Blockchain technologies keep an immutable record of all transactions executed. This record is publicly accessible, meaning someone can identify transactions, check the addresses, and possibly link them back to you.
So, if you want to make a private crypto transaction, what would you do? Well, you can turn to several on-chain protocols implemented across different blockchains to offer you the privacy you need.
1. Confidential Transactions
Confidential transactions are cryptographic protocols that allow users to keep transactions private. In other words, they can hide the amount and type of assets being transferred, while still assuring there are no extra coins for double-spending. Only the involved entities (the sender and receiver) and those they choose to reveal the blinding key can access this information.
Assume John has five BTC in his wallet and wants to send two BTC to Mary, who has already provided her address. John generates a blinding key and integrates it with Mary’s address to create a confidential address. Although the address is recorded on the public registry, only John and Mary know it’s associated with Mary’s address.
John initiates a Pedersen commitment with the blinding key and two BTC. A Pedersen commitment allows a user to commit a value without revealing what it is until a later date. The value is revealed using the blinding key.
John also creates a signature with the confidential transaction address and a mathematical condition requiring Mary to prove they own the associated address’s private key, which they do. The transaction goes through and is recorded in the public registry.
Confidential transaction technology was created by Adam Black in 2013. It has been implemented in numerous projects, including Blocksteam’s Elements side-chain and AZTEC protocol.
2. Ring Signatures
A ring signature is a method of obfuscation that involves mixing the sender’s transaction with several other real and decoy inputs, making it computationally impossible to know the exact sender. It provides a high level of anonymity for the sender while maintaining the integrity of the blockchain.
Imagine a small group of friends, Alice, Bob, Carol, and Dave, who want to make a particular decision without revealing who exactly made it. They form a ring consisting of their public keys (i.e. their wallet addresses). Alice initiates a transaction using her key along with the public keys of the others. Using the mixed inputs, a cryptographic algorithm generates a signature for the transaction.
The signature can be verified using the public keys, but one cannot determine whether it originated from Alice’s key. The same happens with the transactions from the other members. The ring signature is then added to the blockchain, facilitating decision-making while maintaining anonymity.
Blockchain networks like Monero achieve a high degree of transactional privacy and anonymity by mixing transactions through ring signatures.
3. Zero-Knowledge Proofs
Perhaps the most popular on-chain privacy technology, zero-knowledge proofs, enables verification of transaction data without disclosing the actual information. Essentially, the prover will perform a series of interactions that demonstrate to the verifier they genuinely have the information in question. Meanwhile, these interactions are designed so that the verifier cannot guess the info.
Let’s say Peter knows the password to a locker room, but Carl wants to ensure he knows it without him telling the password. Peter decides to perform a series of actions that would only be possible if he knew the password. For instance, he opens the door, steps in, closes it, then opens it again and steps outside and closes it.
Carl realizes that Peter truly knows the password because he couldn’t have opened the door, stepped in, and came back outside without knowing the password. Meanwhile, he has demonstrated knowledge of the password without necessarily stating the password.
ZK proofs play a crucial role in privacy coins like Zcash, ensuring that transaction details are concealed while being verifiable by network participants.
4. Mimblewimble
Mimblewimble is a privacy protocol that obfuscates transaction inputs and outputs through a “cut-through” process, where multiple transactions are aggregated into single sets to create a small cryptocurrency transaction block. This reduces the size of the blockchain while adding a layer of privacy.
Imagine Harry wants to send a secret message to Hermione. With Mimblewimble, the entire transaction will be chopped into pieces like confetti. Meanwhile, the signatures of the transaction are also combined. Harry initiates a cryptographic signature with details that prove he has the authority to spend the coins and authorizes the transaction.
Hermione receives the transaction and verifies it. She confirms that the transaction is valid, that the sums match, and that Harry’s signature is genuine. But she still doesn’t know the individual inputs and outputs.
Mimblewimble has been used in various cryptocurrencies, such as Grin and Beam, to ensure the privacy of transactions. In addition, it does not require a long history of past transactions to verify current ones, which makes it light and scalable.
5. Dandelion
Dandelion focuses on enhancing the anonymity of transaction propagation within the network. It operates by concealing the origin of a transaction during the initial propagation stages. This makes it difficult for malicious actors to trace the source of a transaction back to its origin, enhancing privacy for users.
Lily wants to send a transaction on the blockchain without revealing her identity. In the first phase, she uses a known route to transact. Then, in the middle of the process, she takes a random detour to send her transaction before it reaches the destination. At this point, it doesn’t look like it came from her.
The transaction spreads out from node to node without revealing the origin, like dandelion seeds floating in the air. Eventually, it pops up on the blockchain, but tracing it back to Lily is hard. The protocol has created an unpredictable path and hidden the source.
Dandelion was initially proposed to improve Bitcoin’s peer-to-peer network privacy. However, it had flaws that would result in de-anonymization over time. An improved version, Dandelion++, was adopted by Firo, a privacy-preserving cryptocurrency.
6. Stealth Addresses
Stealth addresses facilitate recipient privacy by generating a unique one-time address for each transaction. This prevents observers from linking a recipient’s identity to a particular transaction. When funds are sent to a stealth address, only the intended recipient can decipher the transaction’s destination, ensuring confidentiality.
Let’s assume Jay wants to keep his transactions private. So, he creates a stealth address so that people can’t easily connect the transaction to him. He sends the address to Bob, who’s to pay using crypto. When Bob initiates the payment, the blockchain diffuses the payment across a series of random transactions, adding complexity.
To claim his payment, Jay uses a special key that corresponds to the stealth address. It’s like a secret code that unlocks the address and gives him access to the funds.
Meanwhile, his privacy remains intact, and even Bob knows his true public address.
Monero uses stealth addresses to ensure the privacy of users’ public addresses. Another project that utilizes this protocol is Particl, a pro-liberty decentralized application platform.
7. Homomorphic Encryption
Homomorphic encryption is a cryptographic method that enables the use of encrypted data to perform computations without first decrypting the data. In blockchain, it facilitates operations on encrypted transactional data, maintaining privacy throughout the process.
Let’s say Brenda wants to keep a number secret while letting Aaron do some calculations with the number without seeing it. She encrypts the secret number, turning it into a locked special code only Aaron can open. Aaron takes the code and performs calculations on it without needing to know the original number.
When he’s done, he sends the result to Brenda, who then uses her encryption key to decrypt the result and turn it into the format of the original secret number. She now has the answer, yet Aaron made the calculations without knowing the original number.
Homomorphic encryption was used to develop Zether, a confidential and anonymous payment mechanism for blockchains by the Stanford University Crypto Group. What’s preventing its wide adoption is slowness, inefficiency, and high storage requirements.
Enhance Your Crypto Transaction Privacy
While blockchains give users a higher level of privacy, many only provide pseudo-anonymity. As long as a public address can be traced back to you, your identity is not entirely hidden.
So, if you want to improve the level of on-chain privacy, use blockchain technologies that employ privacy protocols like the ones above.
