Top 5 Zero-Knowledge Proof Use Cases in DeFi

Published on:

February 19, 2026

Last Updated on:

February 20, 2026

Ilia Storchilov

Chief Growth Officer

Market Trends

Top 5 Zero-Knowledge Proof Use Cases in DeFi 2026

There are different ways to approach privacy, and each serves different objectives and use cases. We’ve already explored some of these approaches in depth: for instance, how stealth addresses can hide transaction recipients on Ethereum, and the layered privacy stacks used in anonymous wallets to protect user data and activity. If you want more detail, check out our previous research:

Stealth addresses: How Ethereum stealth addresses work
Privacy stacks in anonymous wallets: Architecture, privacy tech, and features

Today, we’ll focus on zero-knowledge proofs (ZKPs) in DeFi: how they enable confidential transactions, private trading, scalable execution, and compliance-ready identity verification — and why they’re becoming a core piece of next-generation DeFi infrastructure.

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Before we dive into the use cases, let’s start with the basics and look at what a zero-knowledge proof (ZKP) actually is.

So, what is a Zero-Knowledge Proof?

A zero-knowledge proof is a cryptographic method that allows one party to prove to another that a statement is true — without revealing any information beyond the validity of that statement. In the context of DeFi, ZKPs let protocols verify transactions, user credentials, or complex logic without exposing sensitive data such as balances, trade size, or identity details.

Think of it as proving something is correct without ever showing the underlying numbers or secrets. This is what makes ZKPs such a powerful tool for privacy, compliance, and scalable execution in decentralized finance.

Top 5 ZK Use Cases in DeFi

With the basics covered, let’s see how zero-knowledge proofs are applied in DeFi today.

Below are the most commercially relevant use cases — shaping protocol design, execution strategy, and institutional participation, where privacy, compliance, and scalability intersect in practice.

1. Private Transactions and Confidential Transfers

Private transactions are one of the most important use cases for zero knowledge proofs in DeFi. They allow you to transfer assets, interact with protocols, and manage positions without exposing sensitive transaction data on a public blockchain.

Zero knowledge proofs verify that a transaction is valid while keeping critical information private, including:

sender address
receiver address
transfer amount
wallet balance
position size

The network confirms correctness without publishing the underlying data.

This introduces confidentiality into DeFi without compromising verification.

What Zero Knowledge Proofs Change at the Infrastructure Level

On public blockchains like Ethereum, transaction visibility is default. Zero knowledge proofs modify this model by separating:

verification, which remains public
transaction details, which remain private

This allows protocols to support:

confidential asset transfers
shielded balances usable in DeFi protocols
private treasury movements
private interaction with swaps, lending, and liquidity pools

You can execute capital allocation, liquidity deployment, or portfolio rebalancing without exposing the size or timing of your positions.

What protocols already implement private transactions in DeFi

Privacy-preserving execution using zk proofs is already operating at scale and is implemented on different levels: from protocols to wallets. Let’s look at some examples:

Aztec — a zero knowledge rollup focused on confidential smart contract execution.
Railgun — a privacy focused wallet that allows users to interact with DeFi protocols without exposing balances or transaction data.
Zcash — Early validation of zk-based confidential Transfers. Zcash introduced zk-SNARK-based shielded transactions.

What Private Transactions Bring to DeFi

Without confidential transfers, every position, treasury movement, and allocation decision becomes public market data.

Zero knowledge proofs remove that exposure while preserving verifiability.

This makes it possible to:

move large capital without signaling market intent
protect proprietary trading and liquidity strategies
support institutional capital that requires transaction confidentiality
build DeFi protocols with privacy as a programmable feature

Private transactions are not a niche feature. They are a core infrastructure upgrade, and one of the clearest production use cases for zk proofs in DeFi today.

2. Private Trading and Dark Pool DEXs

Executing large trades on public DEXs exposes your order size, timing, and strategy. Anyone monitoring the mempool can front-run your trades, sandwich orders, or exploit MEV opportunities. For professional traders, liquidity providers, or protocol designers, this is a concrete business risk: execution quality suffers, slippage increases, and capital allocation signals are leaked.

What is a Dark Pool DEX?

