What are Confidential Transactions?

Confidential Transactions (CT) is a cryptographic protocol of the Zero Knowledge Protocol (ZKP) type designed to make cryptocurrency transactions on a blockchain private and anonymous.

Uno of the cryptographic protocols implemented to improve the privacy levels in the networks of some cryptocurrencies, is the Confidential Transactions (CT) o protocol of confidential transactions.

The application of this privacy protocol allows transactions that occur within a network to be encrypted or encrypted. In order that, although they can be verified and validated within the network, the exact amounts of each of the transactions carried out cannot be seen. At the same time it is also hidden from the issuers or recipients of such transactions.

Confidential Transactions Origin

In 2013, the CEO of Blockstream, Adam Back, proposed an idea that would allow addressing the privacy and fungibility problems suffered by the network Bitcoin. Since, despite the fact that the qualities of decentralization and transparency are of its best virtues, in terms of privacy they can become a negative aspect for users. Since anyone has the ability to review the Bitcoin blockchain in its entirety, and therefore search and associate transactions and registered addresses with others. What can generate a scenario in which several coins can lose their fungibility, and even their value. If they are associated with a blacklist for being involved in illegal activities.

Likewise, Gregory MaxwellReinforcing Back's idea, he suggested a solution that would address the privacy and fungibility problems of the Bitcoin network. This involved implementing a protocol to encrypt and hide the details of transactions, ensuring that only the parties involved would know the specifics of the operation.

How do Confidential Transactions or Confidential Transactions work?

In blockchain de Bitcoin When a transaction is made, the nodes can clearly verify that the transaction to be carried out does not exceed the amount of bitcoins received in an address. But in the case of transactions that occur within the network Monero, which implements the CT protocol, this process is much more complex.

When making a transaction in Monero, the data linked to that transaction is mixed and hidden together with others applying cryptography advanced. But even so, the network must be able to verify that said data is correct, without revealing the information to other users. For this to be possible, a scheme known as Pedersen Commitment, a type of homomorphic encryption that, in the first place, allows the completion of a transaction without the need to use addresses. And in addition, it also allows the verification of information through a result without having to reveal it until a future time.

Pedersen's (PC) commitments implement blind signatures instead of using addresses for transfers. Therefore, users involved in a transfer will use multi-signatures to approve a given transaction. Furthermore, PCs allow for the encryption of transaction inputs and outputs, ensuring that the signatures involved are shared exclusively between the sender and receiver. This prevents any third party from accessing the transaction details or related data, providing an unprecedented level of privacy within cryptocurrency blockchain networks.

Exploring confidential transactions in depth

Confidential Transactions (CT) were created in order to improve the crypto system of the block chains. For this, Confidential Transactions allow certain information to be written in which the parties can read without major difficulties. However, any actor external to the participants of the data exchange, would only see encoded information impossible to understand.

The only thing an external actor can do is verify, laterally, that the encoded information is true. And this is done through a mechanism that does not allow them to extract any useful information from the transaction itself.

To achieve this, the cryptographic function uses a hash to perform a commit (data submission) that you can later reveal. In this way, any person can generate a hash whose entry is not identifiable by any person, except who originated the hash. At this point a blinding factor, which is nothing more than random data that guarantees that the hash is not easily identifiable.

Next, the generated hash can be digitally signed to provide irrefutable proof that the secret exists and is known by a specific person. This way, you cannot change any of the information you have revealed through the hash. Thus, when we use the Pedersen commitment formulation, we get the following:

It is this simple formulation that guarantees the security of the data within a confidential transaction.

Confidential transactions in Monero

Monero is a cryptocurrency implemented in 2014 as an open source system focused on privacy and decentralization. Its main objective is based on ensure an optimal level of privacy to users within the network and, in guarantee the fungibility of your cryptocurrenciesSo that they can be used in any case, without the risk of being classified as undesirable if, for example, they have been involved in any illicit activity.

In order for these qualities to be possible within the network, Monero implements the Ring CT protocolwhich allows transaction amounts to be obfuscated instead of being split as previously occurred within the network.

What is RingCT?

The protocol known as Ring Confidential Transactions It is the one that allows the Monero network to hide all the data related to a transaction, such as the amounts sent, the sender and the recipient of the transfer. For this, RingCT combines the actual moneros (XMR) that the sender wants to send with many others that are randomly selected within the network. Thus creating a disorderly mix or combination that confuses other users (third parties) on the network, so they cannot see or determine the amounts transferred, or where these transfers come from or where they are sent.

