35. Do confidential transactions on blockchain exist? What is a Confidential Transaction?
Some cryptocurrency protocols, to improve their level of privacy, have introduced Confidential Transactions on cryptocurrency networks. This is a confidential transaction protocol. The use of the aforementioned protocol allows encryption of transactions that take place on a given blockchain network. As a result, they cannot be verifiable and validated within that network where they occur. Moreover, the exact amounts of these conducted transactions cannot be seen. They are hidden from both the recipient and the sender. Do confidential transactions exist?
The idea for confidential transactions came in 2013. Their originator was Adam Back. Transparency and decentralization are the most important and also the best features of cryptocurrencies. However, some users may have a problem with privacy. Any network user can view the blockchain in its entirety and search for a transaction. The implementation of an encryption protocol in a given ecosystem prevents such an action.
How do confidential transactions work?
At the time of a transaction, nodes can verify its most essential information: the amount, the time, or even the addresses from which the transaction went out. However, in networks that use confidential transactions, such action is impossible. A good example of this would be Monero, or other privacy cryptocurrencies, which we discussed here [LINK – WHAT PRIVACY TOKENS ARE – BASIC LEVEL].
When making a transaction using confidential tokens, the data associated with that transaction is mixed and hidden along with other important data. However, even in such a case, the network must be able to verify the correctness of this data, while not revealing it to users.
To make this possible, a scheme called Pedersen Commitment is used. This is a type of homomorphic encryption that allows the transaction to take place, without having to use addresses for it. In addition, it allows for verification of information.
Pedersen Commitment in its operation uses so-called blind signatures, instead of addresses. Therefore, anyone involved in such a transfer will have to use multiple signatures to validate a given transaction. PC also allows encryption of transaction inputs and outputs. This is how no third party can see the transaction in question or obtain any related data or information.
The idea for Confidential Transactions came to improve the blockchain system. CT allows certain information to be stored, which both parties to the transaction can read without much difficulty. However, such information is perfunctory and at the same time impossible to understand. A bystander to such a transaction can only verify that the encoded information is true. And this is done through a mechanism that will not allow him to get other confidential information anyway.
To make things work this way, Confidential Transactions uses a special hash to assemble the data. In this way, we can generate a block whose record is not identifiable. We digitally sign the hash generated in this way, as proof that no one knows about it. As a result, the user cannot change any information that the hash contains. Such a block guarantees the security of data in a confidential transaction.
Confidential Transactions on the example of Monero
Monero, is a cryptocurrency that was created in 2014. It is completely focused on privacy and decentralization. Its main goal is to provide a maximum level of privacy for users in and within its network. And also – in transactions. It can be used in any case, even if there is a risk of being classified, as undesirable. To make this possible, Monero uses the Ring CT protocol.
Ring Confidential Transactions allows Monero to hide all data related to the transaction. Amount, sender, recipient – nothing is known to us. To achieve this, Ring CT combines the actual Monero cryptocurrency with some others that are randomly selected within a given network. In this way, a disordered mix is created, confusing others. As a result, they cannot see or determine the number of coins being transferred.
Summary
There are many supporters of confidential transactions. They are not discouraged by the fact that in some cases they are used to laundering money or support criminal activity. Privacy advocates stress that Confidential Transactions introduced in all networks of cryptocurrencies would possibly allow them to serve as fungible money.