Enterprise Blockchain

How Is Blockchain Verifiable by the Public and yet Anonymous?

This article discusses the difference between the levels of anonymity on private blockchains and public blockchains

By ConsenSys

January 13, 2020

TL;DR:

  • As public ledgers, Bitcoin blockchain and Ethereum require transactions to be visible by default.
  • Ethereum network offers pseudo-anonymity; for example, transactions are linked to addresses that correspond to public keys derived by user-held private keys, not by username or password.
  • Certain technologies are currently being developed and tested for Ethereum 2 and Ethereum 3 that add an enclave of privacy to public Ethereum, namely, zk-SNARKs.
  • A zk-SNARK is a cryptographic proof system that allows users to maintain private transactions while validating the transactions according to the network’s consensus algorithm.
  • Once zk-SNARKs is implemented, organizations will be able to transact on the same network as their competitors in complete privacy, while enjoying the security of the public Ethereum blockchain.
  • Until then, enterprises can utilize public or private Ethereum to address a wide variety of use cases. Examples are provided below.

How is blockchain verifiable by the public and yet anonymous?

Enterprises looking to integrate blockchain technology often ask how data on the blockchain is publicly verifiable, yet anonymous? To answer this question, we must dive into the definition and uses of private and public blockchains.

What is a blockchain?

A blockchain is a distributed, cryptographically-secure database structure that enables participants to establish a trusted and immutable record of transactional data without intermediary involvement. A blockchain can execute a variety of functions beyond transaction settlement, such as dapp development, operational use cases, deployment, and smart contracts. Smart contracts are digital agreements encoded into the Ethereum blockchain. Smart contracts have limitless formats and conditions.

Blockchains have proven themselves as superior solutions for many instances, such as securely coordinating data, tokenizing assets, incentivization-design, resistance against attacks, and reducing counterparty risk. The very first blockchain was the Bitcoin blockchain, which itself was a culmination of over a century of advancements in cryptography and database technology. 

Blockchains have substantiated themselves as predominant answers for many instances, for example, securely coordinating data, resistance against attacks, reducing counterparty risk, tokenizing assets, incentivization design. The very first blockchain was the Bitcoin blockchain, which itself was a culmination of over a century of advancements in cryptography and database technology. 

How does blockchain work?

Transactions occurring within the same time frame on a blockchain network are grouped within a  cryptographically-secure “block” and broadcast to the network. A blockchain network is comprised of participant nodes that validate and relay transaction information. Miners use computing power to solve a cryptographic puzzle and validate the block of transactions. The first miner that successfully solves the cryptographic puzzle and validates the block receives a reward. Each verified block on a blockchain is connected to the previously verified block; creating a succinct, verifiable chain of blocks.

Explore our knowledge base to learn more about how a blockchain works.

Private vs. public blockchains

To answer the question “How is blockchain verifiable by the public and yet anonymous?” it is imperative to denote that there are two different types of blockchains; public (also known as permissionless blockchain) and private (also known as permissioned). Information can be encrypted in both private and public blockchains, yet there are differences in their anonymity levels. 

What are public blockchains?

The main Ethereum blockchain is public, or permissionless, meaning anyone can join the network and read the transparent public ledger. Transactions are encrypted and stored on multiple devices, or nodes around the globe. This decentralization, transparency, and append-only nature makes it almost impossible to tamper with data on the public blockchain.

What are private blockchains?

Blockchains began as open-source, public efforts. Private, or permissioned, blockchains were later developed to address the needs of private corporations and other administrative bodies when managing sensitive transaction data.

Private blockchains use the same technology as public or public blockchains, but require specific permissions to read, access, and write information on them. Therefore, access can be restricted, and information can be encrypted to protect confidentiality.

At the moment, a public instance of Ethereum is not designed to be anonymous; instead, it is configured to allow users to transact on a p2p basis. When using public Ethereum, users are aware that their Ethereum Public Account Address (ID) is tied to their transactions. The public Ethereum network offers pseudo-anonymity; for example, transactions are linked to addresses that correspond to public keys derived by user-held private keys, not by username or password.

Are transactions anonymous?

On public blockchains, a wallet can be linked to personally identifiable information, such as an IP address, email address, phone number, or delivery address once. Even if the transaction is randomized, data embedded in the software surrounding it can be used to identify the person behind a transaction. Running your own node can obfuscate the identity around transactions, but not entirely. 

On private blockchains, transactions are anonymous to the general public. Additionally, permissions and proprietary document transfer systems can be implemented to allow private transactions on private blockchains.

Table 1: A comparison of privacy characteristics of public blockchains, private blockchains, and traditional databases. 
What is being done to strengthen anonymity on private blockchains?

As public ledgers, Bitcoin and Ethereum require transactions to be visible by default. Certain technologies are currently being developed and tested for Ethereum 2 and Ethereum 3 that add an enclave of privacy to public Ethereum, namely, zk-SNARKs.

zk-SNARKs: providing an enclave of privacy on a public ledger

zk-SNARK stands for zero-knowledge succinct non-interactive argument of knowledge. zk-SNARKS are a cryptographic proof system that enable a user to verify a transaction without revealing the underlying data of the transaction, and without interacting with the user who published the transaction. In the context of a blockchain, zk-SNARKs allow users to maintain private transactions, while still validating the transactions according to the network’s consensus algorithm. Once implemented, organizations will be able to transact on the same network as their competitors in complete privacy, while enjoying the security of the public Ethereum blockchain.

Click here for a technical walkthrough of zk-SNARKs.

