Q9 Markets | Zero-Knowledge is Power

8 min readJan 19, 2023

19 January 2023

· Market rally continues, led by metaverse tokens

· Genesis to file for bankruptcy as soon as this week

· The rise of zero-knowledge proofs

Kung Hey Fat Choy / Gong Xi Fa Cai — As we hop into the Year of the Rabbit the crypto market delivered its own red envelope as tokens once again saw gains across the board. Metaverse coins were the strongest performers with Decentraland (+57%) and The Sandbox ((+32%) leading the pack. Bitcoin (+15%) briefly reached $21k before pulling back slightly yesterday as Genesis began preparing for bankruptcy.

Ethereum (+9.2%) hit 500,000 validators this week ahead of its scheduled Shanghai Upgrade in March according to data from BeaconScan.

Source: BeaconScan

Choose to be Optimistic

The Optimism network logged over 800k transactions in a single day as it surpassed trading activity on rival Ethereum Layer-2 Arbitrum. Traders and investors are increasingly seeing the Optimism ecosystem as a likely spot for capturing outsized returns. Such activity can serve as a predictive indicator of forthcoming investor interest in any blockchain ecosystem.

The Ethereum-based scaling product, which allows traders to transact on the blockchain network for under a few cents in fees and transacting times of a few seconds, is among a flurry of blockchain networks that launched in the past year, each promising to be faster and cheaper than the previous one.

Source: The Block

And On the 8th Day…

…Crypto broker Genesis prepared to file for bankruptcy. The filing could come as soon as this week. Genesis and its owner, Digital Currency Group (DCG), have been in negotiations with creditors since mid-November. The firm owes creditors more than $3bn. A Genesis bankruptcy would be a significant blow for Barry Silbert’s crypto group, which includes trade publication CoinDesk and asset manager Grayscale. CoinDesk has been privately seeking a sale for months.

To compound matters, Genesis and Gemini were both charged by the SEC for selling unregistered securities through Gemini’s “Earn” program. “We allege that Genesis and Gemini offered unregistered securities to the public, bypassing disclosure requirements designed to protect investors,” SEC Chair Gary Gensler said in a statement.

Gemini customers were able to loan their crypto to Genesis under the promise the latter would repay the loan with interest. Genesis had full control over how it would earn a yield to repay Gemini creditors. Gemini co-founder, Cameron Winklevoss claims that Genesis and DCG now owes $900mn to Gemini’s clients.

After FTX There is… GTX

Confirming the old adage that truth is stranger than fiction… the founders of two failed crypto firms, Three Arrows Capital and CoinFLEX, are teaming up to create a new exchange where claims against failed crypto firms are traded. They are seeking $25mn to get the venture, named GTX, off the ground. Once you’ve finished laughing, you might consider crying.

Last year 3AC saddled investors and lenders with potentially billions of dollars of losses when it imploded. But don’t despair: 3AC’s architects are back, bringing with them Mark Lamb and Sudhu Arumugam, the co-founders of CoinFLEX — which filed for restructuring last year after they forced suspensions on withdrawals.

The name of the new exchange, GTX, derives from a next-generation FTX, because G comes after F… Get it. Maybe we’ll have an HTX if this one doesn’t work out.

You can download and enjoy the full pitch deck here.

Source: GTX Pitch Deck

The Zero-Knowledge Economy

Zero-Knowledge proofs are getting a lot of attention and investment as a way to scale blockchains, protect valuable information and bring new entrants into the digital asset economy who require data privacy or IP protection. The technology is expected to revolutionise a myriad of sectors from gaming to payments, and from digital identity to enterprise solutions.

As the question of privacy comes to the forefront of the crypto industry, zero-knowledge technology will become increasingly important. Vitalik Buterin has previously noted how huge zero-knowledge technology is for solving the on-chain information problem and will likely be the main L2 solution for Ethereum.

Whilst the inherent transparency of blockchains provides an advantage in many situations, there are a number of smart contract use cases that require privacy due to various legal or business needs. This is one factor broadly holding back enterprise adoption of public blockchain technology so advancements in this area are needed to bring in large corporations across healthcare, technology, finance, defence and other sensitive sectors.

The Proof is in the Pudding

Zero-Knowledge proofs are all about proving things to another person or entity without revealing the detail of what it is that you’re proving. Even if you’ve never met that person. Sounds complicated.

They essentially allow one party (the prover) to cryptographically prove to another (the verifier) they possess knowledge without actually revealing what that knowledge is. In the context of blockchain networks, the only information revealed on-chain by a zero-knowledge proof is that some piece of hidden information is valid and known by the prover, not the actual information itself.

