Bringing Privacy to Public Blockchains

Key Takeaways

• The rise of trustless peer-to-peer transactions with the Bitcoin blockchain came at the cost of privacy, as public access to the content of each wallet is a fundamental aspect of blockchains.
• Zero-knowledge proofs and stealth addresses are the two prominent ways through which the industry plans to tackle this challenge
• A zero-knowledge proof allows one party to verify a statement to another without providing any underlying information
• Stealth addresses allow users to generate different transaction addresses without additional user interaction.

How Public Blockchains Operate

The world of trustless peer-to-peer transactions was revolutionized when Satoshi Nakamoto unveiled the Bitcoin blockchain, which allowed users from different parts of the world to transact with each other without the need for a trusted intermediary. This revolution, however, came at the cost of privacy.

To understand why that happened, we must first understand how public blockchains like Bitcoin and Ethereum work and how transactions happen. For example, let’s say Alice sends 3 ETH to Bob. When she submits her transaction, it goes to the mempool where a validator picks it up and verifies if Alice has at least 3 ETH (plus the transaction fee) in her account. If she does, the transaction gets added to the blockchain, and ETH is moved from Alice’s to Bob’s address.

This design makes public access to the content of each wallet a fundamental aspect of blockchains. As blockchains get more complex, the information available to the public also increases. Nowadays, crypto wallets don’t just hold cryptocurrency but also ENS names, NFTs, and POAPs. All of those are visible for everyone to see.

To address this issue, the crypto community has debated ways to bring privacy to blockchain transactions. One option is to create a completely privacy-focused blockchain from scratch—the route Monero decided to take. Another option is adding a privacy layer on top of the current public blockchain, which Ethereum, Solana, and others are pursuing. In this article, we’ll examine the second option in more detail.

Adding a privacy layer

Privacy is a fundamental right and one of the core principles of the cryptocurrency ecosystem. However, there is no consensus on how to add privacy to public blockchains. Two of the commonly accepted ideas are Zero-Knowledge proofs and stealth addresses.

Zero-Knowledge Proof is a cryptographic concept through which one party can verify a statement to another without revealing any underlying information about that statement. When implemented, it will increase both privacy and security on a blockchain.

Let's look at an example to understand this better. Where’s Waldo is a popular children’s puzzle book where the player finds Waldo among hundreds of similar figures, as shown in the image below.

Before starting this game, a player might ask for confirmation that the picture contains Waldo. So the task is to demonstrate Waldo's presence in the image without revealing his exact location. This may appear impossible, but it can be achieved by placing a large sheet with a hole in the middle in front of the image, then positioning the picture so that Waldo's image is visible on the other side through the hole. Because the sheet is larger than the image, the player on the other side will still have no idea where Waldo is. They will see something similar to this:

The player now has proof that Waldo is in the image but has zero knowledge about his location. Similarly, in our crypto example, ZKP will allow the Validator to ascertain that Alice has enough ETH on her account without telling them how much is in it. As a result, this feature can add a layer of privacy to the existing blockchain architecture.

Stealth Addresses are another feature expected to add privacy to public blockchains, especially Ethereum. Vitalik Buterin published a blog post about this concept in January 2023. The basic premise is that instead of having all transactions occur on a single public address, Ethereum users can generate different addresses for different transactions without requiring additional interactions.

Let’s use our previous example where Alice wanted to send 3 ETH to Bob. With a stealth address, Bob can generate a ‘meta address’ and send it to Alice. Alice can then use it to create a private address and send the 3 ETH to Bob.

With this feature, each time Alice wants to send ETH to Bob, a new address can be generated and used to transfer the ether. Bob will still control all the assets sent to these new addresses, but it would be extremely difficult for any third party to link these transactions to Bob’s Ethereum wallet.

Conclusion

As blockchain technology becomes more widely adopted, the current mechanism of making every transaction publicly viewable is likely to cause significant privacy concerns. No one wants the whole world to know their bank balance. Similarly, no one would want the whole world to know their crypto balance.

Creating a separate privacy-focused blockchain is not feasible, considering the development already occurring on public blockchains. For this reason, the industry must continue working on new and innovative ways to add privacy layers on top of the current blockchain networks.

Both zero-knowledge proofs and stealth addresses offer additional privacy options for users. As Vitalik mentions in his blog, combining the two will provide an even higher level of privacy. Since this is an ongoing process, it remains to be seen how the industry will address this important topic in the years ahead.

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