Blockchain 101: Industry Dive – Private Transactions

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Remember “Blockchain technology represents a potential 3%-10% cost savings on every good that uses it as a medium of exchange”

     Since the beginning of time, privacy has been ingrained in the way humans live. There are things that we wish to keep private on many levels. Privacy is often important in a protection from harm standpoint, it can be something that we need in order to live our lives in a civilized way. It is a normal function of life.

     Since the advent of currency, it has been hard to know where money has traveled throughout an economic system because transactions have historically been private. The two transactors trade goods for currency without anyone in the middle. Transactions and income were very hard to tax from this standpoint because people can hide or disguise their transactions from the governing body.   

    Over the past 150 years this has changed almost in its entirety. Accounting systems have been widely adopted across the world, creating records which allow for efficient business management but also allow for tracking. Many Westerners today interact with formal records or ledger systems on a regular basis in the form of purchases made with debit cards, or through PayPal, etc. These ledger systems are all centralized and owned by very large institutions with huge amounts of power (Visa, Mastercard, banks in general are all examples of said institutions).  These institutions often keep their ledgers private from other actors but can be easily subpoenaed into giving over the information to a government if there is some suspicion about a transaction made by a customer. This sounds benign at face value but can be very easily used against political opponents or suspected opponents. This type of unchecked economic power is something that many people don’t trust.

     Before blockchain technology was implemented, there was almost no way to transfer value across the world instantaneously without a middle man handling the medium of exchange. Now we can do so with ease through a distributed ledger. This in and of itself isn’t the answer to the problem posed in the previous paragraph. With blockchain technology, the ledger itself is public. Making the tracing of transactions to wallet addresses fairly easy (Though, it isn’t as easy to tell who owns the address). However, through some tricky cryptography, blockchain developers have figured out some effective ways to hide ledger transactions. This can make tracing certain cryptocurrencies impossible for powerful entities.  

Ring Signatures

     One specific technology that has been utilized in the privacy transaction space is called ring signatures. The Monero blockchain was the first to implement this in a large scale. In essence, ring signatures cloud who actually signed a transaction. The method uses previous signers of other transactions to be dummy signers of the current transaction. Meaning that it is impossible for non-signers to know who signed the transaction. Monero has become the largest privacy currency due to its integration of this privacy method and a few others.

ZK-Snarks

     Another technology that has been implemented in the blockchain space to keep transactions private is ZK-snarks (Zero knowledge proofs). Zero knowledge proofs allow for someone to prove that they know some value without the other side revealing any part of that value. This means that you can send value to another person without signing any personal information to that transaction. ZCash is probably the largest cryptocurrency by market cap that uses this method to keep users’ information private. An added benefit of this method is that it makes transaction sizes much smaller than they traditionally are. Enabling more transactions per megabyte.

     These explanations of different technologies used in private transactions are very basic. If you are interested in going down the rabbit hole of privacy transactions, you could spend months studying this stuff yet barely scratch the surface. On top of these technologies, there are other methods being developed to ensure users can pull privacy back into their hands instead of having central authorities dictating what is private and what isn’t.  Check out the technologies mentioned, I am sure you will be fascinated.