1. Blockchain Privacy Gap and Demand Analysis
1.1 Lack of Blockchain Privacy Capabilities
Blockchain technology achieves decentralization and transparency through distributed ledgers and consensus mechanisms. However, this transparency characteristic simultaneously leads to serious privacy leakage issues. This section systematically elaborates on the deficiencies of blockchain systems in privacy protection from the perspectives of theoretical analysis and empirical research.
1.1.1 Complete Transaction Transparency
Problem Description:
The public and transparent nature of blockchain systems leads to complete exposure of transaction processes, specifically manifested as:
- Transaction Transparency: All transaction records are publicly viewable on-chain, satisfying Public Verifiability, but leading to complete exposure of transaction information
- Address Correlation Analysis: Through on-chain analysis tools and heuristic algorithms, different addresses can be correlated to infer user identities, achieving De-anonymization
- Transaction Pattern Recognition: By analyzing metadata such as transaction frequency, amount, and time, user behavior patterns can be identified, achieving Behavioral Analysis
- Relationship Network Exposure: Transaction relationship networks (Transaction Graph) are completely exposed, unable to protect business secrets and personal privacy
Privacy Risk Analysis:
From the perspective of privacy protection, transaction process transparency brings the following risks:
- Business Secret Leakage: Enterprise payment information leakage, competitors can infer business strategies and operational models through on-chain analysis
- Personal Wealth Exposure: Personal wealth information is completely exposed, may become attack targets, leading to security risks
- Transaction Relationship Exposure: Transaction relationship networks are exposed, affecting business cooperation and privacy protection
- Investment Behavior Exposure: Investment behavior patterns are exposed, affecting the effectiveness of investment strategies
1.1.2 Complete Digital Asset Exposure
Problem Description:
Digital assets' storage and circulation on blockchain are completely transparent, specifically manifested as:
- Balance Transparency: All addresses' asset balances are publicly viewable on-chain, satisfying Auditability, but leading to complete exposure of wealth information
- Asset Origin Traceability: Through transaction history analysis, asset origins and circulation paths can be traced, achieving Asset Tracing
- Asset Distribution Exposure: Users' asset distribution across different chains is completely exposed, global asset allocation can be inferred through Cross-Chain Analysis
- Portfolio Analysis: By analyzing asset holdings and transaction patterns, users' investment portfolios and risk preferences can be inferred, achieving Investment Strategy Inference
Privacy Risk Analysis:
Privacy risks brought by digital asset exposure include:
- Wealth Exposure Risk: Wealth information is completely exposed, may lead to Targeted Attacks and security risks
- Investment Strategy Leakage: Investment strategies and asset allocation information are exposed, affecting the effectiveness of investment decisions
- Asset Allocation Exposure: Asset allocation strategies are completely transparent, unable to protect investment privacy
- Cross-Chain Asset Correlation: Assets on different chains can be correlated through cross-chain analysis, achieving Global Wealth Analysis
1.1.3 Lack of Privacy in On-Chain Wealth Management
Problem Description:
On-chain wealth management activities are completely transparent, specifically manifested as:
- Wealth Management Transparency: Enterprises, DAOs, and projects' fund allocation is completely transparent, all allocation decisions are viewable on-chain
- Revenue Distribution Exposure: Salary, dividends, rewards and other allocation information are completely public, allocation strategies and amount information are exposed
- Fund Flow Traceability: All fund flows can be traced and analyzed, achieving Flow Analysis
- Management Strategy Exposure: Wealth management strategies and decision processes are completely exposed, unable to protect management privacy
Privacy Risk Analysis:
Risks brought by lack of privacy in on-chain wealth management include:
- Corporate Salary Structure Leakage: Corporate salary structures are completely exposed, may lead to business secret leakage and competitive disadvantages
- Project Allocation Strategy Exposure: Project allocation strategies and decision processes are exposed, affecting project operations and investment strategies
- DAO Governance Transparency: DAO governance decisions are completely transparent, although beneficial for governance, may lead to decision processes being analyzed externally
- Charity Donation Exposure: Charity donation information is completely exposed, may affect donors' privacy protection needs
1.2 Limitations of Existing Privacy Technologies
There is a fundamental technical challenge in the current blockchain privacy payment field, which this research calls the "Impossible Triangle of Privacy Payment."
1.2.1 Impossible Triangle of Privacy Payment
From the perspective of theoretical analysis, existing technologies cannot simultaneously satisfy the following three core requirements:
- Variable Denomination: Support flexible transfers of arbitrary amounts, meeting actual application needs
- Strong Double-Spending Prevention: Completely prevent the same funds from being reused, meeting security requirements
- Full Decentralization: Require no trusted third party (TTP) or centralized components, meeting decentralization requirements
There is a theoretical contradiction between these three requirements: in variable denomination scenarios, traditional nullifier mechanisms cannot effectively prevent double-spending; to achieve strong double-spending prevention, one must either rely on fixed denomination constraints or centralized components for state synchronization.