Retaining anonymity on a public blockchain 

zk-SNARKs are being integrated into Ethereum2, which will allow for a blockchain transaction to be sent privately, and verified while fully maintaining user anonymity. Industry experts anticipate that private and public blockchain networks will converge, due to increasingly robust and modular privacy and permissioning solutions, industry experts anticipate that private and public blockchain networks will converge. Enterprise Ethereum Alliance (EEA) launched the Mainnet Initiative which aims to accelerate collaboration between enterprises and the Ethereum community working on the public mainnet. One of the components defined in the EEA specification is the “Private Transaction Manager”, a permissioning subsystem that facilitates private transactions between authorized parties.

Until zero-knowledge proofs are widely implemented in Ethereum2.0, there are ways to securely interact, align, and cooperate between private blockchain networks and public blockchain networks. 

PegaSys Plus + Orion

PegaSys Plus is a commercially-licensed Java solution built on Hyperledger Besu Ethereum client built with enterprises in mind. PegaSys Plus’ security configurations give all of the benefits of Hyperledger Besu, plus database encryption, and a special feature called Orion. Orion, is a Java-based Private Transaction Manager that allows for the propagation of secure, private transactions between Enterprise Ethereum nodes.

AZTEC Protocol

The AZTEC protocol was created to enable privacy on public blockchains. It enables logical checks to be performed on encrypted values without the underlying values being revealed to the blockchain. The inputs and outputs of a transaction are encrypted using a series of zk-SNARKs and homomorphic encryption, yet the blockchain can still test the logical correctness of these encrypted statements.


Discover the state of privacy on Ethereum

The State of Privacy on Ethereum→


Enterprise Use Cases on Public Ethereum and Private Ethereum

Below are four projects that further illustrate the level of privacy and scalability that can be achieved utilizing public Ethereum and Enterprise Ethereum

Santander: Issuing the first end-to-end blockchain bond on Public Ethereum

Banco Santander SA used the public Ethereum blockchain to tokenize and securely register a $20 million bond.  

By issuing the bond on a public blockchain:

  • Once recorded on the Ethereum blockchain financial data cannot be altered retroactively without the consensus of the network participants
  • Banco Santander benefits from a drastic reduction of counterparty risk for delivery versus payment (DvP) settlements due to atomic hash time-locked contracts
  • Banco Santander saves on issuance costs and speeds up execution time by eliminating intermediaries
  • Banco Santander will have improved oversight and administration over current debtors

Read more about Santander’s bond on Ethereum.

Hala Systems: Reporting War Crime Information on Public Ethereum 

Hala Systems, a private enterprise, uses the public Ethereum blockchain to store war crime information. Sentry, Hala’s indication and warning system, utilizes a multi-sensor network to generate real-time situational awareness of threats in Syria. IoT devices located on the line of fire report their findings directly to the public Ethereum blockchain, where it lives on forever. 

By using public Ethereum:

  • Hala effectively removes itself from the core of the Sentry reporting equation
  • Hala proves that the information gathered has not been tampered with and/or modified in any way 
  • Hala automatically hashes a timestamp; a geotag of when and where the threat was detected
  • The data increases the efficiency of the Sentry tool
  • The information serves as a record and accurate report of war crimes in Syria

“From a prosecution perspective, it’s invaluable. We can now link bombardments and human casualties and all these war crimes; we can connect them to an airplane, which means we can connect them to a pilot, we can connect them to an airbase, to an air wing, to a commander.”

Tobias Schneider
Research fellow at the Global Public Policy Institute, studying chemical weapons and war crimes in Syria.

Why Hala Systems chose a public blockchain:
By using the public Ethereum blockchain, Hala secures its data integrity while allowing accountability-focused organizations to access, read, and reference reported data. Hala now provides reporting deemed valuable by the United Nations Office of the High Commissioner and the International Criminal Court. Hala’s reporting has been used to augment investigations into human rights abuses, war crimes, and violations of ceasefire agreements. 

Read more about Hala Systems

Project i2i: Enterprise Consortium Payment Network Driving Financial Inclusion in the Philippines 

Unionbank of the Philippines partnered with ConsenSys, Kaleido: Blockchain Business Cloud, Microsoft Azure, and several local banks to create an interbank platform to enable secure, instantaneous, and cost-efficient domestic remittances.

Since its launch, Project i2i allows banks to easily send and receive money across any bank account in the Philippines without relying on the international finance service infrastructure.

Why Project i2i chose a private blockchain:
As with all other banking transactions, transactions should not be visible to the general public. On Projecti2i, various banks transact with each other with different levels of permissions. The Project i2i platform consists of a web API and an Ethereum blockchain back-end. The API allows a bank’s API and core banking system to connect to the blockchain back-end. The connection handles key management and allows participants to construct and send signed transactions to the smart contract running on a private blockchain deployed through ConsenSys’ Blockchain cloud platform, Kaleido.

Read more about Project i2i: blockchain payments in the Philippines.

komgo: The World’s First Private Consortium for Commodity Trade 

komgo is a semi-private, party-decentralized private consortium for commodity trading. In partnership with ConsenSys, komgo created a blockchain-based trade financing platform and network-based. The result is a secure digital platform where authorized parties can store data, send transactions and exchange value or information, and send messages based on permissions.

Why komgo chose a private blockchain:
komgo’s solution was built to address the needs of all parties in commodity trading. komgo facilitates P2P transactions that all network participants should have access to, but not necessarily the general public. komgo acts as a single source of truth, allowing traders, carriers, banks, and other authorized participants to securely transact in a highly efficient, digitized way, resulting in industry-wide simplification of operations and standardized documentation.

For an extra layer of security, the komgo platform has a proprietary document transfer system called Kite that allows secure transfer without revealing the contents to the entirety of komgo’s network. This framework utilizes distributed ledger technology to tackle fraud, increase efficiency, and digitize trade.

Read more about komgo: Blockchain for Commodity Trade Finance.

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