A Necessary Evolution of Privacy and Data Protection on Blockchain Networks

How far has crypto strayed from the decentralized, security-conscious payment system that Bitcoin was intended to be? Ethereum and other blockchains have drifted into the waiting arms of centralized actors, to the detriment of the industry as a whole.

When Satoshi Nakamoto introduced the world to blockchain technology, privacy was highlighted as one of the core features.

The transformative technology would use anonymous public addresses to allow users to transact privately, and at the same time, maintain the level of transparency needed for a trustless, peer-to-peer system to work.

Fast forward 14 years and blockchain technology has become quite popular. Today, there are hundreds of blockchain protocols, all following the same basic principles.

And thanks to smart contracts, functionality has improved greatly to allow for revolutionary applications in finance, supply chain, voting, communication, digital interactions, and more. However, there is a catch.

Such complex applications require what can be considered to be sensitive information. As a result, they need a high level of privacy. Considering that privacy has been a fundamental feature of blockchain technology from the beginning, one may be tempted to assume everything fits right in.

But that’s not the case.

The Challenge of Privacy

Most blockchains today work in more or less the same way. All data, once uploaded to a blockchain, can be viewed by all participants of the network.

So, every transaction is visible to anyone, anywhere in the world. This is how protocols ensure transparency. However, this introduces a challenging problem: how does the network ensure the privacy of its users?

Blockchain protocols today use the same solution Bitcoin shipped with, public keys. Rather than requiring a user’s real identity, the protocol records the wallet addresses involved in the transaction along with the other relevant information.

These addresses can be obtained anonymously. So, while information regarding on-chain interactions is visible to all, the real-world identity of participants behind these interactions remains hidden.

This is a pseudonymous solution that leans on anonymity to ensure privacy. And while it has been sufficient for a long time, its effectiveness is rightfully being called into question.

How Protocols Fail

Privacy is not just anonymity. It’s also about having control of personal data. A user should have the ability to decide who gets to see their information, under what circumstances, and how much of it they can access.

This is becoming especially crucial as blockchain applications expand into more sectors.

It is clear that increasingly sensitive information will need to be stored on-chain. However, blockchain participants still have no control over their data, a situation that’s making a lot of people uncomfortable.

Furthermore, once data makes it on-chain, it stays there forever, making it possible to view all of a user’s past on-chain activities.

It gets more uncomfortable when considering that even anonymity, which is supposed to make such levels of transparency less of a privacy risk, is no longer guaranteed.

It is now a widely accepted fact that a determined enough individual/party can identify the users behind a particular wallet address by tracking their on-chain interactions.

What this means is the problem extends beyond storing sensitive data on-chain. The privacy of just about anyone using a blockchain, even to complete a simple crypto transaction, is at risk.

This was confirmed only recently when a researcher at the Ethereum Foundation revealed the organization monitors the IP addresses of Ether stakers.

The rather huge privacy concern, in this case, comes from the fact that getting a user’s IP address opens the door to identifying them and their location.

This puts the privacy violator in a good position to obtain more potentially sensitive personal information.

The crypto community’s sentiment toward this revelation is as expected; there is a good amount of outrage punctuated by outcries for true blockchain privacy solutions.

What Does a Working Solution Look Like?

There are, fortunately, steps being taken to address the privacy concerns facing blockchain networks. Existing protocols are exploring ways to integrate solutions like zero-knowledge proofs to improve their privacy.

But perhaps more interesting are the decentralized protocols built with a focus on privacy from the ground up. Monero and Zcash are two examples you may have heard of.

Monero was launched nearly a decade ago. It is designed to provide an environment with enhanced privacy and anonymity for conducting crypto transactions.

It uses a variety of technologies, like ring signatures, stealth transactions, and Ring Confidential Transactions (RingCT) to obfuscate transactions and make it difficult to track the flow of funds.

On the other hand, Zcash was launched in 2016. It uses zk-SNARKs (zero-knowledge succinct non-interactive arguments of knowledge) to ensure privacy.

zk-SNARKs allows participants to prove that they know something without revealing what it is, giving Zcash users the ability to conduct transactions while hiding their wallet addresses and transaction amounts.

Zcash and Monero are proof that true privacy on a blockchain protocol is achievable. However, they’re not the best the space has to offer.

The protocols’ applications in the current landscape are limited because they lack smart contract support. Given that the future of blockchain technology will heavily be influenced by dApps, more relevant privacy solutions should feature smart contract support.

This is where newer solutions like Dero, Secret Network, and Beam come in. Dero is based on the Monero codebase. Like Monero, it uses stealth addresses and ring signatures but also features a number of improvements.

These include homomorphic encryption for private computation, and of course, smart contracts.

Secret Network, on the other hand, is based on the Cosmos SDK. It uses SGX technology to provide privacy for smart contacts, which allows for the creation of privacy-preserving dApps.

Being Cosmos-based also makes its dApps accessible from other Cosmos-based networks and vice versa.

The most innovative and far-reaching project in this arena is Beam. The Layer 1 privacy-focused protocol is based on the Mimblewimble protocol, a cryptographic technology that allows it to feature fully confidential transactions by default. It is the only platform to do so.

Beam also enjoys what is perhaps the most advanced smart contract support among privacy blockchains. Its smart contracts run on a Turing complete virtual machine known as Beam Virtual Machine (BVM).

This makes the protocol suitable for the development of all kinds of applications in various sectors. These include Private Instant Messaging (PIM) applications, anonymized decentralized social networks, private stablecoins, oracles, and more, which make it an attractive platform for developers building privacy-focused applications.

The project has organized a Hackathon that will see developers worldwide compete by developing anonymous Web3 communication platforms with a specific focus on building decentralized applications on the platform using standard Web development tools and frameworks.

These applications will be powered by Nostr, the open protocol for decentralized and censorship-resistant social media.

Privacy or Bust!

In a world where data is increasingly the most valuable resource, privacy is the most sought-after feature. So, for a technology that is tipped to shape this world, user privacy will be one of the most defining features of blockchains in the coming years.

Increasingly complex applications have rendered the original pseudonymous approach outdated while early privacy-centric solutions are not future-proof due to their lack of smart contracts.

This is pushing blockchain technology in a direction that will ensure complete user confidentiality while also providing a platform for developers to create privacy-focused applications to serve these users.