That protocol was implemented in 2017, and from that same year its use on the Monero network became mandatory.

Implementation of confidential transactions on the Monero network

Monero implements several elements in its network that allow it to guarantee a high level of security to its users. First, the network implements the ring signaturesIn a group transaction, multiple participants or users form a group. Although each user possesses their own public and private keys, only one user signs the transaction at the time of the transfer. However, this signature is kept secret, preventing other users from seeing who performed the transaction.

Similarly, the Monero network hides the identity of the recipient of the transfer. It doesn't use addresses to send funds; instead, transfers are made directly on the blockchain. For the recipient to claim their funds, they must possess two keys: a spending key and a view key. With these two keys, the recipient, and only they, can scan the blockchain to find the transaction and add it to their wallet.

Lastly, to maximize security and privacy levels within the network, Monero implements the Confidential Transactions (CT) protocols to conceal the amounts transferred in transactions. This protocol allows the miner network to verify that the transferred coins were not created out of thin air. It also verifies that they have not been used in a previous transaction. In other words, it prevents the following from happening double-spendingEven so, both the network and observers can verify that the transactions are valid and have been carried out in compliance with all network rules. However, without revealing important data such as the amount, the recipient, or the sender of the transaction, it becomes almost impossible to trace these transfers.

Other implementations in blockchains networks

In addition to MoneroThere are other networks that implement CT protocols to guarantee greater privacy in their systems. For example, MimbleWimble It uses CTs to verify to the network that users are not creating coins out of thin air. And at the same time, they guarantee a high level of privacy in the operations carried out. Well, the nodes do not reveal information about the amounts transferred or the parties involved; They actually use blind signatures to complete the transaction verification process while maintaining complete privacy throughout the process.

Likewise, the sidechain Liquid Network uses CT protocols to maximize network privacy. While ensuring much faster and faster transactions on its blockchain, which operates in parallel with the Bitcoin network.

On the other hand, there is no doubt that the implementation of the CT protocol in the Bitcoin network would bring great contributions and benefits to it. Well, first of all, confidential transactions would make the most widely used cryptocurrency blockchain of all much more private and secure. Likewise, the application of this protocol would allow the use of Bitcoin coins without any kind of restriction or classification; In other words, it would provide a high level of fungibility to all bitcoin coins.

However, although this would be a great advantage for the network, it should also be borne in mind that adding this protocol to the system would greatly increase the size of transactions. A luxury that, at the moment, cannot be given in Bitcoin due to the limited size of its blocks. Furthermore, implementing this protocol implies making a change in the network with a hard fork. Something that requires many community members to agree to do.

The strategic value of confidentiality for companies

While blockchain's transparency is one of its greatest strengths for public auditing, for the business sector it represents one of the biggest obstacles to its widespread adoption. In a corporate environment, the complete exposure of financial flows is not just a matter of privacy, but of competitive survival. This is where confidential transactions transform blockchain from an open ledger into an institutional-grade tool.

Protection of the commercial and logistics strategy

For a company, operating on a public network means that any competitor, through on-chain analytics, could track payments made to suppliers. If a competitor knows how much a company pays for its raw materials and how often, they can deduce its profit margins, production volume, and inventory capacity. In this case, confidential transactions allow companies to use the blockchain infrastructure to settle payments immutably while keeping the amounts hidden, thus protecting their trade secrets and competitive advantage.

Payroll management and employee privacy

Paying salaries with cryptocurrencies is a growing trend, but doing so on a completely public network compromises employee privacy. Without confidential transactions, any employee could see the salaries of their colleagues or superiors simply by tracing the company wallet address. By implementing protocols that conceal transfer amounts, organizations can ensure compliance with data protection regulations and maintain salary confidentiality, a fundamental pillar of human resource management.

Compliance and security against malicious actors

Finally, the use of publicly visible amounts makes companies targets for targeted attacks. A corporate wallet displaying multimillion-dollar balances and constant transactions is a magnet for phishing and social engineering attempts. Adopting confidential transactions allows companies to operate with a "low profile," reducing their exposure to malicious actors. Furthermore, this technology does not prevent auditing; many implementations allow the use of "view keys" that the company can voluntarily provide to auditors or regulators, achieving the perfect balance between business privacy and regulatory compliance.