Privacy in blockchains

Blockchains add new values, such as transparency and provenance of information. However, many people mistakenly believe that all transactions are publicly viewable in a blockchain. However, in reality, not all the blockchains necessarily facilitate transactions with public viewability:

• Motivations: Several applications on blockchains are not just built for enterprise use cases. Many blockchain applications are now targeting mass consumer audiences. The internet, in recent years, has become a testbed for various approaches in preserving the privacy of users. Unlike any other trend or improvement on the current state of the internet, most blockchain projects aim to deliver a privacy-first mode of operation to users by leveraging pseudonymous cryptographic wallets without revealing the identity of the senders and receivers. Some examples of privacy-first blockchains include Monero, Quorum, and Zcash.
• Approaches: As we already know, public blockchains have design limitations with respect to privacy. As global access to user data is one of the prominent objectives of a public blockchain, we see very few applications of cryptography in them. However, the emerging blockchains such as Zcash, Monero aim to offer untraceable, secure, and analysis-resistant transactional environments for users with their own cryptocurrencies. This is made possible by leveraging a Zero-Knowledge proof mechanism that prevents double spend of the same cryptocurrencies, but at the same time preserves the fundamental values of blockchain.

On the other hand, private and permissioned blockchains consider protecting the privacy of the participating stakeholders as high priority. One well-known private implementation is the Quorum blockchain, which was developed by JP Morgan Chase & Co. Quorum offers transaction-level privacy, yet at the same time offers network-level transparency on the actions by all the stakeholders in the network by using a privacy engine called Constellation. Constellation encrypts the transaction payload with a special key generated from the public/private key pair of the users involved in the transaction. It also facilitates the deployment and operation of private smart contracts within an existing network.

Let's now explore Bitcoin, the earliest cryptocurrency with the largest market capitalization of them all.

Understanding Bitcoin

Bitcoin is a virtual currency on a peer-to-peer network with users and validators distributed across the network. With the help of the Bitcoin blockchain network, users can transfer cryptocurrency in a truly decentralized manner, without a need for either a central bank, a clearing house, or an intermediary. The transfer of Bitcoin between users is recorded in the form of a transaction, which is later verified, mined, and added to a canonical link of blocks.

Bitcoin is believed to have been created by a group work working under the pseudonym Satoshi Nakamoto, with most of its features and functionalities derived based on existing techniques in cryptographic hashes, peer-to-peer network communication, and immutable data structures.

In the following diagram, we have illustrated how Bitcoin mining works in a single node, as well as in pool environments:

You can check it out in detail by going to, https://git.io/JJZzN and https://git.io/JJZzx.

A brief overview of Bitcoin

This section offers historical background on the Bitcoin cryptocurrency, along with factual information on its current state as well as the technical and architectural limitations perceived by experts in the market.

We will now quickly dive into some of the necessary details required for further chapters:

• Motivation: One of the core motivations behind this cryptocurrency was that the currencies rolled out by central banks could not be trusted as they may not be backed by real collateral. This led to the adoption of a free-market approach to the production, distribution, and management of the money, with proof of work for every Bitcoin minted, thereby eliminating the need for central banks and other intermediaries.
• Facts: The virtual currency was open sourced in 2009 with a maximum supply of 21 million Bitcoin that can be minted. Around 18.3 million Bitcoin has been mined to date, with at least three forks.

The following are the prominent Bitcoin forks:

• Bitcoin Cash (with larger block sizes)
• Bitcoin Gold (preserving GPU-based Proof of Work (PoW) mining instead of ASICs) and Bitcoin Adjustable Block-Size Cap (ABC) with 32 MB of blocksize)
• Bitcoin Satoshi's Vision (SV) with an increased block size of 128 MB
  At the time of writing this book, each Bitcoin was valued at around USD 6,806.00. The Bitcoin blockchain network incentivizes validating miners by charging users who transfer Bitcoin with a small fee, which is awarded to the winning block maker as per the PoW algorithm.
• Criticism: The cryptocurrency is alleged to be one of the prime choices of medium for illicit transactions. One of the major crackdowns of this sort of use came from a renowned online black market on the darknet, Silk Road. The FBI shut down the website in late 2013.

With basic knowledge of blockchains, let's now move on and learn about Ethereum.