You must have heard that some of the selling points of blockchain technology or decentralized ledger (DLT) are guaranteed privacy and anonymity. However, is this really accurate, is true Ethereum privacy even a thing?
This article explains what Ethereum, in its current form, truly offers in terms of private transactions. It also sheds light on the Ethereum Improvement Proposal, EIP-7503, and how it plans to introduce true Ethereum privacy. Let’s dive in!
Why is On-Chain Privacy Important?
In the DLT space in general and in the Ethereum sphere in particular, Ethereum private transactions encompass two things: untraceability, where a third party is unable to identify the sender, and unlinkability, where a third party is unable to link a transaction to the recipient.
Several solutions provide a path to unlinkability and untraceability, each falling into one of two categories. For untraceability, which involves concealing the addresses of senders, there are solutions like cryptocurrency mixers and CoinJoin. On the other hand, unlinkability solutions include protocols that range from privacy coins to sidechains with enhanced privacy features. Notable examples are Monero, Zcash, and Liquid Network.
Now, Why is Privacy Essential?
You shouldn’t wait to lose your privacy before making plans to secure it. In many situations, keeping financial information private is important—to protect your earnings from potential theft, make anonymous donations, or simply maintain control over what you choose to share. On-chain privacy matters because everyone should have the freedom to decide how much of their personal information they wish to disclose.
Spoiler: Ethereum isn’t Private or Anonymous (yet)
Privacy means your confidential transactions can be traced back to you, but the details of your transactions remain hidden. It’s like people knowing you have a safe but not having the code to unlock it.
On the other hand, anonymity means that your public actions are separate from your public identity. Anonymity is because whereas the record of transactions is visible to all network participants, the exact person carrying out the transaction can’t be pinpointed because everyone sees a string of alphanumeric characters.
Now, Ethereum isn’t private because there’s a detailed record of every single transaction carried out on the blockchain. It also isn’t anonymous because information about the accounts transacting is also public, despite being identified by addresses.
The word that captures the gist of Ethereum perfectly is pseudonymous—it allows you to operate under a false or made-up identity.
Walking Towards True Ethereum Privacy with EIP-7503
The EIP-7503 aims to achieve true Ethereum privacy at the protocol level by destroying the link between a transaction’s sending and receiving addresses.
EIP 7503 introduces a system allowing users to burn ETH (by sending it to an unspendable address) and follow this action up by generating a ZK SNARK proof to prove that the user did indeed burn the ETH. If the proof of this transaction is verified, an equal number of tokens burned is newly minted to the user’s chosen address.
The proposal makes tracing the newly minted token impossible by creating an anonymity set, a vast pool of Ethereum addresses with ETH with no outgoing transactions on-chain. So, it appears that any of those addresses could be the address that originally sent the ETH.
Why is this Proposal Important to Ethereum?
Private Transactions
The whole point of EIP-7503 is to allow users to privately transact on Ethereum by destroying the link between the sending and receiving addresses. This could be a game-changer for individuals looking to conduct confidential transactions, such as philanthropists making anonymous donations.
Escaping Regulatory Sanctions
Privacy-centric protocols don’t have the best reputation. In 2023, two high-profile attacks that bled well over $250 million were allegedly linked to Tornado Cash. This mishap led to sanctions from the Office of Foreign Assets Control (OFAC). There has also been regulatory pressure mandating exchanges to delist privacy coins.
EIP-7503 could be the solution. With Ethereum’s influence, it stands a better chance of delivering privacy features than past attempts—offering a viable alternative to cryptocurrency mixers.’
Enabling Private DAO Payments
DAOs thrive on transparency, allowing anyone to track contributor payments on the blockchain. This fosters accountability and helps prevent financial mismanagement. However, as DAOs evolve, they may need to keep certain financial details, such as contractor payments, private. Such a need propels EIP-7503 up the stack of suitable use cases. It enables privacy while still allowing verification through cryptographic proofs, striking a balance between confidentiality and trust.
Drawbacks of EIP-7503
Potential Regulatory Compliance Issues
While there’s optimism that the proposal won’t face regulatory hurdles, its acceptance remains uncertain. The public is already sceptical about privacy solutions, and bad actors could exploit EIP-7503. However, there might be ways to refine the proposal to manage such foreseeable challenges.
Centralization risks with ERC-20 tokens
Since EIP-7503 requires changes to Ethereum’s core protocol, an easier alternative could be implementing it via an ERC-20 token. However, this could introduce issues like centralization and blacklisting, which weaken privacy. On the other hand, an ERC-20 version could allow developers to block payments to blacklisted addresses. However, such moves wouldn’t be possible at the Ethereum protocol level without major trade-offs.
High R&D costs and Verification Risks
Building the cryptographic infrastructure for private transactions takes significant effort and resources. In addition, bug infiltration could allow people to mint an unlimited amount of ETH, crashing its value.
Another challenge is verifying older blockchain data, which could be solved with either a system-level contract (requiring major changes) or an oracle. This approach could introduce risks associated with trust. If these verification methods fail, honest users might struggle to redeem funds, while bad actors could exploit the system.
Conclusion
Ethereum privacy is far from perfect, but EIP-7503 represents a promising step toward solving the network’s anonymity problem. By breaking transaction links using zero-knowledge proofs, Ethereum can offer true private transactions while maintaining its usability and security. However, challenges such as regulatory concerns, potential centralization, and development costs need to be addressed before adopting this proposal.
As Ethereum evolves, finding a balance between privacy and compliance will be crucial. Whether EIP-7503 becomes the definitive Ethereum privacy solution remains uncertain, but it’s a strong contender in the ongoing quest for Ethereum anonymity solutions.
For more details about EIP-7503, refer to the original version of this article which was first here.
