The monstrous losses incurred by many during crypto winter and the financial shenanigans that come to light changed a lot of minds about crypto regulation. Nevertheless, folks doing business on the blockchain would still like some privacy. An idea that has attracted attention is the use of privacy pools. What are privacy pools and how would a privacy pool work? Can these balance privacy and regulation to a degree that everyone is happy?
What Is a Privacy Pool?
The idea of privacy pools comes from one of the co-founders of Ethereum, Vitalik Buterin. His research paper on this subject focuses on maintaining compliance with coming regulatory requirements while including features that provide privacy. His work includes contributions from University of Basel researchers, Jacob Illum of Chainalysis, and Ameen Soleimani of Tornado Cash. The goal is to isolate categories of transactions so as to separate lawful activities from criminal ones. Ideally this would provide proof to regulators that one’s crypto funds are not intermixed with those of criminals. The technique at the core of this idea is a “zero knowledge proof.”
What Is a Zero Knowledge Proof?
The rationale of this technique is to provide a piece of information about a crypto transaction to a regulator. That piece of information would indicate that a transaction was legitimate and not criminal. It also would not identify the person or persons involved in the transaction. This would be done using cryptography. Such a proof would demonstrate that a transaction was not associated with an address that was itself associated with illegal activity. At the same time this process would maintain the privacy of those involved in the transaction.
Sorting Out Good From Bad Crypto Wallet Addresses
Another aspect of privacy pools would be association sets. These would be cryptocurrency pool wallet address subsets. The rationale would be to include only so-called good depositors and exclude “bad” depositors. What regulators would see would be that “good” sources were involved in transactions and not “bad” sources. Trusted third parties would be responsible for analyzing or evaluating these association sets and contributing wallets within the pool. The technology involved would be that currently used in transaction analysis for anti-money laundering operations.
Inclusion Versus Exclusion Proofs for Privacy Pools
This means that transactions would be analyzed and sorted based on evidence of low and high risk. Low risk transactions would go into the inclusion or membership group and others would be excluded. What this involves is looking at lots of transactions related to individuals wanting entry into the privacy pool. A person would need to be “clean” in regard to where transactions came from or went to. A single bad transaction could exclude a person from entry into a group.
Would Privacy Pools Provide Privacy and Satisfy Regulators?
Except for the trusted source that audits the pool, a privacy pool would appear to provide what it says it will. This would be like a bank that does not disclose information about its depositors but has the information, nevertheless. What this sort of pool would not provide is complete and utter privacy because it would need to satisfy regulators. Regulators would like crypto exchanges to know their customers. Even though the exchange keeps such information private, it is available to regulators. Such would be the case with a crypto privacy pool. It remains to be seen if regulators will be satisfied with the word of a “trusted source” other than themselves!
SlideShare Version – How Would a Crypto Privacy Pool Work?