Opinion Zero-knowledge proof is not the correct solution for DeFi.

Author: DARREN KLEINE, compiled by blockworks, translated by Shanooba and LianGuai

Many teams are working hard to achieve zero-knowledge DeFi, but they are all dealing with the same fundamental logical issues.

In a recent Lightspeed podcast, Kyle Samani from Multicoin Capital expressed his confidence in zero-knowledge proofs as the correct solution for privacy issues in DeFi. He believes that while zero-knowledge proofs have their uses in other areas, they may not be applicable in DeFi.

Zero-knowledge proofs can be used to prove someone’s age for purchasing alcoholic beverages without revealing other personal details. This is a valid application scenario for zero-knowledge proofs, which can protect privacy and prove specific facts.

However, if the goal of DeFi is privacy, zero-knowledge proofs are not the appropriate solution. In DeFi, the concept of “shared state” needs to be considered, where participants perform mathematical operations and submit zero-knowledge transactions during financial transactions. There is no concept of global state in DeFi, which means that global state inference cannot be performed, rendering zero-knowledge proofs ineffective in DeFi.

Kyle Samani gave an example to illustrate this point. In DeFi, there are limited partner pools and limit orders, and different people engage in transactions and interactions. Due to the lack of a concept of global state, it is not possible to infer the state of the entire system. Therefore, he believes that zero-knowledge proofs are not suitable for solving privacy issues in DeFi. In DeFi, a solution that can handle shared state and global state inference is needed, and zero-knowledge proofs do not provide such functionality.

Top-down inference

In explaining why zero-knowledge (ZK) proofs are not applicable in DeFi, Kyle Samani presents a basic premise using zcash (ZEC) as an example. For zcash, the proof of any transaction indicates that a series of unused transaction outputs (UTXOs) have been sent to a “encrypted blob” of private addresses.

He says in the example, “I received fewer UTXOs than I sent, including the current transaction.” In this case, the transaction proof can only indicate that the user’s balance is greater than zero, but it cannot provide more specific details.

Although the theoretical supply of zcash will never exceed 21 million, as it has the same supply limit as Bitcoin’s fork, its supply cannot be audited due to its privacy-based design. This also means that it is not possible to audit the system from top to bottom and determine whether the total supply of zcash is still fixed at 21 million. In fact, zcash has experienced a potential catastrophic bug, which was reported and fixed in 2019.

Kyle Samani relates this event to attempts to implement zero-knowledge solutions in DeFi, emphasizing that if the system cannot be inferred from top to bottom, DeFi cannot achieve its goals. He states that when everyone submits a bunch of private proofs on-chain, concepts like collateral management and solvency no longer work in DeFi. DeFi needs a top-down perspective to function, rather than just a bunch of encrypted ZK transactions.

Although many teams are working hard to implement zero-knowledge SDKs, he believes that they are still dealing with a very basic logical problem. He suggests that the correct way to achieve privacy in DeFi is to adopt fully homomorphic encryption (FHE). By encrypting contracts end-to-end and applying state transitions by validators, the core logic of the system can be preserved, which is the correct way to solve the privacy problem.

In summary, Kyle Samani emphasizes the reasons why zero-knowledge proofs are not applicable in DeFi and proposes the correct approach of achieving privacy through fully homomorphic encryption. He believes that DeFi needs a top-down perspective to better unleash its potential.

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