Blockchain Privacy
What is blockchain?
A blockchain is a digital distributed ledger that consists of growing lists of records, called blocks, that are securely linked together using cryptography. The distributed database is managed by a peer-to-peer network of participants called nodes, who can access the digital ledger and its immutable record of transactions. Malicious uses are prevented by consensus mechanisms such as Proof of Work. Virtually anything can be tracked and traded on a blockchain network, reducing risk and cutting costs for all involved.
The concept of blockchain technology first emerged in 1991, with a paper explaining the use of a continuous chain of timestamps to record information securely. It was then proposed by Satoshi Nakamoto in the Bitcoin whitepaper, and now forms the bedrock of cryptocurrencies such as Bitcoin and Ethereum.
Bitcoin and Ethereum are some of many decentralized networks. Decentralization means that there is no central authority: the need for third parties is removed, and control and decision-making are transferred to the distributed network. Although there are many advantages to blockchain systems including increased cybersecurity, impossible data breaches, and immunity to tampering, they also raise questions regarding privacy. Is using a pseudonym enough to protect your data? What becomes of user privacy if everything on the blockchain is public?
Blockchain use cases for data privacy
The use of private and public keys is a key aspect of privacy in blockchain systems. They use cryptography to secure transactions, and each user has both keys. They are random strings of numbers, and no user can guess someone's private key from their public key, thus protecting users from hackers. The public key, essentially your 'wallet address', can be shared with other users without giving away any personal data, allowing you to transfer assets such as NFTs and cryptocurrencies. User identity is not revealed, the only thing that you can see in the past transactions on the blockchain is the public address associated with said transactions. Not using the same public address more than one is a tactic to avoid someone tracing transactions. Private keys are used to access funds and personal wallets, adding an extra layer of identity authentication and security.
In large organizations (think Google, Amazon, etc), a large amount of personal data is stored on single devices. If the system is hacked, lost or mishandled, users may lose all of their information, or it could leak to malicious users. Blockchain technology removes the reliance on a central authority through decentralization. Peer-to-peer networks allow users to control their data and own it.
Some methods such as Zero-knowledge proof (ZKP) allow for increased data security. With ZKP, the prover (one party) can prove the verifier (the other party) that a statement is true, without giving away any personal information nor information about the transaction itself. In typical public blockchains such as Bitcoin, the public information contained in a block could theoretically be used to link pseudonymous addresses (public keys) to users or real-world identities. Since zero-knowledge proofs don't reveal any information about the transaction (except that it is valid), it makes it a lot harder to link addresses to people.
Challenges
As the use of blockchain technology becomes more widespread, privacy concerns have come to the forefront.
One of the key features of blockchain technology is that it is a public ledger, meaning that all transactions are recorded and can be viewed by anyone on the network. This transparency is beneficial for many use cases, such as financial transactions and supply chain management, but for situations where personal data is involved, it can raise privacy concerns.
Many public blockchains such as Bitcoin and Ethereum, are designed to provide pseudonymity for users by using a public key for authentication and a private key for access control. However, as more data is added to the blockchain, it becomes increasingly possible to link pseudonyms to real-world identities, leading to privacy issues. Analyzing blockchain transactions could theoretically allow someone to link public keys to individuals.
Privacy laws, such as the General Data Protection Regulation (GDPR) in the European Union and the California Consumer Privacy Act (CCPA) in the United States, also have implications for the use of blockchain technology. Blockchains that process personal information are at odds with the clear distinction that these privacy regulations make between data controllers or data processors and individual data subjects. The distributed architecture of the blockchain means that it's often unclear which party determines the means of data processing. These privacy laws place strict requirements on how personal data is collected, stored, and shared, making it important for blockchain providers to ensure compliance. As an example, GDPR addresses the right to be forgotten, but blockchain's immutability is in direct conflict with this: blockchain data can't be altered.
In contrast, private blockchains, also called permissioned blockchains, are designed for use cases where privacy is a priority, and are generally used by businesses, presenting a simpler case. In these ecosystems, access to the blockchain is restricted, and the network is typically made up of known and trusted participants. This can provide a higher level of privacy protection as compared to public blockchains.
Hybrid blockchains allow for more flexibility in determining which data remains private and which data can be shared publicly. A hybrid blockchain can be compliant with GDPR and other local laws in order to protect user data privacy. This approach mixes characteristics of public blockchains and private blockchains.
Other examples of privacy concerns include smart contracts and the IoT. Smart contracts, which are blockchain-based self-executing contracts with the terms of the agreement directly written into code, can include personal data. Once the data is added to the blockchain, it becomes immutable and can be difficult, if not impossible, to remove. Blockchain technology is also used in the Internet of Things (IoT) to manage data from connected devices. However, as its use expands, more concerns arise regarding data management, and the storage and sharing of personal data.
As the use of blockchain technology becomes more widespread, it is important for companies, startups, and providers to ensure compliance with data protection laws and regulations, and for individuals to be aware of the privacy risks associated with blockchain technology. On-chain privacy is key to mass adoption, and it is important for the blockchain ecosystem to continue developing privacy-enhancing technologies such as zero-knowledge proofs and other cryptographic algorithms to ensure that the benefits of blockchain technology can be fully realized while protecting the privacy of individuals.