Definition of private address?

One of the common misconceptions is that cryptocurrencies are completely anonymous, which is not entirely true. While each address is made up of random letters and numbers, and the sender only needs the recipient’s address, blockchain ledger technology works in such a way that all transactions are public. The anonymity of the user will be affected if other users can be traced from their address to the user. This factor needs attention, especially during crowdfunding, as when your token goes public, this increases the likelihood of your identity being revealed and all associated cash flows coming in and out.

Private addresses can solve this problem by providing unique identifiers that are used only once, even if multiple transactions are sent to a single recipient. The private address will act as a proxy and provide anonymity in the crypto environment. Peter Todd, in 2014, proposed the concept of a unique disposable address using public and private keys, and some private addresses were fabricated from the “elliptic-curve Diffie-Hellman” protocol. Users can keep their anonymity by using private addresses to make private transactions, and recipients access those transactions using a special spending key. This preserves the same level of privacy as generating a new address for each transaction, and interaction is not required.

The purpose of creating private addresses

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One thing to keep in mind is that tracing from transactions to users’ wallets is not entirely a bad thing, as this helps blockchain analysis companies or law enforcement agencies to detect violations of the law. Like money laundering, it’s just the ability to track down criminals.

The use of a private address can be understood as sending a letter in the mail or using a virtual private network (VPN) to conceal personal information and prevent tracing of incoming transactions.

Benefits of creating private addresses

Private addresses are a better security measure when compared to other methods like coinjoin — grouping transactions — as it only works on Bitcoin and depends on the other user to merge transactions, and coin mixers — scrambling different transactions to prevent tracing from transactions — because of the limitations of the solution and have been used to steal cryptocurrency. Private addresses can be used in many different scenarios, such as trading NFTs, POAPs, and ENS domains. As Vitalik Buterin, the founder of Ethereum, once said, if you want to receive POAP, then you just need to send the viewing key without giving the right to sell those POAPs.

Private addresses are generated in certain crypto wallets, or by different protocols like Monero. But because many vendors are concerned about the legal perspective, adding this app to wallets is still a matter of controversy.

Current anonymous address plans: Monero

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Monero is a blockchain with enhanced anonymity and uses a three-tier system to obscure transactions and make them untraceable. This system includes private addresses, ring signatures and RingCT. Ring signatures use multiple public keys to mask transactions, and RingCT enhances this feature with multi-tiered signatures to mask the amount, origin, and destination of a transaction. These functions make it difficult to trace the transaction to the user.

Monero uses a public address generated from a private viewing key and a private spending key, which causes incoming transactions to go through a protected address on the blockchain. Users can also adjust the transparency level and share their keys so that others can view their balances. For privacy, the sender creates a special destination address, which is used only once for its transactions, and requires no interaction with the recipient. Only the people in the transaction know the destination of the funds, and it is impossible to trace those transactions to the public address of the recipient or related addresses. Furthermore, there are wallets that only provide viewing functionality and do not provide spending keys, which allow users to confirm transactions and monitor incoming donations.

Create a private address on Ethereum

Imagine that Alice wants to send ETH to Bob privately, here are the steps quoted from the research source:

1. Bob generates a spending key and a stealth meta address for his name on Ethereum (e.g. bob.eth). He then passes the meta address to Alice or stores it on ENS

2. After knowing the meta address (or looking it up on the ENS), Alice generates an anonymous address for Bob through a computation involving a single-use ephemeral key known only to her.

3. Alice then transfers the ETH to Bob’s anonymous address. In this process, Alice creates and publishes an ephemeral public key — an encrypted data on the blockchain.

4. Bob will scan the registry of all ephemeral public keys to find the recipient’s address. During this process, each ephemeral public key will be combined with the original spending key to generate an anonymous address and check if it holds any assets. When a matching address is detected, Bob generates and remembers the spending key for that address.

What about transaction costs?

Ethereum’s gas fees are an obstacle to the adoption of anonymous addresses, which are empty addresses where digital assets are received. Owners cannot transfer assets to other places because there is no ETH in the private address to pay for gas fees. There are two solutions proposed by Buterin: zero-knowledge proofs and transaction aggregators. But zero-knowledge proofs are considered expensive. Transaction aggregators are low-cost, reliable, and have few worries on the legal side. This solution works by selling the user a set of tickets to pay the cost of gas, and there are no costs. To transfer assets from a private address, the user submits a prepaid ticket to the aggregator, which will bundle the transaction into a continuous bundle until it is accepted as a block.

Legal concerns

Private addresses in cryptocurrency transactions are also a subject of debate, as this function can be used to attract illegal actions such as money laundering or tax evasion. The agency is currently developing measures to detect lawbreakers, such as Operation Hidden Treasure by the US Federal Tax Service. But although many crypto-related scams have made the news, the majority of crypto users are honest people. According to Chainanalysis, the percentage of transactions involving violations of the law increased by only 0.09%, transitioning from 2021 to 2022, when the number of law violations peaked, with 0.24%.

The need for simplification

The lack of a solution that makes it easy for users of anonymous addresses to access this functionality has resulted in lag and increased transaction costs unless grouped. In the future, the advanced Layer 2 network and the improvement of Ethereum could simplify the process.

Source:

Anna. (2023, March 24). Stealth address guide: Keeping crypto transactions private. CoinLoan. Retrieved March 29, 2023, from https://coinloan.io/blog/stealth-address-guide-keeping-crypto-transactions-private/