Earlier this year, we announced the availability of Confidential Assets as part of the Elements open source blockchain platform. This innovative feature enables the exchange of multiple types of assets on a blockchain without publicly revealing details about those transactions. From the point of view of a business, this allows financial institutions to create blockchain transactions that are publicly auditable and remain private at the same time. This post covers the evolution of transparency and confidentiality in blockchains with an eye towards a business audience.
Background: Transparency in Blockchains is a Double-Edged Sword
Blockchains are built on the idea of radical transparency. This is fundamentally what makes them appealing for many use cases: the public or shared, decentralized ledger allows verification of transactions by any participant in the blockchain, and makes new improvements and efficiencies for financial assets and markets possible.
Unfortunately, this new found transparency also radically limits confidentiality and privacy on the blockchain: confidentiality is limited because the participants of a blockchain can see the precise details of each transaction, while privacy is limited because the history of a blockchain can be algorithmically examined to cluster together multiple pseudonymous identities. This constrains many use cases for the technology. However, unlike many other technologies, where these values are too often afterthoughts, blockchain technology is on the forefront of enhancements in privacy and confidentiality as defaults enabled at a protocol level.
The Challenges of Radical Transparency in Markets & Businesses
The current system of absolute transparency on the blockchain creates considerable risks for many real-world use cases in trade and finance.
For example, there are transparency risks for companies using the blockchain for their financial transactions. By fully exposing their transactions in a public ledger, companies might expose any number of trade practices including data about suppliers, customers, production systems, or inventory. They might reveal when sales are good and when they’re poor. Companies using a blockchain are literally publishing their accounting records. Even building a private blockchain doesn’t adequately address these issues because that trust could be trivially broken by a bad actor, such as one angry employee with a grudge or by one corporate spy.
There are also risks for financial markets built on blockchains. Market manipulation can occur during the lag between the transmission of a transaction to the network and its encoding in a block. In an auction system, this facilitates sniping; in a stock-trading system, it enables frontrunning. The stochastic nature of block creation means that transparency doesn’t just permit knowledge of the blockchain, but foreknowledge — with all the risks that implies.
The Solution: Confidential Transactions & Confidential Assets
Two years ago, we began working with companies who were researching the possibilities of blockchain systems. The transparency of blockchains was a big stumbling block, and the need for privacy was raised. From working with prospective customers, we heard that confidentiality was required to compete in an open market, to safeguard customer data, and to obey regulatory privacy laws. Some companies said that confidentiality was even more important than performance or scalability. Blockchain systems at the time were not meeting these needs.
In response, Blockstream invented new technologies that create privacy and confidentiality in the blockchain without giving up the advantages of transparency or decentralization.
Our first confidentiality feature was Confidential Transactions, released in 2015. Confidential Transactions enables counterparties to mask the values of transactions; only they (and designated auditors) can inspect the transacted amounts. Nonetheless, the validity of the transactions remains publicly verifiable.
Our second confidentiality feature was the complimentary Confidential Assets. This new capability within the open source Elements blockchain platform includes a complete package for the issuance of multiple asset types. Companies can transact loyalty points, frequent-flyer miles, tokenized gold certificates, stock shares, eCash, or any other asset types as native within a single system. In addition, as the name suggests, these assets can be transacted in a confidential way. No one, other than the parties involved and their designates, will know which assets are being exchanged or how much of the assets are being exchanged. Participants other than the counterparties can verify that the transaction balances and that the total output amount sums to the total input amount, but they simply see that “some asset” was transacted in “some amount,” without the specific details.
Taken together, we are excited with how these advanced privacy and confidentiality capabilities unlock the potential for blockchains in business applications.
The Confidential Transactions feature is available in the Elements blockchain platform, which is available as a free, open source download for anyone to build their own blockchains. It’s also an integrated feature in Liquid, Blockstream’s federated sidechain for financial markets and Bitcoin businesses.