Ethereum co-founder Vitalik Buterin recently authored a research paper with a primary focus on integrating privacy features into blockchain transactions while ensuring compliance with various regulatory requirements.
This collaborative research project involved experts from diverse backgrounds, including early Tornado Cash contributor Ameen Soleimani, Chainalysis chief scientist Jacob Illum, and researchers from the University of Basel. The interdisciplinary nature of the research drew insights from cryptocurrency, blockchain security, and academic scholarship.
The paper introduces a protocol known as “Privacy Pools” to act as a regulation-compliant tool aimed at improving the confidentiality of user transactions.
According to Buterin and the research team, Privacy Pools are designed to protect the privacy of transactions while separating criminal activities from lawful funds by organizing them into isolated sets or categories to prove to regulators that their funds are not mixed with illicit funds. This is achieved through the use of techniques like zero-knowledge proofs to demonstrate the legitimacy of the transactions and the absence of involvement with criminal activities.
The zero-knowledge proofs are cryptographic techniques that allow one party to demonstrate knowledge of specific information to another party without revealing any details about the information itself. When users want to take their money out of the Privacy Pool, they can choose to create a zero-knowledge proof, which not only confirms the legitimacy of the transaction but also keeps their identities private.
Another crucial aspect of Privacy Pools is the concept of “association sets,” which consist of subsets of wallet addresses within a cryptocurrency pool. When making withdrawals from the pool, users specify which association set to use. Association sets are designed to include only noncritical or “good” depositors’ wallet addresses while excluding those considered “bad” depositors to maintain anonymity while proving the source of the funds.
The researchers also highlighted that as the adoption of cryptocurrencies and decentralized applications continues to grow, governments and regulatory bodies worldwide are struggling to balance enabling innovation and safeguarding against illegal activities. The team emphasized the need to build tools that are resistant to state-level attacks and impossible to shut down or censor to ensure individuals have tools to defend their freedoms and keep governments in check. The pursuit of privacy-preserving tools is seen as essential in achieving this balance between compliance and privacy while enabling innovation in the space.