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Is Bitcoin private? The truth about Privacy on the Blockchain

October 29, 2021

Christina

Is Bitcoin private? The truth about Privacy on the Blockchain
Bitcoin was once considered one of the most private means to carry out transactions away from the scrutiny of the authorities. But is it? And what blockchain privacy options are there?

Despite early promises of total privacy, it’s thanks to the open and public nature of the Bitcoin blockchain that the FBI identified the operator of the world’s biggest dark web marketplace, Silk Road.

Since then, it’s widely understood that rather than complete anonymity, cryptocurrencies on public blockchains mostly offer a degree of pseudonymity. If you can link someone’s public address to their identity, it’s generally possible to identify funds entering and leaving their account. 

However, blockchain developers have always sought to achieve better transaction privacy, motivated by various reasons. The die-hard privacy advocates see blockchain as the ultimate tool for operating off the authorities’ radar and seek to obscure on-chain activity at any cost. On the other end of the spectrum, many enterprises want to secure a degree of privacy to protect competitive interests or meet their client confidentiality and data protection obligations. Nevertheless, enterprises need a verifiable audit trail to demonstrate compliance. 

Various technologies and methodologies have emerged over the years that attempt to meet the range of demands. Some of them are more effective than others in what they aim to achieve. Here, we examine some of the most commonly-used privacy protocols, along with where and how they’re used. 

Ring Signatures

Ring signatures are a way of signing a transaction that intends to obscure the sender’s address so that they can transact with anonymity. They’re used by Monero, one of the biggest privacy coins by market cap. Ring signatures work in a way similar to a multi-signature wallet by having the transaction signed multiple times, such that it’s impossible to tell who signed the transaction. 

For example, if Alice sends Bob a payment from her wallet, she signs it using a one-time spend key. As the transaction is initiated, non-signers are added to the ring signature from past transactions selected randomly from the blockchain. Alice is authorized to send her transaction, and the network nodes will validate it, but all of the ring signatures will be visible on the blockchain, obscuring Alice’s identity. Furthermore, because her key is only used once, it can’t be linked to any other transactions. 

To prevent double-spending, every transaction on Monero also generates a key image, which is a cryptographic key output unique to each transaction. However, because it’s encrypted, it’s impossible to reverse-engineer the transaction from its key image. But if someone attempts a double-spend, the network can detect that the key image is a duplicate of a previous transaction and reject it. 

Monero is known for being one of the most private of privacy coins, and, as it allows parties to transact almost without detection, it’s become delisted from many exchanges due to regulatory concerns. 

zk-SNARKS

Zk-SNARKs stands for “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge.” You’ll also see this referred to as “zero-knowledge proofs” (or zk-proofs). Developed by privacy coin Zcash, zk-SNARKs can be illustrated using a fun analogy of the popular “Where’s Waldo?” books. 

Let’s imagine Alice and Bob are playing a game of Where’s Waldo? Alice has found Waldo on the page, and she wants to prove to Bob that she knows where Waldo is, but without giving away the secret. She cuts out a Waldo-sized hole from a large piece of paper and places it over the book so that all Bob can see is the image of Waldo. He can’t tell where the image is located on the page. As such, Alice has demonstrated that she knows a fact to be true without giving away the fact itself. This is the principle underlying zk-SNARKs. 

In the context of Zcash, zK-SNARKs encrypt transactions such that the network nodes can confirm it but without broadcasting the details of the sender, recipient, or value. 

Due to its privacy features, Zcash has also run into issues with exchange delistings. However, it’s worth noting that the privacy feature on Zcash is opt-in, and users can’t rely on private transactions as the default. 

Mimblewimble

Mimblewimble, with its name inspired by a Harry Potter spell, uses a dual system called CoinJoin and Cut-Through to obscure transactions. CoinJoin combines multiple payments from various senders under a single transaction so that the block will ultimately contain multiple inputs, outputs, and signatures that don’t necessarily correspond to one another. Cut-Through applies further obfuscation by aggregating inputs and outputs of all transactions into smaller blocks. 

Mimblewimble emerged in 2018 and is implemented in proof-of-work blockchains, including Beam and Grin. 

Trusted Execution Environments

Due to the regulatory concerns around privacy coins, they remain the preserve of the hardcore privacy enthusiasts. It’s fair to say that it’s taken some time for enterprise-grade privacy solutions to emerge, but Trusted Execution Environments (TEEs) are currently the best available. It allows a blockchain to segment data into public and private, where the latter is processed off-chain in a TEE. 

Platforms such as the Secret Network and Polkadot-based Integritee make use of Intel’s Software Guard Extensions (Intel SGX) to achieve this, allowing enterprises to leverage blockchain while selectively deciding which transactions need to be executed within the security of a TEE. Visa has also previously disclosed that it is developing its own version of a blockchain-based TEE. 

The drawback of a TEE is that it relies on trust, which compromises some of blockchain’s trustlessness. Nevertheless, it does provide an effective workaround for the lack of privacy on public blockchains for enterprises. 

Blockchain privacy is an evolving topic and one with which researchers continue to grapple. The landscape will likely continue to shift as new solutions emerge. However, for now, there is no “one-size-fits-all” solution for blockchain privacy and meaning that users seeking privacy for whatever reason must determine their priorities and be prepared to make the appropriate compromises. 


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