A dark pool DEX is a decentralized exchange where orders, trade size, and trader identity stay hidden until execution. On a public DEX, anyone can see your orders in real time — which is fine for small trades, but risky when you’re moving large positions or running advanced strategies. Dark pool DEXs let you execute trades on-chain without exposing your intent or liquidation points, while still ensuring the network can verify correctness using ZK proofs.

How hidden order books work in DEXes

Hidden order books rely on encrypted orders and private matching. You submit your trade in encrypted form, the protocol matches it behind the scenes, and a zero-knowledge proof confirms the execution is valid. This keeps everything verifiable but private: nobody can see the size, direction, or identity behind the trade until the system decides it’s time to reveal the results.

Risks dark pool DEXs reduce

Using hidden orders solves several challenges that are impossible to avoid on transparent chains:

Liquidation targeting — if your liquidation level is visible, others can push the market to trigger it
Front-running — bots acting on visible orders steal opportunity and worsen execution
MEV extraction — validators or other actors reorder transactions to capture value
Price slippage — large visible orders move the market before they execute
Strategy exposure — competitors can copy or counter your trading approaches
Treasury exposure — accumulation or exit signals can tip the market against you

By keeping orders private, dark pool DEXs prevent these leaks, letting you trade without signaling your moves.

Why it matters in 2026

Perpetual DEX trading has exploded, but public order books expose liquidation levels. In 2025, trader James Wynn lost over $100 million in liquidation after he was actively hunted by other market participants exploiting on-chain visibility, as highlighted by Lookonchain. Later, Changpeng Zhao noted, if liquidation points are public, others can push the market to trigger them. Dark pool DEXs with ZK proofs remove that attack vector, letting large traders move without becoming targets.

Existing implementations

Renegade — encrypted orders + ZK proofs for on-chain settlement without revealing trades
Penumbra — sealed-bid batch auctions where only net results are public

3. Scalable DeFi via ZK‑Rollups

Scalable DeFi via ZK‑rollups isn’t about cutting gas fees anymore — it’s about removing limitations around throughput, UX, composability, and feature innovation in Decentralized Finance. Zero‑knowledge proofs let rollups prove large batches of transactions to the Ethereum base layer without re‑executing every operation there. That proof becomes the source of truth that Ethereum can verify efficiently and trustlessly.

Why ZK‑Rollups Still Matter

There has been a major shift in how people talk about layer‑2s.

Ethereum co‑founder Vitalik Buterin recently noted that the original rollup‑centric scaling roadmap — where L2s were expected to be “branded shards” that carry most transaction load — no longer makes sense in 2026, because:

Ethereum L1 itself is scaling, with low fees and higher gas limits projected for the year ahead.
Many L2s have progressed slower toward deeper decentralization and interop than expected.
The industry needs clearer roles for layer‑2s beyond just pushing throughput off mainchain.

So if scaling = more transactions per second/cheaper gas fees, that is no longer the sole story. ZK‑rollups are now about special capabilities that go beyond what basic blockspace expansion achieves.

What ZK‑Rollups Actually Bring to DeFi Now

Rather than purely “offloading transactions,” ZK‑rollups offer repeatable, verifiable computation and execution paths that DeFi protocols can leverage for:

Privacy‑oriented execution layers — because zero‑knowledge proofs hide details while proving correctness.
Application‑specific designs — rollups can implement feature sets beyond EVM execution (special VMs, ultra‑low‑latency primitives, or embedded oracles).
Higher throughput for complex DeFi interactions — derivatives, leverage, multi‑step swaps, and sophisticated LP strategies no longer bottleneck users.

This expands the design space for DeFi protocols in ways a raw L1 can’t match by itself.

Where ZK‑Rollups Are Already Supporting DeFi

Here are live examples of how ZK‑rollups power high‑performance DeFi applications:

zkSync Era — handles ~27 million transactions per month with smooth execution and settlement.
dYdX on a ZK‑rollup — achieves 1,000+ trades per second for derivatives markets with minimal congestion.
StarkNet — supports large‑scale DeFi apps with verifiable, high‑capacity execution.

