The future of blockchain privacy: zero-knowledge proofs in decentralised exchanges

Zero knowledge proofs, such as those incorporated in ZK SNARKS, are becoming the go-to privacy technology sought in blockchains at present. This is for good reason — they allow for true “zerocoin” transactions, meaning that coins transferred have no transaction history which can be tracked through the blockchain, and even the amounts are obscured from outside parties. Users transacting with these currencies can rest assured that their identity or use of funds will not be ascertained by any third party, regardless of their resources — an extremely powerful idea. However, problems will occur when they seek to exchange these currencies for a non-privacy equipped token, and even more so when they attempt to buy in or cash out with fiat. Of course, they can exchange their privacy token for something like Ethereum in a centralized or decentralized exchange, but as soon as that happens a trail emerges and can be followed.

Most people will jump to the conclusion that privacy, in terms of blockchain, immediately means the use of cryptocurrency for illegal or nefarious purposes. There is no doubt that this happens. However, there are many very legitimate uses of such technology also — the most pressing is the ability to avoid attraction from theft, ransom or extortion. Leaving a trail through a public blockchain with large transactions could well draw the attention of scammers and, as should be abundantly obvious, anyone who falls prey to such attacks is unlikely to ever venture into cryptocurrencies again. The ethical questions are almost moot, however. Whether we like it or not, concealment in all technology — be it messaging, internet navigation with VPNs, TOR and similar, voice over internet, transacting or any other type of communication, is going to improve.

To that end — the next level of privacy is the emergence of zero-knowledge exchanges. These facilitate exchange of cryptocurrencies, private or not, usually through cross-chain mechanisms like atomic swaps, where transactions can be validated with zero knowledge proofs. The implications of that should be clear. Outsiders will not be aware who is transacting, how much they are receiving, and perhaps most importantly, which currency pairs they are exchanging. This development is upon us — at least two exchanges promise this privacy to users, and although such technology is in the very early stages, we can start to get a picture of what next-level blockchain privacy will look like.

ZDex

The earliest zero-coin decentralized exchange is ZDex — an exchange built on top of the PIVX platform. PIVX is a “code fork” of Dash, which similarly utilizes masternodes but differs from Dash in its proof-of-stake consensus mechanism. Masternodes are responsible for the exchanges on ZDex, which is accomplished through a combination of BIP 65 and multisig contracts. It does not use atomic swaps. It currently supports Bitcoin, Bitcoin Cash, Litecoin, Dash and ZCash and is currently running in alpha. These supported coins are notable in that they are all originally based on the Bitcoin protocol, as opposed to radically different platforms like Monero. Using ZDex will sever a users trail of transactions through the blockchain, protecting them from targeting by nefarious actors. Similarly to other decentralized exchanges, it logs no personal information for further identity protection.

Resistance Dex

Currently in development with mainnet planned in Q2 2019, Resistance promises to take this even further. The whitepaper makes some extremely ambitious claims — two in particular. First, they plan to utilize atomic swaps, and eventually support 95% of all cryptocurrencies in existence. Secondly: all traffic on the exchange will be routed through the TOR network, which means that all IP addresses are masked. It will also provide the option to use a native currency (RES) as an intermediary exchange, which will incorporate zero-knowledge proofs and enormously increase privacy.

The next stage of private transactions

Neither of these are fully functional products — as mentioned, ZDex is in alpha and Resistance is currently running a token sale. With that said, decentralized exchanges and improvements to current offerings are increasingly sought. In line with that idea, Binance is creating their own DEX, which is planned for public testing launch on February 20th. The growth of decentralized exchange platform is also an opportunity to improve privacy. As centralized exchanges are forced by regulators to store more and more user data, the risk of a hack becomes more pressing — not just of funds, but highly personal data also. The past year has not been wonderful for crypto exchanges, with hacks and alleged exit scams dominating the news. Decentralized exchanges, if they can be sufficiently tested and proven reliable, are extremely attractive for users who want to maintain control of their own cryptocurrency and prevent breaches of their private data. As such, dex platforms with privacy features appear to be the next logical progression, potentially eliminating fears of scammers or worse following their transactions through the blockchain.

Article by Byron Murphy, Editor at Viewnodes. All opinions are the author’s alone. For information on some of the services provided by Viewnodes, including our Tezos delegate, click here.