Ever heard of “zero-knowledge proofs,” “self-sovereign identity” or “account abstraction”? What sounds like supercoder slang is actually intended to serve very simple needs of the Web3 sector. After all, with every innovation comes new challenges. And these technologies make tomorrow’s applications simpler, more intuitive, and show that crypto is more than simple price speculation. Those who know them today may be at the forefront of the next wave of innovation.

1. Zero-knowledge proofs

Zero-knowledge proofs (ZK proofs) were already a topic at the end of this year. Next year, they could cause a real explosion in individual sectors. This is because ZK-Proofs seem to be able to provide many areas of the crypto industry with the long-awaited ignition fuel.

Simply put, this is cryptographic (read mathematical) proof of the accuracy of a piece of information without having to reveal its content. This not only protects privacy in general, but also enables a new way of handling sensitive digital data in the otherwise transparent blockchain sector.

The genius of ZK proofs is that the computational effort required to validate the non-priced information is minimal. Complex cryptography compactly packaged, if you will. This makes it particularly exciting for blockchain scaling. So, first and foremost, Ethereum would be infinitely scalable in theory with the help of ZK proofs.

In the next year, Ethereum’s ecosystem will thus be expanded by ZK-based Layer 2 blockchains in addition to Optimistic rollups such as Optimism and Arbitrum. These include Loopring, Starkware’s Starknet, ZK-Sync, ImmutableX, Taiko and Polygon’s zkEVM.

But it’s not just the scaling of smart-contract blockchains that gets a boost. ZK proofs are great for privacy protection. Web3 users no longer have to disclose sensitive information to interact with various applications. This is likely to significantly change online KYC (“Know Your Customer”) procedures.

For example, CC evidence can be used to verify the identity of users without having to know details such as their address or date of birth. In the (crypto) credit sector, on the other hand, the creditworthiness of users would also be ensured without further ado, which would significantly shorten application processes.

2. Digital identities

As CC technology grows, we can therefore also expect digital identities — self-sovereign identities (SSIs) — to blossom in the coming year. As user-friendly as Web2 platforms are, in retrospect, the handling of personal data on them has been disastrous. Recent reports of compromised user data on Twitter also show this.

In principle, we are practicing the same mistake as we did when centralized exchanges held our private keys. “Not your keys, not your coins,” as the saying goes. Or should we henceforth say: “Not your keys, not your identity”? If I can use private keys to store my own money, why not my own data?

Polygon, for example, has been working on digital identities since the beginning of this year and is expected to deploy them across the board with the launch of the zkEVM blockchain. This not only paves the way for on-chain verification in various DeFi protocols in the coming year, but above all makes social media on the Web3 suitable for mass use.

New crypto regulations are also expected to come into force next year with MiCA in Europe and the DCCPA in the USA. They are aimed primarily at combating money laundering and tax evasion, as well as protecting privacy. Regardless of the usefulness of these regulatory approaches, it is now questionable whether the sector can continue to exist in its current form at all.

This is because the regulations will require both centralized and decentralized crypto service providers to verify the identity of their users — quite apart from the fact that this goes against the nature of the DeFi sector. In the rest of crypto-finance, massive centralized data storage would create new vulnerabilities and pose an increased risk to privacy.

With SSI, users and service providers would be able to meet this requirement without giving up the protection of their own data and the prevailing decentralization in the sector. This technology is therefore likely to become more important in the coming year as a response to the new regulations.

3. Account abstraction

In addition to inflation, energy crisis and crypto crash, the lack of mass adoption in the blockchain sector involved the still difficult handling. Self-custody of one’s cryptos and their use in DeFi space remains cumbersome and unintuitive.

Future crypto users are now drawn to such platforms whose utility is greater than their complexity. By means of account abstraction, complex blockchain processes move to the background. Instead, users interact with the novel Web3 protocols with familiar ease of Web2 applications.

In this case, a blockchain user account with the associated address is simply replaced by a smart contract. This has significantly more functional options. From now on, transactions can be signed in bundled form, disposal limits can be set up, and payments can be automated. Recently, the payment service provider Visa presented concepts to ensure the latter by means of account abstraction on Ethereum.

With smart contract wallets, the payment of gas fees could be transferred to the corresponding application instead of users paying themselves for each individual interaction. Users would also be able to manage their private keys more flexibly using built-in key managers. Instead of a permanent private key, it would be possible to create a session key for individual applications. This can then be rotated or, in case of doubt, restored via digital identity.

Account abstraction has been planned with EIP-4337 on Ethereum for some time. However, with Starknet and ZK-Sync, the layer 2 solutions of the blockchain are already running with native account abstraction, which could lay the foundation for mass adoption in the coming year.