In the world of cryptocurrency where ideas churn around like a boiling pot, the topic of privacy is certainly one of the hot ones. The need for financial privacy has been demonstrated time and time again, and many cryptocurrencies today make it their main focus. On the flip side, with total privacy, accountability becomes a seemingly impossible task. Giving people the privacy they need and still maintaining some form of accountability is a difficult trade-off. The blockchain project æternity (Crypto: AE) is leading the field with creative solutions to this challenge.
The primacy of privacy
Privacy is often misunderstood in our society. We tend to focus on the concept of hiding something, instead of the real purpose, which is to protect. In order to conduct business and interact with other people, we must give them information about us. How much information we reveal and to whom is the critical question. Anyone can be trusted to a small extent, but practically no one can be trusted completely. Privacy is simply the practice of managing our risk by controlling how much information we give to each individual person. Cryptocurrencies have developed as fantastic ways for individuals and businesses to transfer wealth with a high degree of privacy.
Adapting for accountability
Privacy is a two-edged sword however. If individuals can hide an untrustworthy action completely, the injured parties have no recourse. The very fact that no one can be trusted completely reminds us of the need for accountability between individuals. Typically, societies institute some form of institution with official monopoly on force that also has the ability to access any information it deems necessary to reach a decision (i.e. a police force). The rub comes in when someone cocks their head to the side and asks, “who polices the police?” Ultimately, every supervising agency is run by people that cannot be completely trusted. The difficulty with giving any human institution an official monopoly on power is that the only restrictions become internal. In other words, there are no effective outside restraints. History is full of examples of corruption in the upper echelons of societal power and the question of accountability merits a real and practical solution.
This issue puts human societies in a bit of a quandary. We need privacy, because others cannot be trusted. We need accountability because we cannot be trusted. Blockchain-based cryptocurrencies address this problem with a highly innovative solution. They create a virtual financial world with rules that cannot be broken. Anyone who wishes can interact with this world, but they do so knowing that any transaction they attempt that is not according to the protocol will simply be ignored. However, any transaction within the operating parameters of the currency becomes immutably added to history through the blockchain and simply cannot be changed. Cryptocurrencies are basically decentralized computers. They are always accountable to their code and it is the relentless adherence to that code that makes their operation so dependable and trustworthy.
Continuing to complicate
We just can’t leave well enough alone, however. As soon as we get a system that works, we just have to push the boundaries. The notion of a self-policing immutable system for organizing financial exchanges was too tempting not to tinker with. When the first cryptocurrency, Bitcoin (Crypto: BTC), was introduced in 2009, there were a few hiccups. After some tinkering however, the system began to function very well. Then there came a few forward thinkers who began trying to push this new system even further. Vitalik Buterin was one of those developers. Growing frustrated with the limitations of the Bitcoin protocol, he developed Ethereum (Crypto: ETH). Because of its Turing complete code base, instead of just financial transactions, any type of computing process could be run and validated by its blockchain. As everyone expected, this led to a massive explosion of creativity and many different projects sprang up serving a multitude of networking and financial needs.
Privacy pops up again
Difficulties with this new development are now becoming apparent. Blockchains are, by their very nature, public. Ethereum smart contracts must be written, stored, and enforced on the blockchain. The details of these contracts, and how they work, are now public. Each business and the inner workings of its structure is now public. That is not the only challenge, however. Blockchains live on what is known as universal consensus. For a transaction to be true on the chain, every single user has to be aware of it and approve. Making every single Ethereum user aware of every detail of every type of contractual transaction is not only unnecessarily resource intensive, it is also an unnecessary loss of privacy.
Money versus contracts
The universal consensus of blockchains is essential for simple currency transactions. This is true because each and every user has a stake in how valuable the currency as a whole is. If it is counterfeited, or inflated, in any way, each user has been stolen from. It is therefore the obligation of each spender to make the rest of the community aware that money has been properly spent. Accountability to each and every user is essential and maintained. Contracts are different. They should naturally be much more private. Contracts are full of details about how the parties should act, what happens if they do this or that, and what the consequences will be. Contracts should be only visible to the people that are directly involved. While that community has a need to know that money was properly spent, they have no need to know why it was spent.
The æternity dual-layer approach
æternity is a platform cryptocurrency that is being specifically designed to address this dual layer of contracts and money transfer. æternity is building into their code from the beginning the concept of state channels. According to their whitepaper, state channels: “operate on the basic principle that in most cases, only the people affected by a transaction need to know about it.” These state channels have set rules that they follow and are accountable to the blockchain, but their contents are not public knowledge. All of the smart contracts with their accompanying information are kept and operated in these channels. The only thing that gets published to the æternity blockchain are simple currency transactions using æternity’s cryptocurrency. This approach enables two peers to participate in a contract that is visible only to them, improving privacy significantly.
Pushing privacy, accountability and options
Maintaining the distinction between what needs to be private and what needs to be public has several benefits. The first is managing risk. There have been a number of hacks on Ethereum smart contracts. The Ethereum system itself is sound, but the contracts written on it have had weaknesses. These contracts are public so anyone can see how much currency is controlled by these contracts. If these contracts had been in a private state channel, it is far less likely they would have been a large target. Privacy of the details has the added benefit of being less resource intensive. The æternity blockchain only needs to achieve universal consensus on currency transactions. This makes for a much quicker and more efficiently operating blockchain.
Sorting a complex future
Business in the human world requires a proper balance between privacy and accountability. The only way to do this is to understand the purpose and scope of each of these ideas. The questions of what should be hidden from whom, and who should be accountable to whom, are difficult ones to answer. æternity is providing business with some unique options in the process of conducting business with transparency and accountability, while still maintaining a healthy amount of privacy.
To learn more about æternity, visit www.AEternity.com
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