Vitalik Buterin’s latest conquest! Privacy pools, in muggle tongue.
Vitalik Buterin’s latest venture is a privacy-focused project known as “privacy pools”. Privacy pools are essentially an innovative system of obscuring user data while making transactions on the Ethereum blockchain. The goal of the project is to provide a safe and secure way for users to protect their financial information. By using this technology, users can ensure that their
Vitalik Buterin, the famous programmer and founder of Ethereum, is now tackling privacy for blockchain-based projects. His latest innovation are so-called “privacy pools,” which utilize cryptography to ensure that users’ data remains private and secure. By utilizing zero-knowledge proofs and ring signatures, these privacy pools enable users to prove certain facts about themselves.
Recently, on Sept 9th, 2023; Vitalik Buterin co-authored and released a dissertation on a new privacy solution concept called privacy pools. Here is my take on the dissertation and what it all means in language we muggles can understand.
“Blockchain Privacy and Regulatory Compliance: Towards a Practical Equilibrium”
Advancing Blockchain Privacy with Privacy Pools
Blockchains are transparent — all transactions are public. This poses a privacy risk as users can be tracked across activity. Protocols like Zcash and Tornado Cash use advanced cryptography called zero-knowledge proofs to obscure transactional links and improve privacy.
However, fully private transactions also enable illicit use, as seen with sanctions on Tornado Cash. Is it possible to enhance privacy while retaining regulatory compliance? A new proposal called Privacy Pools offers a potential path forward.
The Limits of Pseudonymity
The Bitcoin whitepaper argued pseudonymity protects privacy since identities are not revealed. But blockchain analysis techniques can effectively group addresses and trace entire transaction histories, breaking pseudonymity. True privacy requires advances beyond pseudonymity.
Emergence of Privacy Protocols
Zero-knowledge proofs allow proving information without exposing the underlying data. For example, a user can prove a transaction’s validity without disclosing the sender, receiver or amount.
Protocols like Zcash and Tornado Cash leverage zero-knowledge proofs for privacy. Funds deposited into these systems receive newly generated identifiers with no history. Transactions within the systems obfuscate links between senders and receivers. Withdrawals from the systems break tracing to the original deposits. However, vulnerabilities still exist, like with off-ramps.
The Tornado Cash Dilemma
Tornado Cash became widely used for online privacy. But its full anonymity enabled abuse by hackers and criminals. Stolen funds flowing into Tornado Cash led to sanctions by global authorities. However, ordinary users also lost access to private funds.
Tornado Cash offered a path to selective disclosure through its centralized operator to unlock restricted assets. But this required immense trust in the operator themselves.
Introducing Privacy Pools
Privacy Pools proposes a different approach to enable regulated use without full transparency. The key innovation is allowing users to prove their funds originate from an approved source, without revealing the specifics.
Users define a custom association set of prior deposits deemed legitimate by consensus or regulation. A cryptographic proof then demonstrates their withdrawal came from this set without specifying which deposit.
Association sets would be constructed through methods like:
- Whitelisting small transfers that meet anti-money laundering rules through amount limits
- Including addresses of users who completed KYC with regulated institutions
- Community members privately vouching for each other
Properly constructed sets allow compliance without leaking unnecessary personal details. Users gain control through flexible proof creation instead of relying on a centralized authority.
Generating Zero-Knowledge Compliance Proofs
Under the hood, Privacy Pools generates unique secret and public identifiers for each deposit. Public IDs are published openly. Users retain the secret IDs to later prove ownership.
Secret IDs enter a Merkle tree, an efficient cryptographic data structure. The tree hashes IDs in layers to produce a root value representing the complete set.
For withdrawals, users define their association set of approved public deposit IDs. These also hash into a Merkle root.
A zero-knowledge proof demonstrates that:
- The withdrawal originated from a published deposit (matches the overall Merkle root)
- The specific deposit is included in the association set (matches the set’s root)
The validity of the proof can be verified trustlessly but reveals nothing more about the transaction.
Association sets would be public to provide transparency into compliant funds. But privacy is maintained within accepted communities and standards.
Challenges and Open Questions
Privacy Pools offers a compelling framework to improve blockchain privacy if requirements are met:
- Association sets must be large enough for privacy while accurately reflecting risks
- Manipulation by users or set providers could undermine reliability
- Widespread direct proofs would damage privacy, so incentives must limit this
- Complex transaction patterns may require advanced cryptographic techniques
- Access controls around association sets are critical to prevent surveillance
Additional research around early implementations will be needed to formalize effective parameters and assess privacy guarantees. The incentivization for honest use and participation also requires modeling. And global regulatory perspectives would determine jurisdictional viability.
But the underlying concepts show much promise, in advancing privacy while enabling regulatory compliance through a transparent proof system. If executed thoughtfully, Privacy Pools or similar protocols could play an important role in realizing the full disruptive potential of blockchains across sectors. The path forward requires cross-disciplinary collaboration to turn abstract ideas into functional systems. But advances on both the technological and regulatory side make progress possible.