ZK’s are not exactly a new concept — they were first introduced by researchers from MIT in a 1985 paper — but their uses and applications are gaining renewed attention in today’s digital asset space.

Since blockchains are inherently transparent, this application is huge for the industry and allows many more interactions to take place on-chain in a private way. Zero-knowledge proofs are also extremely “lightweight”, making on-chain interactions much more scalable and efficient, using just a few steps.

In this video, a computer scientist explains ZK’s with 5 levels of difficulty: to a child, a teen, a college student, a grad student, and an expert. It’s a good overview of the concept… and here’s another great video on the future applications of ZK’s in crypto and Web3.

Source: Wired, YouTube

The Value of ZKs

ZK proofs allow corporations, individuals and other entities to share confidential, proprietary or sensitive datasets without leaking the data. It allows all manner of parties to conduct authentication with no need to exchange passwords or data, which means they cannot be stolen. No other party can know what you’re communicating about or what files you are sharing with each other.

For example, a healthcare company can reveal that a new groundbreakingly drug works without sharing the sensitive information of its molecular properties. Or an election can be authenticated as legitimate without revealing who voted for which party. Or a loan can be granted by a bank without knowing the specifics of a person’s financial history. They even have use cases for nuclear disarmament.

There is little doubt among blockchain developers that ZK technology represents the ultimate solution to blockchain scaling. For many, it’s the most crucial development in ensuring a fair internet environment for the free exchange of value and digital ownership of assets and data, all without being subjugated to centralised control.

Source: Chainlink Blog

People are realising the limitations of public blockchains and in particular, the amount of information you must reveal to participate. The status quo is everything is public by default, which creates a system in which consumer protection is impossible.

ZK’s are a meaningful tool for DeFi by leveraging Ethereum’s robust security and decentralisation while providing scale in a trustless way. Additionally, they allow blockchain gaming applications to match the volume of users seen in the mainstream gaming sector. ZK rollups will be essential for processing the hundreds of thousands, if not millions, of micro-transactions that a typical blockchain game would require.

ZK tech is also being applied to digital identity, providing a decentralised, privacy-first means for users to verify their credentials and identity without ever revealing personal information.

Other Use Case Examples

· Finance: ZKs allow customers to prove their secret number lies in a known range. For example, a mortgage applicant can prove their income or credit score is in the admissible range without revealing their exact salary or score.

· Voting: ZKs can allow voters to vote anonymously online and verify that their vote was included in the final tally without revealing how they voted.

· Authentication: ZKs can be used to authenticate users without exchanging secret information such as passwords or biometrics.

· Private transactions: ZK protocols allow parties to preserve confidentiality while conducting private and secure transactions on public blockchains. For those with large net-worth’s, there are concerns around privacy and data sovereignty.

· Messaging applications: End-to-end encryption has played a big part in allowing messages to be sent privately. However, traditional messaging applications require users to verify their identity to a server. With ZKs, an individual can prove their identity without releasing additional personal information

· Documentation: Combining ZKs and blockchain allows users to share complex documents with security. ZKs have the potential to encrypt data in pieces, this enables users to control certain blocks and the visibility of the information contained within them, allowing some users access while restricting others.

Rollup, Rollup

With so much potential coming from a single technological breakthrough, it’s increasingly difficult to argue that ZK rollups won’t play a central role in the broad adoption of cryptocurrency. ZK’s will likely be the very thing that will deliver accountability to decentralised networks without submitting to arbitrary oversight.

The technology will enable blockchain projects to facilitate greater transaction throughput, protect user data while still being able to verify identities, and support complex computation, while also allowing global enterprises to adopt blockchain technology while protecting their intellectual property. It’s early days, and many of the potential use cases of ZK’s haven’t even been conceived yet.

There is an enormous amount of mistrust that exists in society and helping to bring people together using maths is a pretty awesome mission… I mean, we can’t all go around signing NDA’s every single time we want to do something!

In the News…

· Silvergate Bank reports net loss of $1bn for Q4

· China’s digital yuan used to buy securities for the first time

· Bernstein expects crypto revenue to jump to around $400bn by 2033

· Coinbase follows Kraken to exit Japan

· US charges crypto exchange Bitzlato with laundering $700mn

· Ethereum Layer-2 Optimism surpasses Arbitrum in transaction volume

· Four men sentenced to 15 years in UK for laundering Bitcoin

· Why Ethereum bulls are turning to LSD

· Crypto investor HashKey Capital closes third fund at $500mn

· Crypto market maker CyberX raises $15mn led by Foresight Ventures

· DeFi protocol Sushi lays out 2023 plans with focus on DEX and UX