Real-world asset (RWA) tokenization offers a transformative approach to asset ownership. It brings benefits such as increased liquidity, fractional ownership, and enhanced transparency.
However, these advantages come with significant privacy challenges due to the transparent nature of blockchain technology and regulatory compliance requirements.
Zero-Knowledge Proofs (ZKPs) present a promising solution to these privacy issues because they allow for the verification of transactions without revealing underlying data. NovaNet’s zero knowledge proof network is well-suited for RWA tokens because it enables proofs to be generated locally for maximum privacy protection.
Privacy Challenges in Real-World Asset Tokenization
There are four major privacy challenges in RWA tokenization.
1. Transparency vs. Privacy: Public blockchains are transparent, making all transactions visible and traceable. This can expose sensitive financial information.
2. Regulatory Compliance: Tokenization requires adherence to KYC and AML regulations, necessitating the sharing of personal data.
3. Custodianship and Trust: Third-party custodians may handle sensitive information, introducing potential privacy risks.
4. Transaction Privacy: Blockchain addresses are pseudonymous, not anonymous, allowing for potential de-anonymization.
Addressing the Privacy Challenges
Here’s how ZKPs address the privacy challenges of RWA tokenization.
1. Enhancing Transaction Privacy
ZKPs can be used to create confidential transactions, where transaction amounts and parties involved are hidden. Locally-generated proofs using NovaNet can be particularly useful here.
In a real estate tokenization scenario, when a token holder sells a fraction of their property tokens, ZKPs can prove the transaction's validity without revealing the buyer, seller, or transaction amount. This ensures privacy while maintaining the integrity of the blockchain.
2. Regulatory Compliance with Selective Disclosure:
ZKPs allow for selective disclosure, where only necessary information is revealed for compliance purposes. For instance, a user can prove they meet KYC requirements without disclosing their entire identity.
For example, a token issuer can use ZKPs to prove that all token holders have passed KYC checks without revealing their identities. This satisfies regulatory requirements while preserving privacy.
3. Protecting Sensitive Information with On-Chain Proofs.
Sensitive data can be stored off-chain, with ZKPs used to prove the validity of the data stored on-chain. This approach reduces the risk of data breaches.
For tokenized real estate, for example, detailed property records can be stored off-chain. ZKPs can be used to prove the authenticity and accuracy of these records on-chain without revealing the actual documents.
4. Improving Custodianship and Trust with Secure Multi-Party Computation (SMPC):
Combining ZKPs with SMPC can enhance the security of custodial services by distributing the management of assets among multiple parties, ensuring no single party has full control or access.
In the case of a tokenized asset held by a custodian, SMPC can ensure that the custodian cannot access the full asset details alone. ZKPs can be used to prove the proper management of the asset without revealing sensitive information.
Implementing Zero-Knowledge Proofs in RWA Tokenization
In practice, there are five key aspects to implementing ZKPs in RWA tokenization.
1. Smart Contract Integration
Smart contracts need to be designed to incorporate ZKPs. This involves defining the logic for privacy-preserving operations such as token issuance, transfer, and compliance checks. The contracts must ensure that ZKPs are used to validate transactions without disclosing sensitive details.
For a tokenized real estate platform, smart contracts can be programmed to validate property ownership transfers using ZKPs. The smart contract can check the proof of ownership without revealing the previous owner's identity or the transaction amount.
2. Leveraging Off-Chain Infrastructure
Complex computations required for ZKPs can be offloaded to off-chain systems. These off-chain systems perform the computations and generate the proofs, which are then submitted to the blockchain for verification.
In an art tokenization platform, detailed appraisal information of an artwork can be processed off-chain. The off-chain system generates a proof that the appraisal complies with certain standards without revealing the appraisal details, and this proof is verified on-chain.
3. Privacy-Preserving Identity Management
Decentralized Identity (DID) solutions use ZKPs to manage and verify user identities. This involves creating DID systems where users can control their identity information and prove identity attributes (e.g., age, nationality) without revealing additional personal information.
A DID solution can be used for investors in a tokenized commodity platform. Investors can prove they meet the regulatory requirements for investment (e.g., accredited investor status) using ZKPs, without disclosing their full identity or financial details.
4. Maintaining Asset Provenance with ZKPs.
ZKPs can be used to verify the provenance and authenticity of tokenized assets without disclosing the detailed history. This ensures that the assets are genuine and their ownership history is legitimate while protecting privacy.
In a supply chain tokenization system, the origin and movement of goods can be verified using ZKPs. Each participant in the supply chain can prove their role in handling the goods without revealing specific details about their operations.
5. Automated Compliance with Privacy
ZKPs can implement automated compliance reporting mechanisms to prove adherence to regulations without disclosing sensitive business or personal information. This can include automated KYC/AML checks and financial reporting that use personal information to generate proofs of compliance to third parties without revealing the personal information.
For a tokenized securities platform, automated compliance reports can be generated using ZKPs to prove that all transactions comply with regulations prohibiting transactions with certain persons or countries. The reports can demonstrate compliance without revealing transaction amounts, participants, or other sensitive details.
ZKPs can fix the privacy problems faced by RWA tokens. Get in touch to learn more about the ZKPs for RWAs we are building at NovaNet.