What Problems ZK‑Rollups Help Protocols Solve

ZK‑rollups address a set of issues that go beyond fee reduction:

Execution friction for complex workflows — multi‑step transactions and composite products confirm more predictably.
UX limitations — users experience faster completion for swaps, margin actions, and multi‑interaction flows.
Synchronous composability — rollups that integrate with L1 state in predictable ways enable innovation across layers (e.g., real‑time oracle consumption, L1↔L2 atomicity).
Feature differentiation — rollups can evolve with specialized VMs or modular features that fit specific DeFi niches.

This turns rollups into capability layers, rather than throughput layers.

4. Compliance via ZK-KYC

One of the main blockers for institutional DeFi is not liquidity or technology. It is compliance.

Protocols dealing with tokenized securities, credit markets, or institutional capital cannot allow unrestricted participation. They must verify users against KYC and AML requirements before granting access. On public blockchains, this creates a structural conflict. Smart contracts are transparent by design, while identity verification depends on sensitive personal data.

Most DeFi protocols avoid this entirely. Others try to integrate traditional KYC flows, which introduces new risks and operational expenses as each user submission requires processing costs.

ZK-KYC introduces a different model. Instead of collecting identity data, the protocol verifies cryptographic proof that the user has already passed verification through a regulated provider.

The protocol enforces compliance rules without ever touching user identity.

This is particularly important for protocols that interact with:

institutional liquidity
tokenized real-world assets
permissioned lending markets
regulated stablecoins

In these environments, participation cannot remain fully open. Protocols must restrict access to verified participants. Traditionally, this forces protocols to collect and store sensitive user data, creating security and legal risk.

ZK-KYC removes this requirement.

The protocol does not perform KYC. It verifies proof that KYC has already been completed by a trusted provider.

How ZK-KYC works at the protocol level

ZK-KYC follows a credential and proof model similar to ZK-ID, but the credential confirms compliance status.

Step 1 — Verification by a KYC provider

A regulated KYC provider verifies the user offchain, following standard AML and identity verification procedures.

After successful verification, the provider issues a cryptographic credential to the user’s wallet.

The protocol never receives the user’s personal data.

Step 2 — Proof generation by the user

When accessing a protocol, the wallet generates a zk-proof confirming compliance status.

For example, the proof can confirm that:

the user passed KYC
the user is not on a sanctions list
the user is allowed to access the product

The proof does not reveal name, documents, or identity details.

Step 3 — Onchain verification by the protocol

The smart contract verifies the proof and allows or restricts access based on the result.

The protocol enforces compliance requirements without storing or processing user identity data.

Platforms such as Polygon ID and zkPass are building infrastructure that allows protocols to integrate ZK-KYC verification directly into smart contracts.

Where ZK-KYC is required

ZK-KYC becomes necessary when protocols operate in regulated or institution-facing environments.

Tokenized real-world asset platforms: Access to tokenized securities, funds, or real estate must be restricted to verified participants.
Institutional DeFi pools: Liquidity pools involving institutional capital require participant verification before allowing deposits or trading.
Stablecoins with regulated access: Certain stablecoins restrict minting and redemption to verified users.
Jurisdiction-restricted products: Protocols may need to block or allow access based on regulatory requirements tied to geographic eligibility.

Why protocols adopt ZK-KYC instead of traditional KYC integration

The traditional approach forces protocols to act as identity custodians. This creates serious security and legal exposure as well as implies operational costs for every user submission processing.

ZK-KYC removes this requirement entirely.

Protocols do not collect identity data.
They verify compliance cryptographically.

This reduces:

legal liability
data breach risk
infrastructure complexity
onboarding friction

It also allows users to reuse verification credentials across multiple protocols. Major financial institutions and technology providers have begun testing ZK-KYC infrastructure.

Deutsche Bank and Privado ID conducted a proof of concept demonstrating blockchain-based identity verification using zero-knowledge credentials.
In July 2025, Google open-sourced its zero-knowledge proof libraries following work with Germany’s Sparkasse group, signaling growing institutional investment in privacy-preserving identity infrastructure.

5. Identity, Reputation, and Access Control via ZK-ID

We already covered ZK-KYC that solves a very specific problem. It allows protocols to verify that a user passed compliance checks without collecting identity data.

