Using the latest cryptography, Blockstream has created Confidential Transactions designed to improve Bitcoin’s user security by keeping the amounts sent visible only to participants in the transaction, or other specified parties.
Many have tried to improve on Bitcoin transactional security, with Darkcoin/Dash being the most notable example through their own altcoin. With the innovations inside chain technology, Blockstream has created Confidential Transactions (CT). Using the latest cryptography, Confidential Transactions is designed to improve Bitcoin’s user security by keeping the amounts sent visible only to participants in the transaction, or other specified parties.
With Bitcoin, you get a globally verified transaction that removes counterparty risk from transactions, but these transactions are fairly public for this process to take place. Not all financial transactions are meant to be for the public, so the Confidential Transactions program looks to fill that niche in the market.
If larger transactions aren’t done confidentially, thieves, agencies, and scammers can target known high-value addresses for more information. Free speech and fungibility issues, where a bitcoin’s history may make it more or less desirable, can compromise a user’s Bitcoin value, depending on the transaction.
How Confidential Transactions Work
With Confidential Transactions, the transaction amounts become privatized without compromising the ability to work within the public Bitcoin protocol. Verification of the amounts can still be done.
Additively homomorphic commitments is a technique within cryptography that makes this possible. CT allows the transfer of private "memo" data (like refund addresses) without raising the size of the transaction and doing so by reclaiming most of the overhead of the CT cryptographic proofing.
Bitcoin helps improve security for its users with the use of pseudonymous addresses, but in any Bitcoin transaction you are learning at least one of the user’s addresses. According to Blockstream, with that information, you can deduce other related addresses linked to the known address, compromising safety and security for any future transactions.
If you are paid in bitcoin by an employer, as an example, then use those bitcoins to pay for your monthly rent and your weekly groceries, this information can be derived by those parties. In theory, the landlord and store, for example, can collude and adjust the market against you if they notice an increase in your funds. Thus, they could use the information to increase food and rent prices accordingly, like inflation.
Mixing methods like CoinJoin and CoinSwap, which CT is fully-compatible with, have been used to improve security for Bitcoin transactions, where mergers of recent transactions of users are created by making joint payments. The problem is the amounts of these transactions can be dialed back to their origins, according to Blockstream. All other methods result in “pruning," with participants assuming ever-larger databases to verify new transactions.
This can happen because the established systems prevent knowledge of which coins have been spent. Other issues Confidential Transactions hope to solve generally include low performance, excessive costs, and the new cryptographic assumptions that are difficult to understand for the novice.
Origins of CT
This concept was originated by Adam Back in a 2013 bitcointalk.org thread called "bitcoins with homomorphic value.” Created by Core Developer Greg Maxwell, this required the implementation of many new cryptosystems that work in concert.
Confidential Transactions are all based on a concept called the Pedersen commitment. This commitment set-up allows users to hold some data secret but make a commitment to this data so that it is unchangeable later. Unlike other proposals, this system is not just speculation or pure cryptography without integration with the Bitcoin system. Confidential Transactions are enabled in Elements Alpha, and used by default by for all ordinary transactions.
Maxwell has been a defender of Bitcoin versus the creation and proliferations of altcoins. A common refrain is of altcoin proponents is that Bitcoin takes too long to make improvements in its protocol, but he points out as digital currency systems grow that issue exists, whether it is Bitcoin or an altcoin. Maxwell hasn’t seen altcoins bring real value to the market, since they cannot generate Bitcoin’s “Network Effect.”
“The value of currency comes from the network effect, and if you’re starting up new cryptocurrencies all the time, all you’re doing is fragmenting the network effect,” explains Maxwell. “Well, when Bitcoin came into existence it was worthless. Over time as people saw the potential value, they started trading bitcoins for larger and larger amounts of money.
“So this creates the potential for a speculative race where people want to get in and hope that it becomes valuable in the future. And this has incentivized the creation of many altcoins, even ones that have no other reason for existing other than creating problematic pump and dumps.”