Privacy in blockchains: Should you care?

Written by: -KiLLeD-by-LaG-#0664

For most people, blockchain technology and cryptocurrency are terms used interchangeably because
they do not care about the underlying technology behind the speculative asset with lifechanging
gains to be made. For others, they say they’re ‘in-it for the tech’ meaning that market volatility does
not faze them and they do not indulge in much price speculation because they identify as early
adopters of a nascent technology. After the invention of the World Wide Web in 1989, companies
have started to monetize various assets. Since 2000s where the main commodity of the Internet
were products and services, companies are now realizing that data is also an asset they can
monetize and sell.

As the popular saying goes “If you're not paying for the product, then you are the product.”, Internet
users have slowly come to accept that they’re being tracked and every interaction of theirs has a
digital footprint. As the WWW transitions from Web 1.0 to Web 2.0 (from early 1990s to 2010s) and
now to Web 3.0, users have grown to become increasingly mindful of their data ownership and its
access to companies.

Blockchain transactions offer more anonymity and flexibility when comparison to fiat transactions,
but with time users have realized that it is quite easy to track transactions of a network whose
ledger is public and free to view. Here is where Privacy tokens and services come into the picture,
some offer private transactions, others offer private smart contract capabilities while others offer
services like coin mixing. How do we ensure privacy? What is the basis of all these privacy features?
Cryptographic Encryption.

Part 1: Basis of all blockchains: Encryption

All blockchains have some inherent features which make them a perfect choice for payment
activities, these features include: 1.) security for both participants 2.) safeguards against double
spending and 3.) Concentration of assets with a single entity. To ensure this, there are security
mechanisms set in place called Cryptographic Encryption. In crypto, both the sender and receiver
have a public key and a private key associated with their crypto wallet which acts as a digital
signature for a user to authenticate their identity in a transaction. This digital signature thus ensures
that nobody except the sender or receiver can read or modify the transaction without having a
digital proof of their identity. This is the security offered by every crypto transaction without a need

for verification of identity.

 Fig 1.1: Blockchain encryption using cryptographic encryption keys. Source: “Token Economy”
by Shermin Voshmgir

Part 2: Privacy blockchains

Privacy blockchains promote their ability to hide transaction details of the sender and receiver and
help conceal their identity. This overcomes the main pet peeve that most users who wish to stay
anonymous, have with a blockchain which has a public ledger, like Bitcoin or Ethereum for instance. I
will now give examples of some blockchains which offer privacy features to their users.

 Monero ($XMR): Monero is one of the oldest privacy-centric in the cryptocurrency space. It
operates on Proof-of-work consensus mechanism and its whitepaper was published by an
anon called Nicolas Van Saberhagen. Monero launched its mainnet launched in 2014& its
whitepaper has highlighted the main inadequacies with the Bitcoin network which is
‘Untraceability’, due to its inherent feature of broadcasting all transaction to a public ledger
which ultimately leads to being “unambiguously traced to a unique origin and a final
recipient.”. To counter this, Monero has proposed a Ring Signature and Obfuscated public
key system which ensures that every Monero transaction is not only Unlinkable but also
Untraceable.
I. Unlinkeable: Monero uses a technology called ‘Ring signatures’ which
combines a given user’s public signature with a bunch of other user’s
signatures in order to create a signature which is obfuscated to anybody
from the outside and can not be linked to a particular user.
II. Untraceable: Monero also uses ‘Stealth addresses’ which conceal the
destination of a given transaction since instead of the funds going from one
public address to another, the transaction goes to a randomly generated
stealth address and from there it goes to the destination so that it cannot be
traced to its owner.

Fig 2.1: Illustration of Ring Signature mechanism used in Monero

 Zcash ($ZEC): Zcash is a privacy token which uses the most advanced privacy algorithm
called zK-SNARK (Zero Knowledge Succinct Non-Interactive Argument of Knowledge)
 technology to conceal the address of the sender, receiver and all its corresponding details
like memo which hold all the transaction information. The sender at their own discretion
may choose to reveal their address or their transaction memo. This is accomplished using 2
type of addresses namely, t-address and z-address in the Zcash network which give the end
user, complete control over what and how much information they choose to reveal be it
their address, memo or neither.
I. t-address: Also known as the transparent address, when a transaction is initiated by
a user in order to send or receive funds using this address, they have chosen to
reveal their address and/or transaction memo (to the blockchain publicly. Example:
A T-T transaction (attached hyperlink)
II. z-address: This is the private address in ZEC and when a user chooses to send or
receive funds using this address it means that they want to ‘shield’ their transactions
and its related information and can choose to reveal it only to interested parties
using a ‘Viewing key’. One main thing to note is that when using shielded
transactions, viewing key can only be used to see transaction details and memo but
not the sender address unless any identifying information is provided separately.
Example: a Z-Z transaction, Z-T transaction and T-Z transaction (attached hyperlink)

A transaction involving transfer of assets from a z-address to another z-address is facilitated by zK-
SNARKs and are private, meanwhile the transactions from one t-address to another t-address is
public like in Bitcoin. Transaction types shown below(fig 2.2)

Fig 2.2: Transaction types in Zcash network

There are undoubtably, many more projects in the crypto space which offer privacy solutions for
blockchain transactions like: DASH token ($DASH), Horizen Network($ZEN) etc., but the ones I
explained above were the among the first and had bought new tech and best privacy features which
are most widely accepted and used.