But compliance is only one part of how financial systems evaluate participants.

Sometimes, protocols also need to distinguish different categories of users. A whale, a bot farm, and a long-term user all look identical at the protocol level.

This creates structural problems:

Airdrops are farmed by thousands of Sybil wallets
Governance can be manipulated by coordinated identity splitting
Lending protocols cannot differentiate between unknown and reputable borrowers
Permissioned liquidity pools cannot enforce participant criteria without collecting sensitive data

ZK-ID allows users to prove properties about themselves, their status, or their history, without exposing the underlying identity or raw data. ZK-ID builds on the same credential model used in ZK-KYC, but expands it beyond compliance.

A trusted issuer creates a credential that contains specific attributes. This could include:

accredited investor status
jurisdiction
institutional classification
creditworthiness
uniqueness
prior participation or reputation

The credential is stored in the user’s wallet.

When interacting with a protocol, the wallet generates a zk-proof confirming that the user meets required criteria.

How ZK-ID works inside a protocol

ZK ID uses zero-knowledge proofs (ZKPs) to separate verification from data exposure. A user (the Holder) stores cryptographically signed credentials from a trusted Issuer, like a bank or identity provider. When interacting with a smart contract (the Verifier), the Holder generates a proof that satisfies the contract’s requirements—“I am over 18” or “I passed KYC”—without revealing the underlying data. The contract verifies the proof mathematically and executes the transaction if valid, keeping sensitive data offchain.

Participants:

Issuer – Provides signed credentials.
Holder – Stores credentials and generates proofs.
Verifier – Smart contract that validates the proof and executes actions.

The protocol receives confirmation of eligibility, not identity.

Projects such as Worldcoin and Polygon ID are building infrastructure around this model, allowing applications to integrate identity checks without storing user data.

ZK-ID Use Cases

ZK-ID is becoming relevant across several protocol categories.

Sybil-resistant token distribution

Protocols can enforce one-user-per-claim rules without collecting personal information. This directly addresses one of the most expensive inefficiencies in token launches.

DAO governance protection

Voting systems can enforce uniqueness constraints, preventing influence amplification through wallet fragmentation.

Permissioned DeFi markets

Protocols can restrict access to specific participants without maintaining centralized identity databases.

Reputation-based protocol logic

Applications can assign different parameters based on user credentials, such as:

borrowing limits
leverage tiers
fee discounts
access to private liquidity

This introduces a reputation layer that operates without exposing user identity.

Why this matters for protocol design

ZK-ID allows protocols to introduce user-level logic that was previously only possible in centralized systems.

This changes how protocols approach:

access control
governance integrity
incentive distribution
risk segmentation

Instead of treating every address as identical, protocols can define participant criteria while keeping user data private.

This is particularly important for:

institutional pools
undercollateralized lending models
reputation-aware financial products
controlled token distributions

Without identity proofs, protocols must choose between anonymity and control. ZK-ID removes this trade-off.

Limitations and adoption constraints

ZK-ID introduces new infrastructure dependencies.

Issuer trust model: Protocols must decide which credential issuers they accept. The security of the system depends on issuer reliability.
Credential lifecycle management: Credentials must support expiration and revocation. Otherwise, outdated or invalid attestations remain usable.
Fragmentation across ecosystems: Different identity systems may issue incompatible credentials, slowing interoperability.

Why Zero-Knowledge Proofs Matter for DeFi

The core shift is architectural. ZK allows protocols to verify conditions without exposing the underlying data. This unlocks system designs that were previously incompatible with public blockchains.

This directly expands what DeFi infrastructure can support:

Institutional-grade markets
Institutions require confidentiality, controlled access, and compliance guarantees. ZK enables private execution, reusable compliance credentials, and permissioned liquidity pools without introducing centralized custody of user data.

Execution environments designed for capital efficiency
Private trading, hidden order flow, and shielded balances reduce strategy leakage, MEV exposure, and liquidation targeting. This improves execution quality for traders, market makers, and treasury operations.

Protocol-level identity and reputation logic
ZK-ID allows protocols to distinguish participants based on verifiable attributes such as accreditation, uniqueness, or prior participation. This allows governance protection, reputation-aware lending, and controlled token distribution.

