Privacy is not always guaranteed when transacting on the blockchain, which is why solutions like shielded transactions were introduced on networks using zero-knowledge proofs.
Understanding Shielded Transactions
A shielded transaction is a type of blockchain transaction based on zero-knowledge proofs.
Unlike transactions on networks such as Bitcoin, where all data about the transaction is viewable by everyone, shielded transactions hide their data using cryptographic methods.
Shielded transactions are performed by two shielded addresses and verified using a mathematical proof known as zero-knowledge proof.
When a sender prepares a transaction, they compute and append a zero-knowledge proof that doesn’t reveal any data about the transaction and its involved parties. Later, when the transaction is verified, the validator checks the proof and compares it to public parameters that were added to the transaction when it was being prepared.
If the proof is valid, the transaction will be accepted and added to the blockchain.
How are Shielded Transactions Positioned For Securing Privacy?
Because neither the validators nor anyone else on the blockchain, except the transaction sender and receiver, can see the details of the transaction, shielded transactions remain completely private.
Outsiders can’t know who the sender, receiver, or amount is. At the same time, the transaction contains everything necessary for its authenticity to be proven by anyone.
Additionally, shielded transactions on networks like Zcash allow for the use of viewing keys, which are special keys that can be given by the participants in a transaction to a third party to grant them access to the transaction data.
This is useful in real-life situations such as financial audits.
“To perform operations in Zcash, each user has two keys associated with their shielded address. First, the spending key that is used during the creation of a zero-knowledge proof allowing the users to prove ownership of the received funds. Second, the viewing key that is used to decrypt the shielded transaction in the blocks and verify if each transaction belongs to the user.”
(Wüst et al., 2019)
Privacy In Zcash
The benefits of shielded transactions are numerous for businesses and individuals alike. On-chain privacy was hard to achieve before zero-knowledge proofs were used to secure transactions.
“Traditional” blockchains (like Bitcoin) aren’t technically private. They are simply pseudonymous — a type of anonymity attained using a pseudonym. In the case of Bitcoin, that pseudonym would be a wallet address.
Anyone can view any dealings happening on the Bitcoin blockchain and this sort of transparency isn’t practical for many businesses who want their operations kept private from competitors.
While a business’s wallet address doesn’t reveal who it is, its actions on-chain can reveal enough information to make it easy to determine its identity.
Networks like Zcash were created to address this and other privacy-related issues present in traditional blockchain design.
Conclusion
As the practical applications of blockchain and cryptocurrency continue to stack up, new and innovative solutions to privacy and security problems are being developed. Zero-knowledge proofs open the doors for new use cases to come into the blockchain world.
Wüst, K., Matetic, S., Schneider, M., Miers, I., Kostiainen, K., & Čapkun, S. (2019). ZLiTE: Lightweight clients for shielded Zcash transactions using trusted execution environments. Department of Computer Science, ETH Zurich.
Retrieved from https://ethz.ch/content/dam/ethz/special-interest/infk/inst-infsec/system-security-group-dam/research/publications/pub2019/zlite.pdf“Compliance Brief for Zcash (ZEC).” ComplyFirst, December 2020.
Retrieved from https://s33483.pcdn.co/wp-content/uploads/2020/12/ComplyFirst-Compliance-Brief-for-Zcash-ZEC.pdf
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