Protecting Privacy on Blockchain Payment Networks

   2019-09-17 22:09

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By Zhengpeng Hou, founder of project Suterusu. He is an open-source veteran with more than one decade of successful experience in contributing and building community. He has also worked for Linux distribution companies like Ubuntu in the past and devoted himself to the blockchain industry. He specializes in open source project development, IoT, and cloud computing and is a true believer in decentralized technology.



Around the world, centralized financial institutions continue to facilitate the vast majority of economic activity. These conventional banks and commercial service providers exert a far-reaching influence that permeates our everyday lives. Although existing financial infrastructure continues to enable global economic activity, cracks have begun to show in the foundation. Since the great recession of 2009, many have been seeking to put power back in the hands of consumers.

As trust in government-backed currency wanes, cryptocurrency has become increasingly attractive to those looking for alternatives. This decentralized technology transforms conventional finance by effectively removing intermediaries from financial transactions. As a result, consumers can utilize borderless currency on their terms. While this concept may be foreign to some, the use of cryptocurrency continues to accelerate. According to the Cambridge Centre of Alternative Finance, there were 35 million crypto-asset users following the third quarter of 2018. This figure represents a 94% increase over the 2017 user count.

Source: 2nd Global Cryptoasset Benchmark Study

Although these numbers suggest robust growth, there are significant challenges to overcome when using crypto-assets on blockchain-powered payment networks. Here’s a look at how these networks function, the resulting benefits and obstacles, and how emerging solutions aim to better-protect consumer privacy.

Blockchain for Payment Networks

The recession of 2009 has been a catalyst for change in the global financial system. Since the first bitcoin came into circulation that year, blockchain-based payment platforms have been prolific. This specific use case continues to generate ample investment due to the potential for lucrative returns via mass adoption. The promise of big profits is likely why 49% of all crypto-asset service providers facilitate payments.

Source: 2nd Global Cryptoasset Benchmark Study

However, there are both benefits and obstacles to overcome when utilizing these emerging payment networks.

Benefits of Blockchain Payment Networks

Transaction Fees

Traditional banks and financial service providers have a reputation for charging high fees. As a result, lowering these costs has become a popular marketing tool for many institutions. For both consumers and merchants, fees can range from 1.5% to 3.5%.

However, because blockchain networks operate without an intermediary, payment networks charge only a fraction of this amount. According to Blockdata, merchants can reduce their processing costs by 70% by using crypto payments. This dynamic is likely why 57% of crypto-asset service providers offer merchant payment solutions.

Settlement Period

Conventional financial institutions typically require 1-3 business days to process a transaction. When using a blockchain-based payment network, settlement occurs within minutes or even seconds.

Blockchain Payment Network Obstacles

Cryptocurrencies are notoriously volatile; the most recent crypto winter was a stark reminder of this. In contrast, government-backed currencies are almost always more stable. As such, despite the emergence of stablecoins, fiat currency remains a better store of value.

Network Scalability

One of the most prominent issues facing blockchain payment networks is scalability. Due to their decentralized nature, blockchain networks remain far slower than conventional payment platforms such as Visa and Mastercard. Although settlement may occur quickly on a blockchain network once it begins, a backlog of transactions can occur depending on network congestion.

Privacy-Preserving Blockchains

In addition to the more noticeable shortcomings of blockchain payment networks, user privacy remains a considerable hurdle to widespread adoption. The distributed, immutable, and transparent nature of public blockchain networks requires the use of privacy-preserving mechanisms.

As one such privacy-preserving mechanism, a Zero-Knowledge Proof (ZKP) is useful when “a Prover wants to convince a Verifier that a statement is true without revealing any further information.” In the context of a payment network, this is the equivalent of a seller knowing the buyer has adequate funds to complete a transaction without the buyer disclosing anything more.

Succinct Non-Interactive Zero-Knowledge Proofs (zkSNARKS)

Succinct Non-Interactive Zero-Knowledge Proofs (zkSNARKS) improve on ZKP functionality. When using zkSNARKS, the proof size of a “statement” is significantly shorter, which is what succinct means. This privacy-preserving mechanism is well suited to financial applications because such transactions are typically simple, requiring only the addition and subtraction of numbers. Although there are many other cryptographic protocols under development, each aims to preserve user privacy on blockchain networks.

Balancing Privacy and Decentralization

As new users continue to enter the crypto asset ecosystem, companies will undoubtedly continue their pursuit of privacy-preserving blockchain networks. There are both economic and reputational incentives for delivering payment solutions that offer privacy and decentralization. Interoperability between these privacy-preserving networks presents another layer of immensely valuable functionality awaiting exploration.

Regardless of how these future platforms evolve, it’s clear momentum for decentralization is building today. By circumventing intermediaries, both merchants and consumers are poised to retain more of their hard-earned money. And as companies like Facebook and IBM continue their foray into crypto-assets, mainstream adoption appears closer than ever.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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