Transparency vs. Privacy on the Blockchain
Blockchain is often noted for its transparency, but how can something transparent simultaneously be lauded for its privacy?
In order to make sense of this, we must take a deep dive into its underlying technology, known as distributed ledger technology or DLT. In essence, DLT can best be described as a database shared amongst computers around the globe, individually known as nodes. These nodes each store a copy of the blockchain’s ledger that is updated as they continue to fulfill their duty to the network of validating transactions. If a node is somehow compromised, a sufficiently decentralized network will continue to run as it did before, calling on other nodes to finish the job and keep the ledger up to date while the affected node prepares to come back online. This practice helps minimize looming threats to the integrity of blockchain networks. Blockchains employ DLT to make current and historical transaction data visible and accessible to anyone using the network, serving as an immutable, on-going receipt of all transaction activity.
DLT also helps solve a critical problem known as the double-spend problem. Double-spending refers to the action of sending the same digital asset (token, coin, NFT, etc.) to multiple different addresses. DLT acts as a safeguard against fraudulent transactions in that there are numerous other nodes validating the same transaction which is then checked against the ledgers of other validating nodes. In fact, DLT has even given rise to smart contract technology that has effectively removed the need for trust between two transacting parties entirely.
So if every transaction is visible, wouldn’t most consider that a privacy concern?
Privacy is achieved largely through the use of public and private keys. Although every transaction is visible on the blockchain using a tool called a block explorer, encryption obscures the link between the public key to the private key. This mechanism makes it possible to view both current and historical data as node operators continue to validate transactions and produce more blocks. The transaction data recorded, however, is only the value of the transaction between entities, not the goods or services transacted for, so anonymity remains intact to an extent.
Bitcoin and Ethereum are the two most notable examples of distributed ledger technology in action. So how have the two networks been able to achieve vastly different use cases deploying the same technology? The answer can be found by looking at the transaction data stored in their distributed ledgers. Transactions on blockchains often have small amounts of data appended to them. This data aids in the execution of the blockchain’s objective. Data appended to Bitcoin transactions provides basic context around the peer-to-peer transactions it enables, almost like a form of notetaking. Ethereum, on the other hand, was built to develop and support an ecosystem of decentralized applications, so it requires additional data to be appended to each transaction in the form of executable code. This additional data is what makes it possible for users to interact with smart contracts and for smart contracts to interact with each other.
With a basic understanding of DLT, it becomes much clearer how transparency and privacy can coexist and why they are considered cornerstones of Web3. Without it, we would not be experiencing the paradigm-shift we are today that has led to the blossoming of a cryptocurrency ecosystem.