedures.