Over the past year, the dramatic rise in the price of cryptocurrencies has led to an influx of participants in the space and the emergence of several new trends. The most popular of these trends has been the minting and trading of non-fungible tokens or NFTs.
NFTs represent a paradigm shift in how people understand value. For the first time, digital scarcity enforced by blockchain technology has enabled media content to take on a new form of appreciation.
From CryptoPunks and Bored Apes to NBA TopShot and exclusive album releases from Kings of Leon, NFTs provide a fun and easily digestible makeover to the complex and elusive subject of cryptocurrencies, giving this industry the catalyst it’s long been waiting for to achieve mainstream adoption.
In observing how NFTs are being used to prove the uniqueness of creative content, companies are starting to adopt NFTs for real-world use cases, such as certifying patents on a distributed ledger, creating unique digital identifiers for items such as an invoice or piece of warehouse machinery, tracking items as they move through a supply chain, or tokenizing real estate in order to unlock liquidity.
Basically, any scenario that requires one to prove the origin and uniqueness of a physical or digital item can be a good use case for NFTs.
What’s the missing link between NFTs and Enterprises?
It would seem that the floodgates have been opened for every major company in the world to jump on board and start using NFTs. However, there remains one more caveat that threatens to derail the mainstream adoption of blockchain by enterprises, and that is privacy.
Blockchain technology has long been criticized for the pseudo-anonymous nature in which transactions are recorded on a distributed ledger. While transparency on public blockchains is great for detecting fraud and reducing the cost of trust between intermediaries, it comes with the downside of ensuring that everyone (including your competitors) can see what you are exchanging and determine with reasonable accuracy who you’re transacting with.
In competitive industries where a high premium is placed on discretion and secrecy, the cost of losing a competitive edge because of pseudo-anonymity is not worth the risk of using a blockchain. In fact, according to a Cambridge University research study on enterprise blockchain adoption, the second most popular reason why enterprise blockchain projects are discontinued is because of concerns over confidentiality and privacy:
While private blockchains provide a better alternative for maintaining privacy, the costs of starting and maintaining one, coupled with the increased security risks due to centralization and the limitations placed on which industry stakeholders can access the network hardly makes the effort justifiable.
The size of the global enterprise data management market is expected to reach $135.8 billion by 2027. Additionally, the global cloud computing market size is expected to reach $1.25 trillion by 2028. These massive figures represent the value of large multinational corporations hosting and sharing data across global supply chains and digital networks.
With 38% of enterprise blockchain projects being discontinued due to privacy concerns, this represents a huge missed opportunity for the blockchain industry if not rectified.
If NFTs are the gateway to enterprise adoption of blockchain technology, and privacy is one of the main blockers, then zero-knowledge proofs (or ZKPs) represent the final solution to clear the path to embracing blockchains in their entirety.
What is a Zero-Knowledge Proof?
A zero-knowledge proof is a form of cryptography that enables one party in a transaction (the prover) to prove a statement about a certain piece of information to another party (the verifier) without revealing what that information is.
One example of this is an engagement between an investment broker and a client, where the client (the prover) needs to prove to the broker (the verifier) that they have a certain amount of money in their bank account in order to purchase an investment product without revealing exactly how much they have.
In this case, the statement is that the client owns an amount of money that is greater than a given threshold (eg. $100,000).
Rather than the broker knowing the details about the client’s finances, they simply need to verify that a computation was run on the blockchain in which the client solves a series of challenges issued by a simulator, which correctly confirms the statement to be true (e.g. bank value > $100,000).
The verifier then takes this verification as proof that the client has enough capital in their bank account to purchase the investment product.
This version of ZKP is called a ‘non-interactive zero knowledge proof’, since the broker and client do not interact in the process of proving and verifying the statement. Rather, the client proves the statement against a hash function simulator, which is meant to represent the verifier.
Horizen - The Zero Knowledge Enabled Network of Blockchains
ZKPs were initially adopted by cryptocurrencies like Zcash to enable transactions to be validated without revealing the details of each transaction to outside observers looking at the Zcash blockchain. They have now been adopted as a key feature by blockchains like Horizen, which uses ZKP cryptography to enable private blockchain transactions to be confirmed on public blockchains while concealing the details of each transaction.
Horizen has also created a special auditing solution called ‘zkAudit’ to enable audits to be performed on private companies in a completely decentralized, transparent, and privacy-preserving manner through ZKPs. Horizen’s zkAudit solution has helped companies like leading crypto lender Celsius Network to securely verify proof of reserves in near real-time without revealing identifiable information or relying on costly 3rd party auditors. This audit system has enabled Celsius to serve as a trusted partner for defi projects and public blockchains despite operating a centralized service.
ZKPs are the missing piece of the puzzle needed for companies to mint and trade NFTs on public blockchains like Ethereum while preserving their privacy.
We can imagine a multitude of scenarios where private companies or governments need to outsource projects to outside vendors or conduct studies that require public input where transparency and data integrity is essential, yet without the ability to preserve privacy, the kinds of projects and studies that blockchain technology can be useful for are much more limited.
Examples include conducting clinical trials using a geographically dispersed sample of patients, recruiting and tracking job applications for high profile or sensitive roles, outsourcing military projects to private sector vendors and tracking progress, running consumer surveys and testing products before releasing, and many more cases.
In each case, we could envision companies minting NFTs to represent unique data sets (people, items, results, etc) on a public blockchain, which would help maintain the integrity of the data and enable participation amongst a wider sample size of people, while simultaneously using ZKPs to keep sensitive data private and ensure that details of transactions are concealed while verifying essential info about public participants.
When combined, NFTs & ZKPs represent the 2 biggest catalysts for the mainstream adoption of blockchain technology.
If you thought Bitcoin at $65,000 and a Cryptopunk being sold for $7 million was validation, then you’re not ready to see a trillion dollars of capital flow into the space once the largest enterprises in the world begin to leverage privacy-preserving ZKP solutions as a means to fully adopt NFTs and blockchain technology.