Differences Between Off-Chain And On-Chain Privacy
The state of every blockchain is constantly changing as new transactions are added to them. Whenever we transact on these networks, be it to send funds to friends or family, or to collect something in a play-to-earn game, we alter the network’s state.
A lot goes on under the hood for us to be able to easily move funds around with our browser wallet extensions or mobile applications. Along the way, there are numerous potential hurdles that could affect our privacy.
Understanding the lifecycle of a transaction
While every blockchain has different aspects to it, the lifecycle of a transaction on top networks including Bitcoin, Ethereum, and the BNB Chain is pretty similar and essentially occurs in two stages: the first one sees the user sign a transaction from their wallets and get broadcasted to a blockchain node so it can be included in a mined block.
The second stage sees the transactions get included in a block. Whenever we use blockchain explorers like Etherscan we are primarily looking at transactions that have been included in blocks, and concerns surrounding the data we are looking at are related to on-chain privacy.
The first stage is where we need to focus to preserve our off-chain privacy better. Whenever we issue a transaction, we first sign it locally with the private key corresponding to the address we control, proving to other network participants that we control the address making the transaction.
The signed transaction is then submitted to a node that validates it to ensure the transaction was signed by the address’ owner and is then broadcast to other nodes on the network. At this point, unconfirmed transactions can now be seen on network explorers as nodes output the transaction ID.
A miner node then accepts that transaction before it’s included in a block. The transaction is maintained in a pool before being included in a block. As rational economic actors, miners often choose to prioritize transactions with higher gas fees attached to them. As they find new blocks, they include transactions in that block, so they can get confirmed.
While privacy-consciousness is vital in the community, most users stick to on-chain privacy. This type of privacy is bolstered by avoiding the use of the same address twice, obfuscating transactions to throw off blockchain sleuths, and more.
On the other hand, off-chain privacy is often considered complete as long as users don’t mention to anyone their private keys or recovery phrases. In reality, they’re still vulnerable to a number of attacks if they don’t protect themselves off-chain.
Off-chain privacy matters
During the entire process, until we arrive at stage two, users’ off-chain privacy needs to be significant, or else their metadata, IP address, and other key information is available to the public and can be used against them.
The metadata included in these transactions can, for example, be used to front-run users. Frontrunning sees bots take advantage of the time it takes for transactions to be confirmed on-chain to get in before the users issuing the transaction can, taking away potentially profitable opportunities or scooping up assets at a lower price on decentralized exchanges to sell them at a premium to users’ already issued orders.
Frontrunner bots essentially scan the blockchain looking for transactions they can extract value off of. These can include trades that will move the price of an asset, for example, allowing the bots to get in before that transaction moves the price of the asset, so they can later sell it after it rose. They can also take advantage of arbitrage opportunities before other users.
The Omnia Protocol addresses the key information these bots use in a bid to stop them from being able to figure out which transactions they can exploit to make a profit. For one, Omnia boosts users’ off-chain privacy by leveraging private mempools, which are private endpoints between users and miners.
Private mempools stop arbitrage bots from getting in and understanding which transactions they may exploit by moving users’ unconfirmed transactions on the blockchain to a private log. These pools are a paid service that deters bad actors from accessing it.
On top of that, through a collaboration with Flashbots, a research and development organization working on mitigating the native externalities of MEV, the Omnia Protocol deploys protections against multiple types of frontrunning, including for limit and market orders and against sandwich attacks.
Holding $OMNIA and using the Omnia Protocol allows users to boost their off-chain privacy and protect themselves against frontrunning and other types of attacks. The Protocol protects users’ privacy by leveraging mixnets, in a way similar to the one leveraged by the Tor browser to provide a 3-hop circuit designed to protect user privacy.
Omnia augments mixnets through state-of-the-art methods to obfuscate traffic. It also injects decoy traffic to guarantee users’ privacy.
About OMNIA Protocol
By foreseeing the state of the current blockchain application network, we have committed to preparing, researching, and applying our technical expertise to our latest project, Omnia.
Omnia Protocol is a decentralized infrastructure protocol for securely accessing the blockchain so that no single point of failure will ever disrupt blockchain applications or wallets integrating with it.
Omnia’s solution is truly decentralized and requires zero technical knowledge. Therefore, all users can set up their nodes in little time and effort. Learn more about the technological marvel behind Omnia by following our Medium or reading our whitepaper.
