Mind-boggling Math could make blockchain work for Wall Street

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 October 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.

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.”

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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.