Part 3: Crypto Mixers/Joiners

Another service we generally see being used in cryptocurrency is the use of crypto joiners and crypto
mixers. What are these used for? A crypto mixer/joiner is a service that offers its users a method to
obfuscate their transactions by ‘mixing’ their coins together so that the it is hard to find out who
sent which transaction and what amount was sent.

A popular type of Coin mixers which is most widely known in the crypto space is Tornado Cash,
whose goal is to “achieve the unlinkability between addresses that belong to the same users, and
protect their privacy in a trustless manner.”; You must be thinking, this is great but Is my crypto
safe? Are my coins in custody of a third-party? Lastly, how does any of this work? Let’s dig in:
Part 3.1: Tornado Cash: A novel example of Crypto mixers
Tornado Cash is a Non-Custodial open-source smart contract which uses zK-SNARKs in order to hide
a transaction for its user. As stated above, zK-SNARKs allow applications to be completely privacy
centric while ensuring that 2 transactions are completely independent at any given time and are
unlinked.

Tornado cash works by a user sending funds(in this case, Ethereum) to a smart contract address and
invoke the contract which causes the user to get a deposit note. After receiving the said note, the
user can choose to withdraw his funds by creating a withdraw transaction to a given address, any
address which has never used by the user previously can be used for this purpose. Naturally, if the
said address will not have either to pay for the gas fees to withdraw these funds, so the user can
request funds to cover gas for transaction cost by sending the required parameters to a ‘Relayer’.
When the contract validates this transaction, it will send the remainder of the funds (minus the gas
fee) to the user. An illustration(Fig: 3.1.1) shows this very mechanism for easy understanding:

Fig 3.1.1: Tornado Cash working schematics

Part 3.2: Case study into legality of Crypto Mixers

If you are Breaking Bad fan like me, you must have seen Walter White washing his hands off his black
money gained from drug trade into white money shown as income from Saloon business in order to
hide tax liabilities from the government. Coin Joiners and Coin mixers are 2 such concepts which
have a similar way of working as one described in the popular AMC series. Now before you oust me
from this community with pitchforks and burning torches, let me explain…

Recently on 08th August 2022, OFAC (Office of Foreign Assets Control) in the USA sanctioned the
popular coin mixer Tornado Cash which according to the press which has been used to “launder”
more than $7 billion worth of virtual currency since its creation in 2019 .” Which effectively meant
that the services of Tornado Cash are illegal to use if you are from the United States. In an even
more unfortunate development, the developer of the protocol was arrested. That too for something
as innocuous for writing code. Even the GitHub repositories of the developers working on Tornado
were suspended. Is all this scrutinization of mere developers by government and companies fair? Or
does this situation signal to a call for more decentralized options for popular platforms?

According to Chainalysis, a blockchain Security and analysis firm, ~23% of all transactions on ALL
crypto mixers combined, were related to Illicit activities the rest were all mostly funds from DeFi
applications and centralised exchanges who possibly could’ve wanted to hide their transactions from
public view. See illustration (Fig 3.1) below which shows detailed analysis of all funds passing thru
crypto mixers:

Fig 3.2.1: Funds passing thru crypto mixers colour coded by transaction type (in USD)

So, what gives? It is a compelling case in point to state that sanctioning open source code like crypto
mixers and joiners and touting all the transactions passing thru them as money laundering would be
equivalent to banning traffic through a highway just because it has high accident rates.

