Privacy on a Public Blockchain in 2024: Dream or Reality?

The blockchain space might seem very attractive for users who strive to take greater control over their financial transactions and data. However, one of the most significant pillars of decentralized technology is its transparency, which allows anyone and everyone to access a blockchain’s entire transaction history from its inception to the present.

This, however, could lead to a different issue often faced by public blockchains, known as the privacy paradox.

So, is it possible to achieve privacy on a public blockchain in 2024?

Key Takeaways

  • Despite the pseudonymous nature of transactions on public blockchains, user privacy remains a significant concern, as patterns of transactions can potentially be analyzed to de-anonymize users, exposing sensitive financial information.
  • Striking a balance between privacy and transparency in blockchain technology is crucial for empowering users while ensuring regulatory compliance.
  • Incorporating privacy-focused design principles and technologies like zero-knowledge proofs (ZKPs) can protect user data without compromising protocol transparency or regulatory requirements.
  • Achieving complete blockchain privacy is difficult due to the inherent need for transparency in blockchain infrastructure. Still, solutions like on-chain privacy features and network-level privacy measures are emerging to address these challenges.

Why Does Blockchain Privacy Matter?

Even though transactions on public blockchains remain anonymous at first glance, user privacy is still a critical concern because, in reality, the anonymity on blockchains that people are often referring to is mistaken for pseudonymity.

Nibras Stiebar-Bang, the CTO at Concordium, told Techopedia:

“Transactions are tied to public addresses that serve as pseudonyms. While these addresses do not directly reveal the identity of the user, patterns of transactions and interactions with known entities can potentially be analyzed to de-anonymize users.”

Stiebar-Bang further explained that financial transactions can often reveal a lot about a certain person, including their income, interests, and social connections.

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In traditional finance, institutions are legally obliged to protect user privacy. However, on public blockchains, such information is exposed as it is not bound by laws, making privacy a significant concern for users who wish to protect their financial activities from public scrutiny.

Alan Scott, a contributor at RAILGUN, added that when users transact in crypto, their actions are tied to an address that on-chain analytics companies have become very good at tying to people or entities in the real world. He said:

“This has ramifications on a myriad of levels. Personal security, business processes, and competitive advantages in trading are all eroded by the knock-on doxing effect of publicly decentralized ledgers.”

Striking a Balance Between Blockchain Privacy and Transparency

According to RAILGUN’s Scott, one of the best ways crypto companies can strike a balance between privacy and transparency is by distinctly avoiding Web 2 practices like logging browsing activity.

In addition, “privacy-focused thinking can be incorporated in protocol design such as selecting default RPCs [remote procedure calls] that do not leak IP addresses.”

This can eliminate certain blockchain privacy issues that may arise while also protecting protocol transparency, Scott noted.

Another way to achieve blockchain privacy and transparency is by implementing zero-knowledge proofs (ZKPs) that allow verifying transactions and balances without revealing any underlying data.

Karel Kubat, the founder of Union, explained:

“For example, a company could prove that its reserves match user deposits without publicly disclosing individual account balances or transaction details. Therefore, we should still maintain a certain level of transparency without requiring users to divulge sensitive information, ultimately empowering them with control over their data and giving them the opportunity to decide with whom and when they want to share it.”

Another critical feature of merging blockchain privacy and transparency is how these align with existing regulations, especially around anti-money laundering (AML) and know-your-customer (KYC).

While privacy features aim to protect users’ identities and the details of their transactions, AML and KYC regulations require a certain level of transparency to track the flow of funds and verify the parties involved in financial transactions.

Concordium’s Stiebar-Bang explained:

“Blockchain platforms and cryptocurrency businesses must find a balance that respects user privacy while still providing enough transparency for regulatory compliance. This key distinction is how we will not only safeguard the industry but also provide a foundation for true broad-scale adoption.

“Many privacy-oriented blockchain projects actively engage with regulators to ensure their technologies comply with legal standards. This engagement can involve modifying features to allow for selective transparency, where transaction details can be revealed under specific conditions, such as with a legal warrant or to satisfy compliance checks.”

Blockchain Data Privacy Could Face Key Challenges

Even though blockchain privacy protection has become an integral part of decentralized finance (DeFi), experts note that its implementation faces several key challenges, specifically around the complexity of integrating new systems into existing protocols and the impact this could have on the overall user experience.

Union’s Kubat pointed out:

“It is also important to take into consideration the interoperability aspect, where different privacy features may not seamlessly integrate between blockchains. Blockchains that prioritize transparency might not seamlessly interact with blockchains that implement strong privacy measures, complicating the exchange of assets and information across different networks.”

Additionally, achieving complete blockchain privacy is difficult as the concept goes against the very nature of the chain itself, RAILGUN’s Scott explained.

This is because the blockchain technology infrastructure must reveal at least some user data for most blockchains to function.

While privacy concerns could lead some users to consider using a private blockchain vs. a public blockchain, Scott noted that the market has been quite clear to signal that public blockchains with the highest security and network effects, like Solana, are the ones that people and developers prefer to use.

Scott told Techopedia:

“There are a lot of considerations and nuances when it comes to privacy and the vector of privacy you are trying to address. On-chain privacy solutions like RAILGUN, for example, aim at providing privacy at the blockchain level. [But] there are also considerations beyond these that must be taken into account. RPC calls, network privacy, etc., all play into this, and it makes the scope of privacy really challenging. For example, around the network level of privacy and who has access to your packet data.”

Zero-Knowledge Proof Is the Leading Man in Blockchain Privacy

RAILGUN’s Scott noted that the leading man to blockchain privacy is, first and foremost, zero-knowledge proof. However, it is essential to remember that not all ZKPs are geared towards privacy.

“In fact, it seems a lot of zero knowledge research is more geared towards scaling and not privacy. Beyond that, there are network privacy-focused projects like Nym and gossip networks like Waku, which aim more towards a different part of the stack but are equally important to the overall picture of privacy in crypto.”

Matthew Niemerg, the co-founder of Aleph Zero, added that multi-party computation (MPC) can also be used as a primary privacy protocol for blockchain platforms.

He noted that Aleph Zero uses both ZKPs and a secure MPC. In addition, the products integrate with third-party tools like ZK-ID systems for KYC verification, enabling enhanced privacy without compromising regulation.

The Bottom Line

Pursuing privacy within public blockchains confronts the challenge of balancing transparency and regulatory compliance.

While users seek greater control over their financial transactions and data, the transparent nature of blockchain exposes potential privacy vulnerabilities, raising concerns about the security of sensitive information.

Striking a balance between privacy and transparency is imperative for blockchain platforms, necessitating the integration of privacy-enhancing technologies like ZKPs and MPC while ensuring alignment with regulatory requirements.

FAQs

How does blockchain support data privacy?

What is a public blockchain?

Since blockchain technology is public, how are the identities of users protected?

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Iliana Mavrou
Crypto journalist

Iliana is an experienced crypto/tech journalist reporting on blockchain, regulation, DeFi, and Web3 industries. Before joining Techopedia, she contributed to a number of online publications, including Capital.com, Cryptonews, and Business2Community, among others. In addition to working in journalism, she also has experience in tech and crypto PR.  Iliana graduated from the City University of London with a degree in Journalism in 2021. She is currently pursuing a Master's degree in Communication.