Privacy is Privacy… Right?

There is a great deal of discussion around privacy in many aspects of our daily lives but there is none more important than that of our financial privacy. 

This article will give a brief overview of the different types of privacy offered in cryptocurrencies today. The different approaches have varying degrees of effectiveness and will be laid out below.

Opt-in Privacy

This approach has been taken by several well-known projects and works by having transparent accounts and transactions as the standard, this is similar to how Bitcoin works. A user can choose to carry out a transaction using a shielded (private) address, however, this has a couple of issues for anyone who wishes to maintain their privacy. Having to opt-in creates additional user friction and also means that addresses can be blacklisted or prevented from carrying out shielded transactions. In order for a transaction to be fully private, it also requires both parties (sender and receiver) to use the shielded addresses. 

Additionally, the in/out nature of this setup prioritizes the group behavior over the individual behavior. The privacy set is determined by the number of shielded addresses and transactions in use, and given the additional friction of opting in, the incentives are stacked against privacy. As an example, if only two wallets use two shielded addresses to send one shielded transaction network-wide, their interaction would be completely visible due to the lack of network participation in privacy. This makes it transparent despite their individual use of privacy technology.

2nd Layer Privacy

This approach gives users of non-private cryptocurrencies (e.g. BTC) the ability to use an additional service or a ‘layer’ to obfuscate on-chain interactions and provide a certain degree of privacy, this is determined by the routing and discovery properties and technologies of the second layer. Whilst it is still early days for the development of these protocols they come with several drawbacks including:

• Additional fees and user friction
• Requires access and opt-in to 2nd layer service
• 2nd layer interactions with the blockchain have unique properties, lowering the privacy effect against analysis services

Privacy by Default

Default privacy means just that and is the most user friendly and efficient way to maintain it. This is the method Haven (and Monero) employ to maintain a user’s financial privacy as it’s not possible to accidentally send an unshielded transaction. Every address, balance and amount sent or received is private by default. There are several advantages to this including:

• No additional fees or user friction
• No requirement to trust 3rd party service
• Not possible to blacklist addresses or coins giving 100% fungibility
• No need to convince the network to focus on privacy opt-ins
• Reliable use beyond 2nd layer experimentation stages