How does blockchain help to stay private? The key market players and use cases.
Recently, anonymous blockchain protocols have become increasingly popular. In this study, we talk about the leading players in the market of anonymous currencies, existing encryption mechanisms and their use cases.
Anonymous blockchain protocols use cases
There are two primary use cases for the anonymous blockchain protocols.
- Anonymous transactions Thanks to this type of the blockchain protocols users can spend safely, knowing that others cannot see their balances or track transactional activity. This allows making cross-border transfers between any jurisdictions, hiding the direction of transfers and their amounts for tax avoidance, provides opportunities to overcome sanctions regimes. Funding charitable, educational, political organizations anywhere in the world, regardless of the will of the government of a country.
- Deployment of user decentralised applications (private dApps) based on the provided blockchain architecture. For instance, Loki Messenger. The main difference from centralised anonymous messengers is the inability to for malicious actors to exfiltrate metadata from the servers thanks to the distributed architecture.
The blockchains that support anonymous transactions
There are already several anonymous blockchain protocols presented on the market, which, to some extent, allow network participants to hide their operations. Among these projects, Monero, Dash, Zcash, Loki, and Verge, stand out. Let us give a short description of each.
Monero is a cryptocurrency built on the CryptoNote Protocol and is focused on the increased anonymity of transactions. The main feature of Monero is the CryptoNote Protocol, which uses ring signatures ringCT and Stealth address to mask transactions. CryptoNote and the added obfuscation Protocol provide passive mixing: all transactions in the system are anonymous, and all participants in the system can use plausible deniability in case of capture.
Monero uses ring signatures, the essence of which is to create a pool of 10 agents for each transaction, only one of which is the actual sender. Besides, the public address of the recipient is not disclosed by creating a temporary public account to receive the transaction (called a Stealth address).
The main drawback of Monero is the large size of transactions — on average, they are eight times larger in transaction size than the bitcoin transactions. Also, among the shortcomings are noted weak currency anonymity, which has been confirmed in some of the studies. Scientists from MIT in a work from 2016 found that in 90% of cases, it was possible to track the movement of transactions, which reduced anonymity almost to zero. This has since been patched and Monero is in a constant battle to increase privacy when flaws in their protocol are found.
DASH is a decentralized payment system. The main differences between Dash and other anonymous cryptocurrencies are the use of a combination of several cryptographic algorithms, namely CoinJoin, and a higher energy-efficiency of mining Dash. CoinJoin is to mix coins in Dash’s PrivateSend feature. The reason for better energy efficiency is the fact that the complexity of mining Dash is not fixed-growing and is regulated depending on the load of the network, using the DarkGravityWave mechanism. Miners’ rewards are also not fixed and are not tied to a specific block or indicator of complexity, but are calculated according to a particular formula. Thanks to the built-in InstaSend technology, Dash also allows you to conduct instant transactions.
TON or Telegram Open Network was initially positioned as an anonymous cryptocurrency, which was to be built from the client base of Telegram messenger. However, later the project team said that it would abandon the idea of anonymizing the created cryptocurrency for the sake of making large partnerships.
ZCASH is also an anonymous cryptocurrency that is capable of providing selective privacy. Zcash was established in 2014 and became the first cryptocurrency based on a zero-knowledge cryptographic proof-of-concept Protocol. Blockchain Experts praise Zcash for achieving an exceptional level of transactions anonymity. The ZK-SNARK Protocol hides any external data except the timestamp.
Also, in 2017, the famous privacy defender Edward Snowden called Zcash ”the most interesting Bitcoin Alternative”.
VERGE uses an open registry that allows tracking most of the transactions. However, the Protocol protects the personal data of users using Tor and I2P to mask IP addresses. Verge uses Tor to encrypt traffic and routes it through a chain of computers around the world, then also using I2P. Also, using the Wraith pool, users of the VERGE network can conduct both public and private blockchain transactions.
Building Privacy Dapps on a Blockchain Protocol
Loki is one of the forks of Monero. The core of the project is based on the source code of Monero, significantly expanding its capabilities. The main expansion of capabilities is the Service Node system, which allows users to create a network of Service Node Applications (SNApps). At its core, SNApps are like off-chain dApp’s with the ability to anonymously transfer any data packets within the ecosystem. This may repeat the revolutionary nature of Ethereum in the field of anonymous blockchains. Loki, like Monero, uses ring signatures with the purpose of anonymization of transactions in the network.
