Ethereum co-founder Vitalik Buterin recently authored a research paper, the primary focus of which was integrating privacy features into blockchain tr
Ethereum co-founder Vitalik Buterin recently authored a research paper, the primary focus of which was integrating privacy features into blockchain transactions while ensuring compliance with a range of regulatory requirements.
Experts from various backgrounds collaborated on this research project, including early Tornado Cash contributor Ameen Soleimani, Chainalysis chief scientist Jacob Illum, and researchers from the University of Basel.
The diverse team reflects the interdisciplinary nature of the research, drawing insights from cryptocurrency, blockchain security and academic scholarship.
The paper suggests a protocol known as “Privacy Pools,” which can act as a regulation-compliant tool aimed at improving the confidentiality of user transactions.
How do Privacy Pools work?
Privacy Pools, as Buterin and the team explain in the research paper, aim to protect the privacy of transactions while separating criminal activities from lawful funds by organizing them into isolated sets or categories, allowing users to prove to regulators that their funds are not mixed with illicit funds.
This is accomplished through the use of techniques like zero-knowledge proofs to demonstrate the legitimacy of the transactions and the absence of involvement with criminal activities.
Zero-knowledge proofs are cryptographic techniques that allow one party (the prover) to demonstrate knowledge of a specific piece of information to another party (the verifier) without revealing any details about the information itself.
When users want to take their money out of the Privacy Pool, they can choose to create a zero-knowledge proof. This proof does two things: First, it confirms that the user’s transaction is legitimate and doesn’t involve a blockchain address associated with criminal activity. Second — and more importantly for users — it keeps their identities private.
Association sets
Another crucial part of how Privacy Pools work is the idea of “association sets,” subsets of wallet addresses within a cryptocurrency pool. When making withdrawals from the pool, users specify which association set to use. These sets are designed to include only noncritical or “good” depositors’ wallet addresses while excluding those considered “bad” depositors.
The purpose of association sets is to maintain anonymity, as withdrawn funds can’t be precisely traced to their source. However, it can still be proven that the funds come from a noncritical source.
Association set providers (ASPs) create these sets and are trusted third parties responsible for analyzing and evaluating the pool’s contributing wallets. They rely on blockchain analytics tools and technologies used in Anti-Money Laundering and transaction analysis.
Association sets are formed through two distinct processes: inclusion (membership) proofs and exclusion proofs.
Inclusion, also known as membership, is the process of curating a selection based on positive criteria, much like creating a “good” list. When considering deposits, for instance, you examine various options and identify those with clear evidence of being secure and low-risk.
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Exclusion involves forming a selection by focusing on negative criteria, much like compiling a “bad” list. In the context of deposits, ASPs evaluate different options and pinpoint those that are evidently risky or unsafe. Subsequently, they generate a list that comprises all deposits except for the ones categorized as risky, thereby excluding them from the list.
The paper takes an example of a group of five people: Alice, Bob, Carl, David and Eve. Four are honest, law-abiding individuals who want to keep their financial activities private.
However, Eve is a thief or hacker, and this is well known. People may not know who Eve really is, but they have enough proof to know that the coins sent to the address labeled “Eve” come from a “bad” source.
When these individuals use the Privacy Pool to withdraw money, they will be grouped together by ASPs with other users based on their deposit history via association sets.
Alice, Bob, Carl and David want to make sure their transactions are kept private while reducing the chances of their transactions looking suspicious at the same time. Their deposits have not been linked to any potential malicious activity, so the ASP chooses for them to be associated only with each other. So, a group is created with just their deposits: Alice, Bob, Carl and David.
Eve, on the other hand, also wants to protect her privacy, but her own deposit — which comes from a bad source — cannot be left out. So, she’s added to a separate association set that includes her deposit and the others, forming a group with all…
cointelegraph.com
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