R3’s Blockchain Report: 7 Cryptocurrency Privacy Tools Compared

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As a transparent network of transactions, Blockchain ensures the availability and integrity of stored data continuously. However, this total transparency can compromise confidentiality and privacy. The R3 Consortium issued a report comparing the seven privacy tools available within Blockchain technology.

Blockchain is perhaps the most disruptive technology since the inception of the Internet. The technology has gained a prominent place in recent years, especially in finance. However, privacy tools have been developed to mitigate certain flaws.

Blockchain Between Transparency and Privacy

In principle, Blockchain is a single ledger shared by all members and updated in real time; data are recorded in an irreversible and incorruptible way, and can be consulted by anyone, at any moment.

For instance, if you want to receive funds through the Blockchain system, you must provide your e-wallet address so that the other party can complete the transaction. But, it is possible to track all the history of your transactions made with this address.

Edgy compares 7 Blockchain known privacy tools plus some new ones.Click To Tweet

At Distributed Ledger Technology, Blockchain is based on consensual validation: adding or modifying data requires approval by the required quorum of network members. Yet, this openness and transparency doesn’t necessarily rhyme with confidentiality and privacy.

Blockchain’s Confidentiality Privacy Tools

R3 is a financial consortium that was founded in 2014 around Blockchain technology and its applications. Composed of over 80 of the world’s largest financial institutions, the consortium is exploring the potential of this technology to offer solutions for banking and finance industries.

Last year, R3 commissioned Zcash (Zerocoin Electric Coin Company) to conduct a survey that summarizes and compares the different techniques for making blockchains more private. At first, the report was distributed to the R3 consortium’s members, and recently R3 published it on their website.

Compiled from R3’s report, Edgy has compared 7 Blockchain privacy tools:

1. Ring signatures

 

Rivest R.L., Shamir A., Tauman Y. (2001) How to Leak a Secret

Invented by Rivest, Shamir, and Tauman in 2001, ring signatures are created for a group of possible signers without divulging which member created the signature.

 

From R3’s report: “In the case of a blockchain, ring signatures can be used to create transactions where the sender cannot be identified (although an observer will know that the sender is one of a specific group that corresponds to the public keys used in the ring signature).”

2. Stealth addresses and One-time use keys

Stealth addresses could be legally problematic. One-time use keys are effective but are limited in terms of their practical application. Once received monies are spent, information on the transaction is inevitably leaked and could, in theory, be linked to previous transactions even where a one-time use key was implemented.

3. Confidential Transactions (Pedersen commitments)

On the other hand, high-end approaches and protocols (Pedersen commitments, sidechains) are based on mature cryptography but haven’t been thoroughly tested in real-world.

4. Coinjoin and Mixing

Mixing is one method that users can implement in order to mask transaction history. Mixing entities, also known as tumblers, like Bitcoin Fog and BitMixer, take in bitcoins from many different sources, scramble them up, and release them at different times, in different quantities, and to different users. This is an effective way to mask transaction history. Yet, in theory, the scrambling of bitcoins could still be tediously mapped.

Coinjoin attempts to remove the third-party (the tumbler). This is limited by the number of people willing to participate in the coinjoin. Privacy concerns arise as each member of the coinjoin can potentially unmix the process.

5. Zero-knowledge proofs

Zero-knowledge allow one user to prove to another user that a statement is true without revealing any information apart from the fact that the statement is true.

The explanation for how this works is complicated, but you can learn more from Jean-Jacques Quisquater‘s How to Explain Zero-Knowledge Protocols to Your Children.

With this proof, there is a chance for fraud by a party that fakes a proof. They have to very lucky for this to take place, and this phenomenon is known as the soundness error. Be sure to check out the link above for more info.

6. Off-chain approaches

Zcash concluded that although low-tech solutions (such as storing data off-chain and one-time use addresses) are simple and low risk, they have some limitations. Hashes of transaction information is made available to connected nodes, but full information can only be verified from one end of the transaction.

7. Restricting Read Access

A sidechain of sorts, a new Blockchain is created with restricted access to the private network. All information is still open to those with access, however, which inevitably allows for bad actors.

Conclusions

The report analyzed only the approaches and methods available at the time it was written (November 2016). Since then, other solutions have been released, such as R3’s own Corda or JP Morgan’s Quorum. Corda is an open source distributed ledger platform where only the members involved in the transaction ensure its consensual validation. Further solutions and services are expected to be released throughout 2017 and beyond.

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