Does your blockchain have privacy?

Good morning! Welcome to The Daily Moon. It’s a brand new week. Zuckerberg’s VR dreamscape, Metaverse, was dealt a body blow when the man running Oculus quit. John Carmack joined Oculus, before it was acquired by Meta and was absorbed into the social network, to be one of the key voices in its quest to build Horizon. The blood on the books and the resignations means Meta may have to rethink its plans. Or Zuck will soldier on.

Moving on, today we talk about why privacy blockchains are the new buzz and crypto’s legal maze.

The markets were shaky. Bitcoin was below $17,000 and Ethereum was at $1,180 levels. Nasdaq fell on recession fears. Back home, Sensex and Nifty ended lower on weak global cues.

Blockchains And Privacy  

Picture this. Your house has a passcode entry. You know the code but can’t reveal it to anyone. At the same time, you need to prove that this is indeed your house. What’s the solution? You secretly key in the entry code and when the door opens, the people are convinced. Something similar is happening in the world of blockchains.

Blockchain, as we know it, is a digital database that stores information in blocks. It is immutable, meaning the data entered is irreversible. Blockchains are synonymous with transparency, which means that all the information is accessible. Bitcoin’s popularity is also linked to this inherent trust. But, not everyone wants their information public. That’s why some blockchains decided to go private.

Privacy blockchains come with an added layer of secrecy. The community can see the block additions, but details such as wallet balance, senders, receivers are masked, which makes transactions anonymous.

Monero, Zcash, Dash, Decred, and Oasis are some of the prominent privacy blockchains. And recently, Cardano’s developer Input Output has joined the list with the launch of the privacy-focussed blockchain called Midnight.

How does it work?Privacy blockchains work on a concept called zero-knowledge proof. Similar to the passcode example, it involves giving indirect proof that the transaction is legit.

So instead of saying I completed the transaction, users will complete a series of tests to prove their authenticity. Let’s take an example:

1. Ringo has solved a Rubik’s Cube but George and Paul want proof.

2. Ringo cannot reveal how and when.

3. George and Paul give Ringo a series of similar challenges (except the Cube) to solve.

4. Ringo solves all the challenges in the given timeframe.

5. The duo is convinced that Ringo solved the original puzzle.

It’s got to do with probability. If a person has completed random tasks correctly for say more than 50% of the time, their action/statement can be considered truthful.

Why do we need them?Because people want complete privacy. The idea behind crypto was to take back power from the hands of the government. But blockchain transparency meant that wallet details for BTC, ETH, SOL addresses were easily viewable. The next wave of blockchain evolution wanted to get rid of that feature. A rise in crypto crackdowns globally have pushed more users towards privacy tokens.

Privacy-focussed versions of existing blockchains are also being built. Aztec Network, for example, calls itself an encrypted version of Ethereum. It enables confidential transactions on DeFi protocols.

Similarly, Input Output will launch Midnight as a side-chain to Cardano. Initially, it will support smart contract privacy.

Some are unhappyYou can’t really please everyone. And of course, none of the governments like “too much” privacy. Remember when the US Treasury blacklisted Tornado Cash over anonymous transactions? There’s more coming. Last we heard, the EU may ban privacy coins. It’s a new trend, we spotted it, now you know it.

The Regulatory Contrasts

We’re a long time away from a consensus on how crypto will be regulated. Different countries deal with it differently. But a lot of the decisions seem to be knee jerk reactions to current events. The latest, opposing examples, are Japan and France.

JapanThe country is planning to ease taxation for local crypto firms. Japanese crypto issuers are currently required to pay a 30% corporate tax on their holdings. It doesn’t matter if they made a profit in a sale or not. That had led to domestic companies setting up shop elsewhere. Now nobody wants to let go of the crypto, or Web3 opportunity. So Japan has agreed to remove the 30% tax requirements.

FranceFrance, largely considered cryptocurrency friendly so far, looks set to tighten regulations. It is mulling doing away with a provision that did not require crypto companies to have a licence until 2026. The proposal goes to Parliament next year and if it passes, crypto businesses will have to get licences beginning October 2023.

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Who are we? This newsletter’s ambition is to educate (and to entertain). The world of money is changing everyday and we want to help you decode what’s happening in the world of crypto, public markets in the US and India.