The first SNApp to be developed on the Loki network will be the decentralized Loki Messenger for anonymous messaging. It will differ a high resistance to metadata collection relative to centralized applications.
Also, thanks to Loki service nodes, it will be possible to deploy exit nodes to the regular Internet, similar to the approach used in Tor. There will be the same function as Instasend in the Dash introduced in the Loki ecosystem.
Loki uses its own open source Protocol for traffic routing, which is a hybrid between Tor and I2P called LLARP.
The Skrumble project aims to change communication in messengers, making it more secure by creating a decentralized architecture. Also, Skrumble creates a decentralized third-party app for communication. The Skrumble blockchain Nodes can communicate with each other using the hashed messaging Protocol. There are two different types of nodes in this structure: peer and validation nodes. A peer node can transmit, receive and pass on a transaction or block, while validation node may generate data blocks.
NuCypher is based on the Cryptographic Key Management System (KMS), which ensures the privacy of information in public blockchain networks and decentralized applications. With NuCypher, developers can build dApps on public blockchains that require secure storage, sharing, and handling of private data. At the same time, the use of KMS provides more reliable protection and control over the data. The system uses proxy re-encryption (proxy re-encryption), allowing a decentralized network of nodes to provide critical management operations without access to private keys or unencrypted data. With Smart Contracts, NuCypher allows you to submit and revoke access to any application publicly.
The project is at the prototype stage. However, the platform is already used in MediBloc (medical records), Datum (user data), Wolk (encrypted database).
The table below presents the main characteristics of the considered coins. The figures are correct for August 22nd, 2018.
Other ways of anonymizing cryptocurrencies: CoinJoin, Mimblewimble, Breeze Wallet, Exchanges.
In addition to the anonymous cryptocurrencies discussed above, there are also services for the popular cryptocurrencies that aim to make the transactions anonymous. The most popular ones are Mixers (CoinJoin, Breeze Wallet) and Mimblewimble (including Grin and Beam). Let’s take a closer look at each of them.
Coin Mixers are add-ons for popular cryptocurrencies that allow you to increase the anonymity of operations. The algorithm of their work is very straightforward: the user sends cryptocurrency to the address of the mixer, which is generated separately for each client. Then, at this address, the coins are mixed with transactions of other users or distributed between hundreds of thousands of wallets inside it. After that, the ”processed” cryptocurrency is sent to the address required by the user.
CoinJoin, developed by Gregory Maxwell, uses a method of decentralized coin mixing where several transactions typically of the same amount are joined to make it more difficult to track them.
Coinjoin’s successor is the Mimblewimble Protocol, which uses so-called” blinding factors “ that allow transactions in the bitcoin blockchain to be made anonymous, by encrypting the transaction value. MimbleWimble completely gets rid of the transaction as you create the new block. However, in its current form, Mimblewimble is not compatible with the Bitcoin Protocol as it requires removing the script from the transaction. As a result, there is no space left for other bitcoin functions, such as time-locked transactions, etc. Grin and Beam are light implementations of the MimbleWimble protocol, though still highly experimental.
Breeze Wallet is a wallet for desktops, the main feature of which was the integration of the TumbleBit coin mixing service. TumbleBit is an add-on on top of bitcoin that gives users the ability to mix coins without having to trust each other or accepting wallets. Breeze Wallet users can “confuse” transactions, that is, give them a disguised appearance.
Also, even a regular money transfer to a crypto exchange may serve as a useful way of concealing the transaction. In the current situation, exchanges publish very little information about their work. That is why users can hide money in cryptocurrency simply by sending money to exchanges and then transferring them to the desired wallet.
Conclusion
Despite numerous attempts to develop products in the segment of anonymous blockchain solutions, the market is still very far from maturity. In this regard, it is tough to predict which products will be the top performers in the fields. Moreover, each of the solutions has already met or will face regulatory restrictions in the most developed countries, but the anonymity of several blockchain protocols may help to overcome regulatory issues.
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