How does the blockchain support data privacy?

Blockchains are being built into finance, consumer apps, and more. How do they protect user privacy?

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Blockchains, cryptocurrencies, and crypto wallets have surged in popularity as new use cases are invented across finance, consumer applications, and privacy. Although distributed ledger technology is an excellent form of immutable data storage, the technology’s open-source nature and transparent data model present an interesting dual-sided nature for user privacy. For most protocols, users’ blockchain transactions, assets, and other data may be completely transparent. Others rely on zero knowledge proofs and protocols to hide all information about transacting parties.In this article, we’ll walk through the basics on how blockchains work, how they interact with decentralized apps, and privacy-focused crypto wallets and products that deliver real-world value to users.

What are blockchains?

A blockchain is a digital ledger of all cryptocurrency transactions. It is constantly growing as "completed" blocks are added to it with a new set of recordings. Each block contains a cryptographic hash of the previous block, a timestamp, and transaction data. Bitcoin nodes use the blockchain to differentiate legitimate Bitcoin transactions from attempts to re-spend coins that have already been spent elsewhere. Blockchains generally rely on either “proof of stake” (wherein validating nodes must contribute currency and compute to a network) or “proof of work” where a certain number of computing power is necessary to “mint” a new block.The first blockchain was conceptualized by an anonymous person or group of people known as Satoshi Nakamoto in 2008 in this infamous Bitcoin whitepaper. Nakamoto described how a blockchain could be used to timestamp digital documents so that they could not be backdated or tampered with. The first ever blockchain was created on January 3, 2009, when Nakamoto mined the first block of the chain, known as the genesis block. Since then, the Bitcoin blockchain network has been growing continuously as more and more blocks are added to it. As of February 2021, the blockchain is over 457GB in size and contains over 6.6 million blocks.However, the history of blockchain technology can be traced back to the early 1990s with advances in cryptography and hashing algorithms, which generate deterministic mathematical results given the same inputs. Nakamoto is the anonymous creator of the first and most famous cryptocurrency, Bitcoin. In his white paper, Nakamoto proposed a decentralized digital cash system that would allow online payments to be sent directly from one party to another without the need for a financial institution or third party. Nakamoto also proposed a way to timestamp digital documents so that they could not be backdated or altered.The blockchain is often lauded for its potential to disrupt the financial industry. For example, blockchain has the potential to speed up transaction times and reduce costs because there is no need for a third party to verify or approve transactions. Blockchains are also praised for their security and immutability. Once a transaction is recorded on the blockchain, it cannot be altered or deleted. This makes blockchain an attractive option for businesses and individuals who want to avoid fraud or corruption. However, for some protocols and communities, this immutability can yield challenges as hackers or malicious actors may exploit protocols or users and forever have access to their stolen funds.Despite its potential, blockchain technology is still in its early stages. One of the main challenges facing blockchain is scalability. The blockchain is growing continuously as more and more blocks are added to it. Another challenge facing blockchain is governance. Because the blockchain is decentralized, there is no central authority that can make decisions or set rules managing a largely peer-to-peer network. This can make it difficult to reach consensus on how the blockchain should be governed. However, more and more, decentralized autonomous organizations (DAOs) are using on-chain, blockchain-based governance methods with tokens to vote on community proposals. As these challenges are solved, blockchain technology has the potential to revolutionize the financial industry. It remains to be seen how quickly and widely the technology will be adopted.Some applications now differentiate between public blockchains (like Bitcoin and Ethereum) and private blockchains, where users must be properly permissioned to interact with a system. On a private blockchain, a permissioned user will be able to mint blocks, earn rewards, and submit transactions; on a public blockchain, anyone can set up a node to contribute to mining.

What is privacy online?

Data privacy mandates the protection of personal information online, from financial and healthcare information to messaging and browser history. On a more fundamental level, privacy ensures individuals know, understand, and can change how their personal information is used online. Generally, personally identifying information is understood to include name, address, date of birth, social security number, and credit card number. These more intuitive definitions of privacy have been increasingly codified in new legislation, including the General Data Protection Regulation (GDPR), the California Consumer Privacy Act (CCPA), and similar laws around the world.In the financial context, typical fintech or banking applications require an enormous amount of user data to be divulged and shared with other parties, leaving individuals at risk of cyberattacks (such as the Capital One breach or infamous Equifax data breach), or privacy issues stemming from poor data management and privacy policies. Frequently, these entities have poor cyber hygiene, leading to numerous vulnerabilities and privacy issues across companies and centralized banking authorities.In a world where our every move is tracked online, privacy matters now more than ever. When we share our personal information online, we are at risk of identity theft, fraud, and other crimes. By keeping our information private, we can protect ourselves from these threats. In addition to protecting our personal information, privacy also allows us to express ourselves freely online. We can share our opinions and beliefs without fear of being judged or persecuted. Privacy gives us the freedom to be ourselves. Without privacy, we would be living in a world where we are constantly being watched and our every move is monitored. We would have no freedom to express ourselves or to be ourselves. Privacy is essential to a free society.Privacy is particularly important for financial matters and in crypto, where the costs of scam, theft, or hacks can be existential. Financial privacy matters for a number of reasons. First, it allows people to keep their financial affairs private if they so choose. This can be important for personal privacy reasons, or for business reasons (e.g. to prevent competitors from learning about a company's financial situation).Second, it can help to prevent fraud and financial crimes. If people's financial information is kept private, it is more difficult for criminals to access it and use it for illegal purposes. Finally, financial privacy can help to promote economic stability. If people feel confident that their financial information will not be shared without their consent, they are more likely to engage in financial activities, such as investing and borrowing, which can help to grow the economy.These privacy concerns do cut both ways. Although private financial information preserves many critical freedoms, traditional banking service providers are generally more capable of enforcing banking regulations, such as those by the US’ Securities and Exchange Commission (SEC).Furthermore, blockchain systems’ decentralized nature can yield frustrating consumer experiences for some, even beyond the potential for hacks and cyberthreats. Losing one’s crypto private keys will almost always lead to a total loss of all funds held in a particular wallet. A cryptocurrency private key is a secret number that allows a user to spend his or her cryptocurrency. The private key is used to sign transactions and provide mathematical proof that the transaction is coming from the owner of the cryptocurrency.

