Privacy on the blockchain
A series on privacy in cryptocurrencies and smart contracts
In this series, I’ll discuss the privacy trade-offs of public blockchains: what can and can’t be done today, why privacy on the blockchain matters, and popular approaches to ensuring privacy in today’s applications.
In 2009, a person or group of people named Satoshi Nakamoto published “Bitcoin: A Peer-to-Peer Electronic Cash System”. If you haven’t already, give it a read. The Bitcoin design was revolutionary — it elegantly tied cryptography, game theory, and economics into a trustless solution to the double-spend problem, and introduced the world to the first “chain of blocks”, a censorship-resistant public ledger protected by proof-of-work.
This is a big deal. Unlike traditional payments, Bitcoin transactions don’t rely on a trusted third-party. Anyone can connect to the network and transact, without fear of censorship. Satoshi’s work solved these problems, and founded the field of cryptoeconomics.
In 2013, Vitalik Buterin proposed a new cryptocurrency — Ethereum. Ethereum was Vitalik’s answer to Bitcoin’s poor scripting capabilities. Instead of focusing on financial transactions and their outputs, Ethereum transactions are about state: agreeing on a computed state, and transitioning from one state to the next.
Each transaction in Ethereum includes a sender, recipient, funds, and data, similar enough to Bitcoin. Unlike Bitcoin, however, a recipient can be a user or a smart contract.
Smart contracts are cool. You can build complex financial services, and even self-governing organizations. Consider 0x, a decentralized exchange protocol, or Aragon, a governance layer for DAOs. Smart contracts can also provide a backend for user-facing decentralized applications (“dApps”). Think censorship-resistant Twitter.
Today’s blockchains hold the promise of more open, participatory systems. But while these technologies are powerful, they aren’t ready to take on the world¹.
Hurdles to mainstream adoption
There are a number of technical hurdles to mainstream adoption, but by far the most pressing are scalability and privacy.
When I and others talk to companies about building their applications on a blockchain, two primary issues always come up: scalability and privacy.” ― Vitalik Buterin
Replicating transactions globally across thousands of computers, as the Bitcoin and Ethereum networks each do, is incredibly inefficient. We need many orders-of-magnitude improvements to scale to what would be considered a reasonable consumer success.
Luckily, some of the best minds in the space are working on blockchain scalability. In Bitcoin, the Lightning team is preparing to test on the main network. In Ethereum, there are multiple promising efforts, including sharding and the recently announced Plasma.
Privacy efforts don’t always get the same attention as scaling. Scale is a problem any growing tech startup will encounter. Systems need to scale to handle more users. And while scaling solutions in decentralized systems are much more difficult than in your typical web app, the problem is familiar and easy to understand.
Privacy, on the other hand, is nuanced, and often leads to uncomfortable questions. What needs to be kept private? Why, and from whom?
The baby and the bathwater
In the pursuit of the benefits blockchains can bring to financial systems — immutability, censorship-resistance, and open and permissionless innovation — what are we losing? Do we need to become accustomed to living and transacting in the open to enjoy these benefits?
A couple years ago, I was at a Bitcoin networking event in San Mateo. Over drinks, Justin W. Newton and I discussed the future of the space — in particular, how Bitcoin as a public network could scale to handle the next order-of-magnitude increase in demand we both expected to be around the corner.
We discussed a few approaches, including sharding, a frequent topic in Ethereum.
During a lull in the conversation, I had a thought. “What if all we’re really doing is building a more easily controlled currency?”
He asked what I meant. “Well, we talk about the ‘war on cash’ as a bad thing, then in the same breath, about Bitcoin helping to create a ‘cashless society’ as the future. What if the work we’re doing to spread Bitcoin is actually building infrastructure for future financial control?”
It’s a sobering thought. We talk a lot about “being your own bank” and financial empowerment, but we’re still advocating the use of a public, easily traceable ledger. What better way to invite public opinion and interference than opening all of our finances to the world?
This idea stuck with me years later. If we’re building the future of finance, we need to build a future that empowers individuals, not outside interests.
Who needs privacy on the blockchain?
Government censorship of your finances might seem dramatic, and that’s fine. In many places in the world we have the luxury of trusting our government and social institutions.
Whether or not you need a financial system that’s resilient to government censorship, you almost certainly want one that deters identity theft, unwanted prying, and nosy neighbors. In the blockchain space, this mundane struggle for privacy has made it difficult to tackle problems that would otherwise be killer applications.
Think electronic medical records, which can’t be manipulated or shared on public blockchains without jeopardizing patient confidentiality.
Think identity verification, credential management, autonomous sales of digital goods, and the significant chunk of traditional finance that can’t safely operate on an open ledger, including many types of trading and lending.
As we explore this topic further, we’ll discuss approaches to maintaining privacy today, the applications they power, and the future of privacy on the blockchain. Our next post will focus on financial privacy and today’s privacy-enhanced cryptocurrencies, including mixers & ring signatures.
Thanks to Corbin Pon and Laura Wallendal for reviewing early drafts of this story.
[1] https://www.youtube.com/watch?v=GBkT19uH2RQ
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