`Mind-Boggling' Math Could Make Blockchain Work for Wall Street

‘A game of cat and mouse’ as privacy matters gain attention

`Mind-Boggling' Math Could Make Blockchain Work for Wall Street
A Wall Street Sign Displayed in Front of the New York Stock Exchange, New York (Photographer: Michael Nagle/Bloomberg)

(Bloomberg) -- A major breakthrough in cryptography may have solved one of the biggest obstacles to using blockchain technology on Wall Street: keeping transaction data private.

Known as a “zero-knowledge proof,” the new code will be included in an Oct. 17 upgrade to the ethereum blockchain, adding a level of encryption that lets trades remain private. Previously, users were able to remain anonymous but transactions were verified by allowing everyone on the network to see them.

“Zero-knowledge proofs are one of the biggest inventions in the last two decades in cryptography,” said Emin Gun Sirer, an associate professor of computer science at Cornell University. It “will allow a slew of applications we can’t even imagine right now.”

An industry group called the Enterprise Ethereum Alliance -- whose members include JPMorgan Chase & Co., Credit Suisse Group AG and BP Plc -- is trying to leverage zero-knowledge proofs for the financial industry with its distributed ledger, known as Quorum.

This could be the moment Wall Street’s blockchain champions have been waiting for. Its ability to reshape vital financial market functions like clearing and settlement has always hinged on whether banks can keep customer and proprietary data secret. Zero-knowledge proofs, a theoretical possibility for decades, are now a reality, letting transactions be verified without the need to share any of the underlying data.

“The privacy issue is the main reason blockchain hasn’t reached a bigger enterprise solution,” said Zooko Wilcox, the founder of Zcash, the first public blockchain to guarantee financial privacy by using zero-knowledge proofs. “That’s our deal with JPMorgan and Quorum to use zero-knowledge proofs to have private transactions and settlements.”

Many of the largest blockchains in use, such as the ones that support bitcoin and ethereum, are open to the public with user identities shielded by pseudonymous addresses. Every transaction can be traced. But that’s not the only way to build a blockchain. By using the encryption provided by zero-knowledge proofs, the blockchain that supports Zcash offers the option for a user’s identity and the amount of money being sent to remain hidden. That degree of privacy is currently unavailable on ethereum.

The cardinal rule on Wall Street is to always keep client and bank positions secret so competitors can’t profit from knowing about existing trades. That has posed a big problem in the adoption of blockchain as its benefits rely on a network effect. For blockchain to improve how the corporate bond market works, for example, banks and investors need to be able to verify when one firm sells bonds to another, without notifying everyone else about the trade.

The upgrade project is known as Metropolis and is split into two phases named for the united cities that became the ancient capital of the Roman Empire. The first, Byzantium, is expected to be upgraded by the network’s hard drives later this month, then Constantinople will follow later. The change is known as a hard fork because the blockchain will be altered on purpose as a function of the update. Ethereum underwent a famous and controversial hard fork last year to reverse the theft of $155 million associated with the DAO smart contract.

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Casey Detrio, a core developer on the Byzantium project, said an anonymous transaction layer within the ethereum system is a ways off as “someone has to build it.” In a practical sense, zero-knowledge proofs are an important step toward future improvements in how many transactions can be processed at a given time, he said. “It can be used for scalability, but that’s a long way out,” Detrio said. “It’s nice to see it activated on the main net and people use it and then it can be adapted.”

The innovation will also help prevent fraud on decentralized exchanges, which operate similarly to a blockchain by being hosted on computers spread around the world. That differs from the New York Stock Exchange or the Chicago Mercantile Exchange, which control their markets with centralized authority. Among the biggest risks of such a system is front-running.

Zero-knowledge proofs could ease that threat, Detrio said. Because bids and offers are all publicly displayed on markets such as Ether Delta or AirSwap, another user can jump the line while a transaction is pending and complete a deal at a higher or lower price. The reason this can be done on the blockchain is because a front-runner can offer to pay a higher transaction fee to have their dishonest trade verified before the honest trade.

A market that used zero-knowledge proofs would be immune to this, Detrio said, because the bids and offers are encrypted, or sealed.

“Zero-knowledge proofs are a way to cryptographically demonstrate the truth of something without revealing any information about it other than it’s true,” Wilcox said. The underlying math is incredibly complicated and at “the forefront of computer science,” so people shouldn’t feel bad if they don’t understand it, he said. “The whole concept that zero-knowledge proofs work is mind-boggling.”

While regulators or law enforcement may see anonymous transactions as an invitation to money laundering and other crimes, Cornell’s Sirer said digital transactions shouldn’t be tracked by the government just as the cash in his wallet isn’t tracked.

“As we live our lives online we leave all these digital breadcrumbs” that can be gathered and used to offer different people different prices depending on their perceived income, he said. “I have colleagues looking into differential pricing online,” he said. “All you want to do when interacting with a service is reveal who you are, nothing more.”

Citizens and law enforcement have always battled about the amount of privacy in any given system in “a game of cat and mouse,” Sirer said. Police are getting better at tracking blockchain transactions and understanding how to use private keys, which has prompted the recent advances in cryptography that make zero-knowledge proofs possible, he said.

“That has caused a push to these technologies,” Sirer said. “Hopefully we’ll strike the right balance.”

To contact the reporter on this story: Matthew Leising in Los Angeles at

To contact the editors responsible for this story: Nick Baker at, Rob Urban