Early blockchains featured public ledgers to build user trust through data verifiability. However, public verification contrasts with the right to privacy. Therefore, finding trustworthy solutions that balance verifiability and privacy is essential. Midnight, a partner chain of Cardano, aims to achieve this balance.
The Public Ledger Might Reveal Everything About You
Blockchain technology has earned users’ trust largely through its ability to verify the exact number of coins in circulation and all transactions recorded in blocks. Users don’t need to rely on third parties for key claims about the protocol’s properties and state. Since the source code of public blockchains is open-source, users can review the rules and verify that the protocol functions as publicly claimed. They can also run a client, connect to the network, and replay all processed transactions. Users don’t have to trust, they can verify.
Data verifiability has been crucial in building trust in decentralized networks.
However, this verifiability contrasts with the right to privacy. Blockchain transactions are financial in nature, as the transferred assets have market value. These transactions reveal information about the sender and recipient that should remain private.
For example, if Alice sends assets from her address to Bob’s address, Alice can see information about Bob’s wallet, including transactions, and vice versa. The entire world can also see this transaction.
Alice and Bob might be friends, but their relationship could also be different, such as buyer and cashier, supplier and customer, or citizen and official.
Although typical blockchain transactions don’t carry direct user information, linking real identities to wallets is common due to regulatory requirements and KYC pressures when using exchanges or other financial services.
Public ledger blockchains offer little privacy. When someone sends a transaction, they reveal part of their privacy, at least to the recipient.
Privacy Chains
Privacy chains tackle the issue of public ledgers by using various techniques to mask the addresses of both the sender and receiver, as well as the amount of assets being transferred.
While these chains effectively protect sensitive user data, they typically don’t allow for selective disclosure of certain data to a limited number of participants. This makes it difficult to prove that transactions aren’t being misused for illegal activities.
As a result, authorities have ordered the delisting of such projects from exchanges, leading to a loss of liquidity and diminished interest from ordinary users who don’t prioritize privacy.
50 Shades Of Privacy
Balancing privacy and verifiability is crucial for broader blockchain adoption by ordinary users, businesses, and governments.
Users are more likely to adopt blockchain services if their privacy is protected, alongside other essential features like low fees, security, and scalability. However, it’s also important to verify key aspects of the blockchain, such as the number of coins in circulation and their release schedule.
While a project’s monetary policy must be publicly verifiable, individual transactions should remain shielded.
For businesses and governments, protecting sensitive information and user data is both a necessity and often a legal requirement. Modern financial services need to maintain user privacy while allowing authorities to verify certain transaction details, with varying requirements across jurisdictions.
Governments must ensure that citizens pay taxes and do not engage in illegal activities if they are to permit the use of DeFi services.
Let’s be realistic. Governments’ need to oversee financial transactions isn’t going to vanish because of blockchain. We might prefer that governments adopt blockchain rather than reverse it. A modern blockchain like Midnight must offer a range of use cases that can have various privacy requirements. Fully private chains have been delisted from exchanges, limiting their potential for mass adoption.
Midnight focuses on privacy. It enables the creation of services that shield user transactions while allowing selective data disclosure to specific observers when necessary.
Midnight developers can utilize Zero Knowledge Proofs (ZKPs), a technology that allows on-chain verification of data statements without revealing the underlying information.
Midnight can be described as a smart contract platform that offers privacy as an added benefit. It allows for the creation of applications and the minting of assets. Midnight provides developers with programmable data protection, enabling them to integrate business policies, such as user data preservation for regulatory compliance, into their applications.
Cardano currently operates with a public ledger, and this is unlikely to change in the foreseeable future. The most straightforward way to achieve higher privacy is through Layer 2 solutions or partner chains like Midnight.
Midnight aims to become a privacy partner not just for Cardano, but for the entire crypto industry. This is an ambitious goal, but surpassing such ambitious targets is essential for the widespread adoption of blockchain technology.
Furthermore, the balance between privacy and verifiability will shift dynamically as needed. While verifiability was crucial for gaining the trust of early adopters, I believe that as adoption increases, there will be a greater emphasis on privacy.