Original article: "Weekly Brief | ZK-KYC: A strong competitor in the compliance direction"

Compliance is an important topic in the process of a large number of traditional Web2 institutions transitioning to Web3. The traditional financial market is huge, but the security and trust infrastructure of the on-chain market is still not ready.

The KYC track of on-chain DApps is expanding. KYC is the only way for traditional institutions with large-scale funds to enter the Crypto field safely and smoothly. Institutions and individuals who pass KYC can jointly release liquidity in this emerging field.

Events such as Tornado Cash regulation have brought reflections to the Crypto market, and projects based on KYC services are also being updated and iterated. For a long time, projects in the KYC field have been trying to find a balance between the dilemma of "user privacy" and "user authentication". As the maturity of zero-knowledge proof increases and the universality of technology increases, the ZK-KYC sub-field is receiving more attention.

In September 2021, the paper “zkKYC in DeFi” outlined the ecosystem for implementing ZK-KYC solutions in DeFi:

（https://eprint.iacr.org/2022/321）

For the purpose of regulatory transparency, ZK-KYC in DeFi does not require any personally identifiable information to be shared with DeFi protocols. The zkKYC solution introduces KYC issuers and decentralized Oracle Network (DON) as key components through DID and zero-knowledge proof. The "KYC issuer" verifies personal identity without touching the user's digital asset wallet information (or DeFi activities); while the DeFi protocol interacts with the user's digital wallet without knowing the user's identity. In some cases, only designated governance entities (government agencies in the figure) can touch the suspected user's identity.

"ZK-KYC and ZK Authentication Process" provides a more accurate definition of ZK-KYC: the process of making an authentication judgment on a customer without knowing any direct information about the customer is called zero-knowledge knowing your customer, or ZK-KYC (Zero Knowledge-Know Your Customer).

(*Other related definitions include: The technology that makes judgments under zero knowledge is called ZK Authentication Technology, and the process of using ZK Authentication Technology to complete the authentication of customers, assets, events, etc. is called ZK Authentication Process.

The paper further explains how the ZK certification process is implemented:

The zero-knowledge authentication processor ZKPU (Zero Knowledge Processing Unit) needs to process the input information and check it against the established protocol, increase the data dimension of the user's basic public key, and use ZK authentication to implement various tasks such as user-related asset enhancement and credit verification.

This core link is often complex in design, and the technologies that may be used include but are not limited to: edge computing, blockchain protocol, ZK authentication algorithm, encryption algorithm, asynchronous computing, etc. The form of ZKPU is also very diverse depending on the application scenario, such as algorithm functions, on-chain nodes, oracles, etc.

The design of ZKPU needs to:

1) Prove the validity of its certification questions and ensure

2) The actual data will not be leaked or hacked

The final presentation of ZK-KYC will be able to include personal privacy, meet regulatory needs, and create a compliant environment for DeFi protocols. For example, users use their own information to generate ZK Proof with ZK through their own devices off-chain, and then use Proof to verify whether they are whitelisted users. Subsequently, a DeFi protocol cooperates with the KYC issuer (or service provider) to prove that it complies with regulations with the zk proof presented by the user, and allows the user to use the protocol. This approach is also easy for Web2 institutions to accept.

Recently, Binance announced 12 projects selected for the fifth season of Binance Incubator, including zkPass, a privacy-focused decentralized KYC solution for the zkDID track. zkPass is designed to prevent fraud (users forging data) through MPC and protect user privacy using ZKP.

In addition, other platforms worth paying attention to in this field include: decentralized KYC NFT provider IdentDeFi, on-chain zero-knowledge proof identity platform 0xHolonym, etc.

References:

zkKYC in DeFi: An approach for implementing the zkKYC solution concept in Decentralized Finance：https://eprint.iacr.org/2022/321

ZK-KYC and ZK certification process: https://mp.weixin.qq.com/s/9LtNJACyW9m_n_wCJdGxMA