PriFi is the natural evolution of DeFi, and demand for it will only accelerate as many industries rightly move to capitalize on the unique features of blockchain technology, says Alan Scott Jr., Co-Founder, RAILGUN Privacy Project.
A blockchain is immutable. That’s its calling card. The problem, however, is that anyone can see the transactions taking place in the decentralized ledger.
Blockchain technology began as a novel way to consider money. It has grown into a multi-faceted industry tool that cannot be ignored. More corporations are eyeing blockchain technology to provide innovative solutions to existing problems. But they will continue to run into the same issue: total lack of privacy.
Privacy protocols and mixers exist for every step of blockchain technology. But most of them have failed to live up to the level of security they promise. That’s about to change.
Mixers exist on-chain and off-chain
The main objective of all mixers is to break the link between users’ transactions. This can occur “on-chain,” whereby a transaction is shuffled directly on the blockchain. Or it can occur “off-chain,” whereby the shuffling occurs a step or two removed from the blockchain. The latter has more trust assumptions than the prior.
An off-chain privacy protocol takes the transaction off the blockchain and puts it in a mixer. Say a group of users wants to mix their coins, making them harder to trace to add a layer of privacy. One way to do this is by trusting a centralized off-chain service to mix the coins on their behalf. For a centralized off-chain service, each user deposits one coin and specifies an output address. After collecting a number of coins, the service distributes one coin to each output address. The coins have been “mixed” off-chain. They can also utilize the TSS (Threshold Signature Scheme) approach, which operates on a similar idea: individuals share a public key and a private key. Coins are deposited via the public key, verified, and redeemed by being sent out to the private key.
Off-chain privacy protocols are fairly common right now. But the level of security they provide depends on how well information can be protected when moving to and from the mixer. In the case of crypto, wallet addresses and amounts are moved off of, say, the Ethereum or Polygon blockchain into a completely separate environment in order to be mixed. They are then put back into the blockchain. This doesn’t even consider the limited utility to give users true transactional privacy.
PriFi: On-chain privacy contains and secures transactions with proprietary information
An on-chain privacy protocol implies that transactions are guaranteed to be processed precisely, and they have the same security level provided by the underlying blockchain. An on-chain transaction will be validated by every miner on the blockchain. Users don’t have to trust any centralized party or pool outside of the blockchain they’re transacting upon. This is possible because of the development of what’s called a “Zero-Knowledge Succinct Non-Interactive Argument of Knowledge, or zkSNARKs, which act as the “verifier” and confirms the correctness of private transfers and withdrawals. These zkSNARKs are able to ensure the correctness of transfers without leaking any information about the transferred amount, token, recipient, and sender.
When a privacy protocol happens on-chain, it not only erases the need to move a transaction from the environment of origin, it also eliminates issues of exposure. As more corporations and business transactions move to blockchain-based technology, the necessity of shielding transactions on major chains will grow.
The other major benefit of an on-chain privacy protocol is that it allows for seamless integration with dApps. This means corporations can maintain a veil of privacy while utilizing the multitude of applications DeFi offers on chains such as Ethereum and Solana.
PriFi: Blockchain privacy will become as necessary as cybersecurity
Much like cybersecurity, on-chain privacy for corporations is critical to combat voyeurs. The rise of on-chain analytics firms and trackers creates opportunities for would-be voyeurs to gather market intelligence. As more industries move to utilize blockchain technology for supply chain management and similar ledger-based uses, the ability to shield on-chain transactions will become paramount. For example, corporations create a competitive advantage through supply-chain negotiations. If these payments are on a public ledger blockchain, it jeopardizes confidentiality and exposes competitively negotiated contracts. Without using on-chain privacy, employees being paid on-chain, in cryptocurrency, risk having their salaries and personal wallet holdings publicly visible.
To date, one of the biggest issues facing long-term institutional adoption of cryptocurrency is the lack of practical on-chain privacy solutions. Payroll solutions will gain significant efficiency if run on a blockchain, and on-chain privacy fixes the biggest issue. The goal of on-chain privacy is to allow users to hold a private wallet that they can utilize to interact with any smart contract.
On-chain privacy allows for the full benefits of the blockchain to exist alongside the full benefits of shielding. PriFi is the natural evolution of DeFi, and demand for it will only accelerate as many industries rightly move to capitalize on the unique features of blockchain technology. Sophisticated on-chain protocols will now be there to meet it.
About the Author
Alan Scott Jr is the Co-Founder of the RAILGUN Privacy Project. He is an investment, cryptocurrency, and DeFi privacy specialist with extensive experience negotiating in the Tokyo and the U.S. financial sectors. His passion for privacy and ability to articulate it in common terms has made him an in-demand presence at conferences and on podcasts. When Alan is not breaking down the benefits and application of blockchain privacy, he specializes in online marketing and web management.