Infrastructure capable of supporting global-scale usage
ZK-rollups provide verifiable high-throughput execution environments. Protocols can support more complex financial products, higher transaction volumes, and new interaction patterns without inheriting base layer constraints.

Taken together, these capabilities move DeFi closer to parity with traditional financial infrastructure while preserving the verification guarantees of public blockchains.

This is why many next-generation protocols are being designed around ZK-based execution, identity, and settlement layers.

Adoption Challenges and Infrastructure Constraints

Even with clear advantages, ZK systems introduce new constraints:

1. Computational Overhead

Proof generation requires significant resources
Can introduce latency for complex circuits or mobile environments

2. Specialized Engineering Requirements

Circuit design and cryptographic expertise needed
Developers must work with Circom, Noir, Cairo, and other domain-specific languages

3. Credential and Issuer Fragmentation

ZK-KYC and ZK-ID depend on trusted issuers
Standards for credential formats, revocation, and cross-chain interoperability are still evolving

4. Regulatory Uncertainty

ZK proofs support compliance verification
Regulators are still evaluating how cryptographic identity proofs fit within reporting obligations

5. Production Readiness Challenges

Pilots demonstrate feasibility, but scaling across millions of users and multiple chains adds operational complexity

Key Takeaways

How ZK-Proofs Improve Blockchain Privacy

ZK-Proofs address privacy at multiple levels: from individual transactions to regulatory compliance.

Hiding transaction details. In shielded transactions, details (sender, receiver, amount) are represented as private notes, which are cryptographic commitments. Only a nullifier and validity ZKP are published on-chain, without confidential details. The link between fund inflows and outflows is broken.

Proving facts without revealing data. Instead of sharing a document, users generate a ZKP about a specific claim: "age >18" without birthdate, "KYC passed" without documents, "sufficient balance" without exact amount.

Minimizing stored data. Institutions verify facts without possessing underlying personal data. This reduces breach risk and GDPR liability, also they recommend not storing personal data on-chain - ZKPs allow working with hashes instead of raw data.

Controlled disclosure. Systems include a "viewing key". It keeps data private to the public but can be decrypted by authorized parties under lawful conditions. Privacy by default, auditable when required.

What Are the Top Use Cases for ZK-Proofs in DeFi?

Zero-knowledge proofs (ZKPs) are powering next-generation decentralized finance by enabling privacy, compliance, and scalable execution. Core applications include:

Private Transactions and Confidential Transfers
- Hide sender, receiver, and transaction amounts on public blockchains
- Enable shielded balances and private interaction with swaps, lending, and liquidity pools
- Protect institutional capital and proprietary strategies
Private Trading and Dark Pool DEXs
- Execute large trades without revealing size, direction, or identity
- Prevent front-running, MEV attacks, and liquidation targeting
- Support encrypted order books and sealed-bid batch auctions
Scalable DeFi via ZK-Rollups
- Batch large transactions efficiently to Ethereum L1
- Improve throughput for derivatives, multi-step swaps, and LP strategies
- Enable application-specific execution layers and privacy-oriented VMs
ZK-KYC for Compliance
- Verify user compliance without storing personal data
- Reduce legal liability, GDPR exposure, and onboarding friction
- Support institutional pools, tokenized real-world assets, and regulated stablecoins
ZK-ID for Reputation and Access Control
- Prove identity attributes, uniqueness, and creditworthiness without revealing raw data
- Protect governance from Sybil attacks and enable reputation-aware lending
- Control access to private liquidity and specialized financial products

Why ZK-Proofs matter for DeFi

Enable institutional-grade markets without centralizing user data
Allow capital-efficient trading with hidden order flow and shielded balances
Introduce identity and reputation layers for access control, governance, and risk management
Scale complex DeFi products without sacrificing verification guarantees

ZKPs are not just a privacy feature—they redefine protocol architecture, enabling DeFi that is compliant, private, and scalable for both retail and institutional users globally.

What are zero-knowledge proofs in cryptocurrency?

ZKPs are cryptographic methods that verify information without revealing the underlying data. In DeFi, they protect transaction details, enforce compliance, and enable reputation-based access.