Zero Knowledge

Demand for performant, inexpensive, and secure ways of performing zero knowledge proofs will increase dramatically with the advance of Web3. The reason for this is that privacy is a critical component needed for a complete and user-friendly experience within the Web3 ecosystem.

However, present Web3 applications are predominantly utilizing public blockchain technology, making transactions transparent for anyone to see. The public nature of blockchains opens up users of Web3 services to exploitation and abuse, such as front running and arbitrage.

One solution towards the exploitation challenge public blockchains are confronted with to obfuscate absolutely everything about a transaction – i.e. absolute privacy. The problem with absolute privacy, however, is that it precludes programmability.

The emergence of Decentralized Finance (DeFi) has highlighted once more the importance of programmability for expressive blockchain networks.

The existing tradeoff blockchain developers are confronted with is to choose between privacy or programmability. For example, Ethereum provides limited privacy but offers powerful programmability. Zcash, on the other hand, enables full privacy for its users – at the cost of programmability.

As the world’s first decentralized, open-source platform, Aleo enables fully programmable and truly private applications. Equipped with opt-out privacy by default, Aleo enables a sustainable Web3 system characterized by full transparency that meets the needs of developers, enterprises, and consumers.

With the aid of zero knowledge cryptography, Aleo is able to create a blockchain that combines privacy with programmability. The foundation for Aleo is a system called ZEXE (Zero Knowledge EXEcution), which allow users to execute state transitions offline. The resulting proof is then bundled into an on-chain transaction. As a result, on-chain records are consumed/created, which updates the state of the system. The on-chain transactions contain the proof without the inputs that generated them. This allows Aleo to provide strong privacy guarantees, like a privacy-focused chain such as Zcash. By ensuring programmability, Aleo’s ZEXE supports smart contracts, which enables users to interact or transfer value in a pre-defined way – similarly as on Ethereum.

To better understand Aleo’s value proposition, let’s have a look at the real-life example of a decentralized exchange (DEX). Contrary to a centralized exchange (CEX), a DEX is a decentralized application powered by a public smart contract which allows users to buy or sell tokens on-chain without finding a specific buyer or seller. An important feature of a DEX is that it allows its users to remain full control over their own assets. This is not the case with popular centralized exchanges (such as Coinbase or Binance), who maintain full custody over their user’s assets.

The transparent nature public blockchains introduces several challenges and opens up users of decentralized exchanges to exploitation. For example, miners can front run transactions by inserting their own buy and sell orders before those of DEX users. Another attack vendor is that a user’s identity becomes associated with their on-chain anonymous address. Once the association is established, it can never be undone as the data on the blockchain is unchangeable.

Aleo helps to address the above-mentioned risks by keeping users and transactions of applications private. In the real-life scenario of a DEX, Aleo is used to make counterparties fully anonymous. In doing so, a user’s activity cannot be associated with a specific address on the Aleo blockchain.

Additionally, Aleo keeps the details of any transaction private. This ensures that patterns of financial activity or broad contours does not contain identifying information.

But how is all of this accomplished? When users make trades on a DEX in Aleo, the updated account balances are computed off-chain based on the exchange rate. The trade is then finalized when a transaction in the form of a zero knowledge proof is submitted to the Aleo network. This indicated that an action has occurred but it does not specify what the action was, where it occurred, or who was involved. Despite not containing any information, the underlying cryptography can be used to convince all involved parties that a trade was executed on a DEX and that all balances updated correctly.

Users that wish to trade one token (A) for another token (B) on an Aleo-powered DEX will first prove to the DEX that they indeed possess enough tokens of A to complete the intended transaction. Instead of having to reveal their wallet balance or trade history, users can simply reference an on-chain proof of a prior transaction.

Despite proving that you have the required liquidity for conducting the transaction, the DEX will not learn anything about the user, such as:

In combining privacy and programmability, Aleo can be used to create a fully-private DEX ecosystem that is scalable for users but replicates one of Ethereum’s and other smart contract blockchain’s key feature: composability.