Part 4: Privacy in Smart Contract applications

Smart contracts are an essential part of crypto since they allow decentralized applications to be built
on top of blockchains. These allow for blockchains to create a Finance economy around its token its
ecosystem applications. Since these obviously include to and forth transactions from users to smart
contracts etc, preserving the privacy around these transactions become a pre-requisite for people
holding large funds on chain. A couple of blockchains which also offer smart contract capabilities
include:

I. Secret Protocol ($SCRT): Built on the Cosmos network, Secret Network launched in 2020 and
describes itself as a permissionless smart contracts platform it uses “Trusted Execution
Environment (TEE) technology to bring encrypted input, output, and state to the
blockchain”.
Secret Network achieves this by encryption techniques and specified hardware instead of
using ZK-Proofs, Multiparty Computation (MPC) or Homomorphic Encryption (HME), due to
various concerns like scalability, technical infeasibility and information centralization.
 Fig 4.1: Working of Secret Network smart contracts

Secret Network offers its Secret smart contracts, also referred to as ‘Secret Contracts’ for various
purposes, which include:

 DeFi applications: Secret Network allows for programmable privacy which means that not
even validators processing the blocks know about the transactions since they are processed
in an encrypted state, which means that there is no possibility for MEV capture on secret
and frontrunning and sandwich attacks are not possible.
 Secret NFTs: Secret Network uses its smart contracts to create private NFT collections which
can only be viewed by select members of the public and create scarcity and exclusivity for
the said art collectible. Notable artists like Quentin Tarantino and Kevin Smith have released
their NFT collection on Secret Network. Secret Labs are currently working on Fractionalized
NFTs.
 Payment Privacy: Silk Pay is building a payment medium on SCRT network using Shade
Protocol to create an escrow contract in the middle of sender/receiver contract for ensuring
that the transfer is going to the intended address.

II. Oasis Network($ROSE): Oasis network is a Layer-1 PoS blockchain which offers privacy
features using the Consensus and the ‘ParaTime’ layer. Oasis Network uses the Trusted
Execution Environment (TEE) same as Secret Network, for privacy-driven applications on the
blockchain. It also offers option to ‘Tokenize Data’ so that the users can stake their data to
receive rewards for it.

Use cases:

 Cryptosafe Alliance: CryptoSafe Platform was developed by a joint alliance of Binance and
Oasis labs and facilitates sharing of threats and intelligence data using Oasis Network’s
confidential compute for privacy.
 Healthcare sector: Oasis partnered with a Fortune 500 company to share data with 3 rd party
while being able to track, control and trace patient data usage even when shared.
Part 5: Summary
As we are seeing the current rate of explosive growth of crypto adoption, more and more
cryptocurrency users want more out of their blockchain experience than the usual DeFi applications.
With the governments in many countries trying to restrict or ban cryptocurrencies and many
imposing high taxes on Crypto gains, users are looking for ways no be as stealthy on the blockchain
as possible. With Privacy being a fundamental human right, it is high time that cryptocurrency users
turn to decentralized applications and privacy centric applications since blockchain technologies not
only allow us to own our coins unlike the traditional fiat money, but also enable us to not disclose
our private financial transactions with 3 rd parties. The truly era-defining transition from Web 2.0 to
Web 3.0 is only possible when users are in complete controls of their assets and their data.

References:
I. Iredale, G. (2021, April 15). Blockchain cryptography: Everything you need to know. 101
Blockchains. Retrieved October 13, 2022, from https://101blockchains.com/blockchain-
cryptography/
II. “ Token Economy “ Shermin Voshmgir
III. Token Security: Cryptography – Part 2 https://blockchainhub.net/blog/blog/cryptography-
blockchain-bitcoin/, 10 Sept 2018
IV. O' Sullivan, A. (2020, July 7). What are mixers and “privacy coins”? Coincenter . Retrieved
from https://www.coincenter.org/education/advanced-topics/what-are-mixers-and-privacy-
coins/
V. https://z.cash/technology/
VI. Press Release. (2022, August 8). U.S. Treasury Sanctions Notorious Virtual Currency Mixer
Tornado Cash . United States Dept. of Treasury. Retrieved October 12, 2022, from
https://home.treasury.gov/news/press-releases/jy0916
VII. Chainalysis Team. (2022, July 14). Crypto Mixer Usage Reaches All-time Highs in 2022, With
Nation State Actors and Cybercriminals Contributing Significant Volume . Chainalysis.
Retrieved October 12, 2022, from https://blog.chainalysis.com/reports/crypto-mixer-
criminal-volume-2022/
VIII. Tang, Y., Xu, C., Zhang, C., Wu, Y., Zhu, L. (2022). Analysis of Address Linkability in Tornado
Cash on Ethereum. In: Lu, W., Zhang, Y., Wen, W., Yan, H., Li, C. (eds) Cyber Security. CNCERT
2021. Communications in Computer and Information Science, vol 1506. Springer, Singapore.
https://doi.org/10.1007/978-981-16-9229-1_3
IX. Melcher, J. (2021, June 20). Privacy preserving smart contracts: Projects to watch out for in
2022. Exodus.com. Retrieved October 12, 2022, from
https://www.exodus.com/news/privacy-projects-2022/
X. Secret Labs. (n.d.). Secret Network Overview. Secret Network Documentation. Retrieved
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network-overview