Privacy on the Blockchain: Where Are We Headed?

For all the claims that have been made over the years about bitcoin being a safe haven for criminals, it’s becoming increasingly clear that capital flows on the blockchain aren't private.

Bitcoin itself indexes poorly on both the anonymity and confidentiality fronts, as addresses offer pseudonymity at best, and balances are completely public. Companies like Elliptic and Chainalysis are building businesses around blockchain forensics, and as the network increases in value, incentives to track flows of capital only become stronger.

The rising tide of awareness about this is largely responsible for the growth in privacy coins in 2017, many of which experienced meteoric price and transaction volume increases.

To those new to the field, getting up to speed can feel like an onerous task, but it's important to remember we're still in the early days, and catching up on the cutting-edge is as easy as familiarizing yourself with a handful of key issues and projects likely to be of interest in the months and years ahead
Practicality vs. ideology

There’s never a shortage of ideological differences in the world of cryptocurrencies.

As it relates to privacy, one of the biggest is whether or not techniques that keep data from being shared should be default. Emblematic of this issue are two of the sector's biggest coins – monero and zcash.

Of the two, monero offers private by default, a feature its core developers and community value highly. However, zcash’s model includes allowing for either shielded or transparent transactions.

And there's reason to want to see both models continue.

While privacy by default may seem like an obvious solution , we see that zcash may be well-suited for use cases such as personal or business banking situations in which privacy is generally desired, but auditability is required. Indeed, JPMorgan recently went so far as to implement zcash's zero-knowledge security layer on its Quorum blockchain, and we may yet see more trials as enterprise interest in confidentiality advances.

Beyond ideology though, practical considerations still figure prominently.

Most transactions that enable heightened privacy require far more space on the blockchain than those that are public, and with concerns about scalability already front and center, it’s hard to justify further adding to that burden.
Advances in cryptography

Fortunately, developments are being made at the intersection of math and cryptography that will likely continue to cut down on the trade-offs between privacy, efficiency and trust.

And make no mistake, there are big trade-offs today.

Zk-snarks, the zero-knowledge proof technology currently implemented at the core of zcash, may be heralded as the most advanced blockchain privacy tool, but even it has drawbacks. Namely, researchers have taken issue with that fact that it requires a somewhat elaborate trusted setup in order to function correctly.

Alternatives are now emerging that aim to tackle the issue, and they're likely to continue to warrant interest and attention next year.

Zk-starks, for example, developed much more recently, don't rely on public key cryptography at all, but rather use hash functions that are unpredictable, allowing for the elimination of the trusted setup. Still, the technology is in its earliest stages at present.

More immediate might be "Bulletproofs," a paper published in late 2017 by a notable group of leading cryptographers. But aside from the big names involved, the concept is believed to offer a substantial reduction in the size of rangeproofs needed to make transactions private.

This is seen as a major step forward in enabling space savings, faster verification times and lower fees.

Monero has already announced it is enabling the feature on testnet, with the eventual goal of bringing them to its blockchain, though that, too, may still be a ways off.
2018 and beyond

At this point, it’s still hard to predict how these technologies will advance.

Key questions include whether advances from these cryptocurrencies will continue to necessitate the existence of dedicated blockchains (with unique tokens), or whether they will simply serve as testing grounds for features that will migrate to dominate coins.

So far, it appears that the leaders of major blockchain ecosystems are hoping the outcome might be the latter.

Ethereum creator Vitalik Buterin's recent blog post about zk-snarks and zk-starks suggests that the blockchain's community of developers is thinking through the problem. Yet, it’s unclear how far in the future we might have to go to see a full suite of privacy features live on ethereum.

As for bitcoin, implementing changes that are beneficial for privacy looks even less likely in the near future – if we’ve seen anything this year, it’s that reaching consensus for any major change to the protocol is non-trivial.

But though there might not be answers, it seems a safe bet to project that privacy coins will continue to see their heyday in 2018. The interest and enthusiasm may just be beginning.