Privacy-focused cryptocurrencies

Since Bitcoin’s launch in 2009, there have been numerous other cryptocurrencies created, all with different features and purposes. Some cryptocurrencies, like Bitcoin, are designed to be used as a form of digital currency, while others, like Ethereum, are meant to be used as a decentralized platform for running applications known as “smart contracts.”Privacy-focused cryptocurrencies are those that place a strong emphasis on privacy and anonymity. Some of the most well-known privacy-focused cryptocurrencies include Zcash, Monero, and Dash, which use radically different blockchain implementations that keep user transaction information unknown.Zcash: Zcash is a cryptocurrency that offers users the option of shielded transactions, which means that the sender, recipient, and amount of a transaction are all hidden. Zcash also offers transparent transactions, which are similar to Bitcoin transactions in that they are not anonymous.Monero: Monero is a cryptocurrency that uses a technique called ring signatures to hide the sender, recipient, and amount of a transaction. Monero also uses stealth addresses, which are randomly generated one-time addresses that are used to receive payments.Dash: Dash is a cryptocurrency that offers both private and public transactions. Private transactions, which are the default, hide the sender, recipient, and amount of a transaction. Public transactions, on the other hand, are similar to Bitcoin transactions in that they are not anonymous.

Best privacy practices for crypto users

Use a hardware wallet:A hardware crypto wallet is a physical device that stores your private keys and allows you to sign transactions offline. This means that your keys are never exposed to the internet and are therefore much more secure. There are many different types of hardware wallets, but the two most popular are the Trezor and the Ledger Nano S. Both of these wallets support a wide range of cryptocurrencies and are very easy to use.The Trezor is the original hardware wallet and it is very well-known in the cryptocurrency community. It costs around $100 and it is very easy to set up. The Ledger Nano S is a newer wallet that costs around $60. It is also very easy to set up and it supports a wide range of cryptocurrencies. If you are serious about holding cryptocurrency, then a hardware wallet is a must. It is the best way to keep your coins safe and secure and prevent against a variety of cybersecurity threats. We highly recommend purchasing from a reputable seller, as some other companies have suffered from supply chain threats where wallets are compromised.Consider a multi-signature wallet: A multisig wallet is a digital wallet that uses multiple signatures to authorize a transaction. This means that multiple people must sign off on a transaction before it can be processed. This can be useful for businesses or organizations that need to have multiple people approve a transaction before it is processed.Use trustworthy wallets only: We recommend sticking with well vetted, audited, and open-source wallets trusted by millions of other cryptocurrency users. For example, the MetaMask Ethereum wallet is used by tens of millions of people on Chrome and mobile. For Solana, Phantom is used by millions of users but is not open-source. Using your wallet safely is a critical blockchain security skill, as these non-custodial wallets hold store your private and public keys and any assets belonging to them.Consider using custodial and non-custodial wallets: A custodial wallet is a wallet where the private keys are held by a third party. A non-custodial wallet is a wallet where the private keys are held by the user. The type of wallet you choose may depend on your use case; for example, if you are comfortable keeping most of your assets in a custodial wallet held by an exchange (such as Coinbase, Huobi, Binance, or Gemini), you may not need to manage private keys and your own hardware or non-custodial wallet.

The best blockchain enabled privacy products

Status: Status is an Ethereum based messaging and wallet app. It lets you own assets, send messages, and communicate with contacts you may interact with on the Ethereum ecosystem. The product has also begun to invest in more and more features for anonymous use as well.Skiff: Skiff is a privacy-first, end-to-end encrypted email, notes, and file storage product. Skiff users crypto wallets to ensure total privacy for all personal data, including end-to-end encrypting all documents, messages, and files stored on the platform. Skiff’s use of blockchain extends into data storage, with an integration into decentralized storage.

Conclusion

In the future, privacy is likely to become an increasingly fundamental building block for all blockchain applications. As the technology is used to store data, facilitate transactions, and run applications, reliable authentication and pro-privacy practices are needed to ensure the technology can continue to scale to more users and use cases. We hope the products above help you find easy-to-use, intuitive applications for using blockchain technology in your day to day life.