When you send cryptocurrency using a public blockchain, it’s possible for anyone who’s interested to view that transaction. The wallet addresses of all parties involved, the type of cryptocurrency used, and the amount that was sent is all out in the open. It’s like publishing your bank statements so that others can see exactly who you’ve paid, and how much.
For most cryptocurrency users, this isn’t much of a concern, but there are others who would prefer to keep some of these details a secret. Using confidential transactions is one way to do that. In this AAG Academy guide, we’ll look at what confidential transactions are, how they work, and the benefits they bring.
When a confidential cryptocurrency transaction takes place, the amount of cryptocurrency being sent and the type of asset is not publicly visible. Only the sender and receiver can see these pieces of information. That’s not typically the case with cryptocurrency transactions, most of which happen on public blockchains that allow anyone to see the details of any transaction.
Confidential transactions give those who are particularly sensitive about their privacy the ability to send and receive cryptocurrency without having to worry about it being seen. However, it is possible for wallet addresses to be seen, so confidential transactions cannot cover up the fact that two parties transacted — they can only hide the details of any transfer made.
The concept of confidential transactions was first proposed by Blockstream CEO and Hashcash co-founder Adam Back in 2013. It was later picked up and expanded upon by Bitcoin developer Gregory Maxwell, creator of CoinJoin, who recognized the need for cryptocurrency users to transact without revealing the quantity or type of asset being sent and received.
You might be interested in: Coin mixing and CoinJoins explained
As we touched on above, most cryptocurrency transactions conducted on public blockchains are visible to whoever wants to see them. Under normal circumstances, it’s possible to see the sender’s wallet address, the receiver’s wallet address, and the quantity and type of asset sent. Confidential transactions use a variety of techniques to conceal some of these details.
The Confidential Transactions (CT) protocol for Bitcoin, which was first implemented in 2015, uses a combination of scriptPubKeys, the Pedersen commitment scheme, and a random Diffie-Hellman’s elliptic-curve (ECDH) code to encrypt transaction data. Here’s what role each of those things plays:
Now let’s look at an example of a CT to understand how all of these things come together:
One of the most important parts of this process is the Pedersen commitment scheme, which solves one of the biggest problems with confidential transactions. Without this, it is not possible for a blockchain network to determine whether a sender has the funds to facilitate a transaction because the network cannot see the quantity of cryptocurrency being sent.
There are other types of confidential transactions, including zero-knowledge (ZK) proofs and RingCT, and they all use similar technologies. RingCT, which is used for Monero transactions, is actually an extension of the CT protocol for Bitcoin.
The biggest and most obvious benefit of confidential transactions is that they prevent key details of a transaction from appearing on a public blockchain. When a confidential transaction is carried out, although it is possible to see that two parties transacted, we cannot see the quantity or type of asset that was used. This further enhances the privacy of both parties.
Anyone can take advantage of confidential transactions by using a dedicated sidechain, such as Liquid Network, or RingCT for Monero. These make the process as simple as possible so that executing a CT is almost as easy as executing a regular cryptocurrency payment. It’s worth noting, however, that these services do charge a small transaction fee.
Although confidential transactions bolster the privacy of cryptocurrency transactions, they cannot completely conceal the wallet addresses of the users involved. Therefore, the biggest problem they pose for the privacy-conscious is that it’s still possible for anyone to see that two parties transacted on a public blockchain; they just cannot see the details of the transaction.
Confidential transactions can be used to conceal the type and quantity of an asset that is sent and received in a cryptocurrency transaction.
Yes, confidential transactions cannot hide everything. All transactions can still be viewed by their transaction ID, and the wallet addresses of both the sender and receiver are visible.
This article is intended to provide generalized information designed to educate a broad segment of the public; it does not give personalized investment, legal, or other business and professional advice. Before taking any action, you should always consult with your own financial, legal, tax, investment, or other professional for advice on matters that affect you and/or your business.
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