Blockchains aren’t as private as you think
Blockchain technology was introduced to the world in 2009 when Bitcoin burst onto the scene. This technology has been revolutionary for securely transferring peer-to-peer value without the need for intermediaries. The technology works like a distributed ledger that anyone can examine through block explorers. Personal information is masked by alphanumeric public key addresses. However, with growing adoption, these addresses can often be easily connected to particular individuals via forensic AI projects like Chainalysis.
While it is possible to create private blockchains where personal information can be protected or permission-based, many chains capable of running smart contracts, including Ethereum, remain open. This means anyone can see any wallet address or transaction that happened on these blockchains. Additionally, wallet addresses can be tracked and large traders and holders of digital assets can be easily identified. There is a growing demand for these transactions to protect both private information and transaction value to improve financial privacy.
Railgun is the most advanced privacy protection solution for people who transact with ERC-20 tokens in DeFi and want to keep their transactions private and anonymous.
Ways to Protect Your Financial Privacy on the Blockchain
There are currently several ways to protect an individual’s financial privacy, even on these publicly distributed blockchains. Most privacy solutions are created through tumbler services. These services act as a third-party extension that works either as a wallet generation service or a similar dark cash pool for users.
Portfolio Generation Services
Wallet generation services like blender.io allow a user to send cryptocurrency from a public blockchain, like Bitcoin, from one wallet to another without a trace. The failover service disguises the final destination of the crypto by providing an intermediate relay address.
Dark liquidity pools
Dark liquidity pools operate like private exchanges for crypto trading. They traditionally facilitate block trading by institutional investors without impacting the markets with their large orders. The problem with using these pools is their centralized and custodial nature where users lose direct control over their crypto assets.
Railgun’s Privacy Preservation Protocol allows users to engage in DeFi anonymously. It is managed through the Railgun smart contract which allows users to maintain full custody of their cryptocurrency while all identifying information is stripped from transaction data.
How it works
Users deposit their crypto funds into a private wallet via the Railgun smart contract. From there, users can interact with the Railgun balance the same way they would with any other wallet address. Transactions made from the Railgun smart contract are obfuscated by zk-SNARK cryptography. This privacy system protects the identity and value of the transaction made through the smart contract.
Anyone using the Railgun protocol can send digital assets to another Railgun account anonymously. The recipient will only see the deposited assets and no other information about the sender’s wallet address. This creates an additional layer of anonymity for the entire protocol, as any user can theoretically own any amount of digital assets that have been added. By using relayers, this same anonymity can be extended to the entire world of DeFi.
When engaging in DeFi projects, the blockchain will record that there has been a transaction between the Railgun smart contract and the DeFi protocol, and record the relay address as the gas payer, but no information about Railgun user identification will not be revealed. Privacy is fully protected.