PriFi is the natural evolution of DeFi. The demand for PriFi (Private Finance) will only increase as many industries are rightly moving to take advantage of the unique features of blockchain technology, says Alan Scott Jr., Co-founder of the RAILGUN Privacy Project.
A blockchain is immutable. This is the flagship of technology. However, the problem is that anyone can view the crypto transactions that take place on a decentralized ledger.
Blockchain technology was initially a completely new way of using money. After that, the technology developed into a versatile industry tool that can no longer be ignored. More and more companies are relying on blockchain technology to find innovative solutions to existing problems. However, companies always encounter the same problem: the absolute lack of privacy.
As blockchain technology evolved, privacy protocols and crypto mixers began to appear. But most of these new technologies failed to meet the promised level of security. That will change now.
Krypo-Mixer: On-Chain and Off-Chain
The main purpose of all crypto mixers is to break the connection between users’ transactions. This can “on-chain” done by mixing transactions directly on the blockchain. However, a crypto mix can also “off-chain” done. The mixing of one or two levels takes place outside the blockchain. The last variant assumes more confidence than the former.
An off-chain privacy protocol takes a transaction from the blockchain and then places it in a crypto mixer. Suppose a group of users wants to mix coins so that they are more difficult to trace and thus create an additional level of privacy. One way to do that is to use a centralized off-chain service to instruct them to mix the coins on behalf of the users. With a centralized off-chain service, each user deposits coins and specifies an output address. After collecting a certain number of coins, the service distributes the cryptocurrencies to each previously specified issuing address. The coins were thus “mixed” outside the blockchain.
Alternatively, you could also the TSS approach (Threshold Signature Scheme) based on a similar idea: individuals share a public key and a private key. The coins are deposited via the public key, the transactions are then verified and the coins are finally paid out again with the private key.
Off-chain privacy protocols are quite common at the moment. However, the level of security that these protocols provide depends on how well the information can be protected during transmission to and from the crypto mixer. For example, wallet addresses and holdings can be moved from the Ethereum or Polygon blockchain to a completely separate environment for mixing. The coins are then inserted back into the blockchain. Users can thus benefit from a strong protection of privacy.
PriFi: On-Chain Privacy secures crypto transactions with confidential information
An on-chain privacy protocol ensures precise transaction processing and that the transactions have the same level of security that the underlying blockchain provides. An on-chain transaction is validated by every miner on the blockchain. Users do not have to trust a centralized party or a pool outside the blockchain through which the transactions are processed.
The whole thing is made possible by the development of so-called zkSNARKs proofs (“Zero-Knowledge Succinct Non-Interactive Argument of Knowledge”), which act as a “verifier” and check the correctness of private transfers and withdrawals. zkSNARKs are able to ensure the correctness of transfers, without revealing information about the transferred amount, token, recipient and sender.
When a data protection protocol works on-chain, it not only eliminates the need to move a transaction from the source environment. The risks associated with off-chain transactions are also eliminated. As more and more companies switch to blockchain-based technology and more and more business transactions take place on blockchains, the need to protect blockchain transactions from heavily used chains will continue to increase.
The other big advantage of an on-chain privacy protocol is that it allows seamless integration with dApps. Companies can use these protocols to protect their privacy while taking advantage of the variety of applications that DeFi offers on chains such as Ethereum and Solana.
PriFi: Blockchain data protection becomes just as necessary as cybersecurity
Similar to cybersecurity, on-chain privacy is crucial for companies to protect themselves against unwanted behavior from third parties. Zalong with the rise of on-chain analytics firms and trackers, opportunities for potential attackers to gather market intelligence also increased.
As more and more industries use blockchain technology for supply chain management and similar ledger-based applications, the ability to protect on-chain transactions will be crucial. For example, companies gain a competitive advantage through supply chain negotiations.
If these payments are made on a public ledger blockchain, confidentiality is compromised and the contracts negotiated in competition are disclosed. Without the use of on-chain privacy tools, employees who receive on-chain crypto payments risk having salaries and personal wallet holdings publicly visible.
To date, one of the biggest problems in the long-term institutional adaptation of cryptocurrencies is the lack of practical on-chain data protection solutions. Payroll solutions will gain significantly in efficiency if they are based on a blockchain, and on-chain privacy fixes the biggest problem associated with it. The goal of on-chain privacy is to enable users to own a private wallet that they can use to interact with any smart contract.
The on-chain privacy makes it possible to take full advantage of the advantages of the blockchain along with the advantages of data backup. PriFi is the natural evolution of DeFi, and the demand for it will only increase, as many industries rightly want to take advantage of the unique features of blockchain technology. Sophisticated on-chain protocols will now be there to meet this demand.
About the author
Alan Scott Jr. is the co-founder of the RAILGUN Privacy Project. He is an investment, crypto and DeFi privacy specialist and has extensive negotiating experience in the financial sector of Tokyo and the USA. His passion for data protection and his ability to formulate knowledge in generally understandable words have made him a sought-after guest at conferences and podcasts. When Alan isn’t just breaking down the benefits and application of blockchain privacy, he’s taking care of online marketing and web management.
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