Understanding Zero-Knowledge Proofs: Privacy is Freedom

Ishan Pandey: Hi Emanuele Francioni from Dusk Network, welcome to our series “Behind the Startup.” Please tell us about yourself and the story behind ?

Emanuele Francioni: I’m Emanuele Francioni, founder-director and Tech Lead at Dusk Network. Dusk Network is the privacy blockchain for financial applications.

At Dusk Network, we are pushing hard for a decentralized and permissionless blockchain that preserves privacy, designed to facilitate privacy-preserving smart contracts. Through Dusk Network, financial institutions have the opportunity to ensure data privacy and automatically meet compliance requirements on-chain. We are at the stage of releasing our testnet, Daybreak, on February 1, 2022.

Ishan Pandey: How are financial instruments tokenized through blockchain? (please give workflow and technical explanation)

Emanuele Francioni: Financial instruments, such as equities and bonds, get currently dematerialized through trusted third parties, called central securities depository, which holds them in digital form, and intermediate transfer of ownership simply through a book entry. Dusk Network (“Network”) captured such a digitization process in a smart contract standard called XSC (confidential security contract), which defines a common set of rules that all security tokens must adhere to.

These rules simply automate (and therefore determine) how the security token transactions get executed. The protocol has been engineered to remove the need and costs for intermediation and introduces the possibility to augment the digital securities with programmable behaviours that remain compliant within the confines of the asset’s governing regulatory framework. For common securities like company shares, the implementation and deployment of an XSC contract on the Network signifies that all changes in the future are capable of complying with all of the rights and rules that come with owning shares, and processing events that happen during the lifetime of the share (for example: dividend payout, stock split, company buyout, etc) are programmed right in the security behaviour and therefore administered automatically.

Ishan Pandey: What is a zero-knowledge proof? Further, how does it work?

Emanuele Francioni: A zero-knowledge proof is a type of advanced mathematical construct in which we can express a statement so that a prover can convince a verifier of the truthfulness of such a statement without learning anything else apart from the fact that the statement is true.

For example, on Network, a user can create proof that shows she owns a positive balance of tokens without disclosing exactly how many tokens is owned to the verifying party. In addition, one can prove they are eligible to trade a financial instrument proving that they have undergone investor onboarding (including due diligence such as KYC, etc), without disclosing who they are. In Dusk Network zero-knowledge proofs are made possible by PLONK, which is among the fastest proving systems for zero-knowledge proofs. Simplistically speaking, proving a statement depends on the capability to translate such a statement into an equivalent polynomial form (through a so-called zero-knowledge circuit), which evaluates to zero for all points of a given set (normally a field of prime order). Therefore, verifying the truthfulness of the statement translates into verifying that the prover can supply the right evaluation of the polynomial (and its quotient) at some points chosen by the verifier. We published a series on Hackernoon to explain how ZK-proofs work.

Ishan Pandey: What are your views on NFT based games?

Emanuele Francioni: NFT based games are in their infancy and the ones we see today will likely not survive. If anything, we’ve learned from DeFi 1.0, is that incentivization attracts a lot of mercenary liquidity. Meaning if a project provides a high short-term income to participants, many players will join their game.

However, as soon as a new game starts, with a higher incentive, their participants will leave and never come back. In DeFi 2.0 they’re actually working to solve the issue of ‘mercenary liquidity’ by creating long-term value-generating token economics. That said, so far, I haven’t seen the same type of incentivization schemes in NFT-based games, so I think its popularity (spiked by money incentives) will pass. A more long-term game will survive, which provides actual utility and is not only about earning money.

Ishan Pandey: What are your views on Metaverse?

Emanuele Francioni: The metaverse will likely be a disaster for user privacy, and unless that is solved, a real threat to the freedoms we benefit from today. So far, prototypes of the metaverse look like a virtual adspace, where experiences are monetized. As citizens of this world, we need to be conscious of centralized platforms and how they use our personal information and data.

Ishan Pandey: What are your views on Ethereum vs Solana?

Emanuele Francioni: It is very interesting to follow the ongoing development of Ethereum and Solana as they are both tackling scalability issues differently. Ethereum is now looking to scale on layer-2 via zero-knowledge technologies, while Solana benefits from a very different consensus mechanism that enables lightning-fast transactions straight from layer-1. These developments are something we pay close attention to.

Ishan Pandey: What part did the pandemic play in traders being able to benefit from their cryptocurrency investments? Further, how do you envision the blockchain ecosystem in the post-Covid-19 era?

Emanuele Francioni: The pandemic played unmistakably a role in the surge of capital markets worldwide, including crypto, by enabling an unprecedented availability of capital due to the combined effect of extremely low-interest rates and extremely high emission of valuta in the hope of sustaining the economy during these trying times.

This excess of liquidity was among the causes of euphoria on any investable asset class, especially those that could hedge against inflation, one of the main mantras of crypto influencers. Epidemics usually take 3-5 years to be dealt with, but already we’ve learned from its consequences. Remote operations have become the norm, and the digitization trend will likely continue to increase, even in a post-covid society. This will also create the right conjunctions to accelerate the adoption of blockchain innovations, and we could very well see a thriving ecosystem spanning a multitude of markets in the near future.

Ishan Pandey: As someone who has been in the industry for quite a while now, what will be your advice to novice traders who want to partake in the industry?

Emanuele Francioni: The most important advice would be not to invest any amount you cannot miss. As we are active in an industry that is in the process of maturing and still shaping its guidelines, any investor should be knowledgeable about the higher risk involved. Secondly, if you can spare the investment amount, make sure to know what it is you are investing in. Try and find decentralized projects with the potential to solve problems you may have stumbled upon.

It is even better if you encountered them during your professional endeavours. And make sure that they provide convincing benefits compared to their centralized counterparts. If you can find such projects, they are a good candidate for investment. If you can’t, well, you’ll have a good candidate for a startup. On the upside, there is a benefit to crypto investments as you can fractionalize your investment, making it widely accessible. You could invest in relatively small amounts.

Ishan Pandey: According to you, what new trends are we going to see in the blockchain industry?

Emanuele Francioni: Zero-knowledge technology plays a fundamental role in two key topics that will continue to gather interest from the industry: privacy and scalability.

Together with that, I foresee an increase of attention to the regulatory aspect, first because crypto seems to be slowly becoming a staple of many institution’s investment portfolios, and secondly because of the ongoing debate around the environmental concerns over the energy consumed by Bitcoin, Ethereum and other decentralized network using proof-of-work. I am particularly proud that the technology betted heavily on these trends, which seem to become more relevant than ever before.

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