Given that blockchain transactions are pseudonymous, not anonymous, and that blockchains themselves are transparent, numerous protocols exist for the incorporation of greater privacy to protect individuals from those seeking to connect them with their transactions. It goes without saying that the motives behind this include facilitating protection from legal entities, but also the desire to grant individuals privacy from those who might wish to steal funds or identify those with large holdings for the purpose of solicitations or more serious crimes. With that in mind, not all privacy protocols are alike. There are different methods to achieve the goal at hand — namely obscuring transaction histories to the point where tracking someone’s balance history becomes prohibitively resource intensive, if not completely impossible. Here we discuss the three most common methods of achieving this, and their applications thus far.
Zero knowledge proof (ZCash, PIVX)
Last week we published an article going into detail on ZKPs, which can be read here. There is evidence to suggest this could be the most popular privacy technology moving forward, as it is promised in Ethereum, Cardano, Tron and others.
Ring signatures (Monero)
The earliest privacy coin, Bytecoin, uses a concept called ring signatures which had been theorized as far back as 2001 in a paper delivered to ASIACRYPT. The concept was proposed as a way to leak secrets with anonymity, for example in the White House or a Board of Directors, by having all members of the group in question sign the output even when it comes from only one individual. In cryptocurrencies, ring signatures send a transaction from a member of a group in which all members have their own account keys and sign the transaction. This creates a group of individual accounts which all could theoretically have sent a transaction, when only one has. Put more simply, it is not possible to say which of the group has actually sent the transaction.
Monero is a Bytecoin fork which maintained its employment of ring signatures, and in 2017 added “ring CT” (confidential transactions), which hide details of transactions from all but the sender and the recipient. Monero has a minimum of 7 signatures per transactions, and when combined with the range proofs introduced with its Bulletproofs update this year it is arguable that Monero remains the most comprehensive privacy blockchain platform (and indeed this is recognized by the market, where Monero stands at 13th on the top 100 coins by market cap, ahead of all other privacy tokens).
Coin mixing and change addresses (Dash)
In Bitcoin’s early days, coin mixing became popular for those trading on illicit activity websites to scramble their transaction histories and making tracing funds through the blockchain much more difficult. This was not a feature on Bitcoin’s blockchain, but rather a third party service which mixes coins for a fee of 1–3%. The concept is simple: swapping one denomination of Bitcoin for another of equal size, thereby obfuscating the trails of both and making identification much more difficult.
As discussed in our write up on Dash masternodes and their functions, Dash introduced a privacy feature initially called DarkSend (now PrivateSend), which facilitates a type of coin mixing directly into their blockchain using masternodes. When requested, these masternodes split a transaction into denominations, mixing them with the denominations of others using PrivateSend, before sending it back to a change address the user controls. At that point it is much more difficult to trace the transaction history. Most notably, this is an elective feature which makes Dash a rare example of a currency with optional privacy or transparency, depending on the user’s goal and the demands of vendors — thereby avoiding the blacklisting problem which could devalue specific tokens devalued by privacy measures.
Article by Byron Murphy, Editor at Viewnodes. We help clients establish and maintain masternodes for the currencies which currently support them. To contact us for information on our masternode services, please submit this contact form.