1.2.2 Technical Limitations of Existing Solutions
Solution 1: Fixed Denomination Schemes
Typical representatives include Tornado Cash and other mixing protocols, with technical characteristics:
- ✅ Strong Double-Spending Prevention: Through nullifier hash mechanism, ensure each commitment can only be used once, meeting cryptographic security requirements
- ✅ Full Decentralization: Adopt pure on-chain verification mechanisms, no centralized dependencies, meeting decentralization requirements
- ❌ Fixed Denomination Constraint: Only support preset denominations (e.g., 0.1 ETH, 1 ETH, etc.), lack flexibility, cannot meet actual application needs
Solution 2: Variable Denomination with Centralization
Technical characteristics of such solutions:
- ✅ Variable Denomination: Support arbitrary amounts, meeting flexibility requirements
- ❌ Centralization Risk: Rely on centralized relayers or trusted third parties for double-spending detection, with Single Point of Failure risks
- ❌ Insufficient Double-Spending Prevention: Centralized components may be attacked or act maliciously, cannot provide cryptographic-level security guarantees
Solution 3: Variable Denomination Decentralized Attempts
Technical characteristics of such solutions:
- ✅ Full Decentralization: Adopt pure on-chain implementation, meeting decentralization requirements
- ✅ Variable Denomination: Theoretically support arbitrary amounts, meeting flexibility requirements
- ❌ Double-Spending Prevention Failure: Cannot effectively prevent reuse of the same funds, with security vulnerabilities
1.3 Fundamental Technical Difficulties
From the perspectives of cryptography and distributed systems, traditional nullifier mechanisms have fundamental technical difficulties in variable denomination scenarios:
Technical Difficulty Analysis:
Fixed Denomination Scenario: In fixed denomination scenarios, commitment hash can be used as a unique nullifier, ensuring uniqueness through the one-way property and collision resistance of cryptographic hash functions, but this method limits transaction flexibility and cannot meet actual application needs
Variable Denomination Scenario: In variable denomination scenarios, different amounts from the same user produce different commitments, unable to establish effective uniqueness constraints. Traditional nullifier mechanisms rely on commitment uniqueness, but in variable denomination scenarios, the same user may produce multiple different commitments, causing nullifier mechanisms to fail
Decentralization Constraint: From the perspective of distributed systems, cannot rely on off-chain centralized services for state synchronization and double-spending detection, must be purely on-chain. This requires independent on-chain verification of double-spending, but in variable denomination scenarios, on-chain verification has technical difficulties
Theoretical Analysis:
From the perspective of cryptographic theory, the effectiveness of nullifier mechanisms depends on the following conditions:
- Uniqueness Guarantee: Each fund unit must correspond to a unique nullifier
- Unforgeability: Attackers cannot forge valid nullifiers
- Verifiability: On-chain independent verification of nullifier validity is possible
In fixed denomination scenarios, these three conditions can be simultaneously satisfied; but in variable denomination scenarios, there is a contradiction between uniqueness guarantee and verifiability, causing traditional nullifier mechanisms to fail.
1.4 Actual Application Requirements: Application Scenarios in Three Privacy Dimensions
From the perspective of application needs, actual application scenarios require adding privacy capabilities to blockchain in three dimensions. This section systematically analyzes application requirements in each dimension.
1.4.1 Transaction Process Privacy Requirements
In actual applications, transaction process privacy requirements are mainly reflected in the following scenarios:
- Corporate Payment Scenario: When enterprises pay salaries or bonuses to employees, payment relationships and amount information need to be protected, preventing business secret leakage and competitive analysis
- B2B Transaction Scenario: B2B transactions need to protect both parties and transaction amounts, preventing business secret leakage and strategy analysis
- Personal Transfer Scenario: Transfers between individuals need privacy protection, preventing wealth exposure and security risks
1.4.2 Digital Asset Privacy Requirements
Digital asset privacy requirements are mainly reflected in the following scenarios:
- Asset Protection Scenario: Protect user asset holdings, prevent becoming attack targets, meeting security and privacy requirements
- Investment Privacy Scenario: Protect investment portfolios and investment strategies, prevent tracking and analysis, meeting investment privacy protection needs
- Cross-Chain Privacy Scenario: Protect asset distribution across different chains, prevent cross-chain correlation analysis, meeting cross-chain privacy protection needs
1.4.3 On-Chain Wealth Management Privacy Requirements
On-chain wealth management privacy requirements are mainly reflected in the following scenarios:
- Corporate Wealth Management Scenario: Enterprises need to privately manage funds, allocate assets to multiple recipients, protecting management strategies and allocation plans
- Project Dividend Scenario: Projects distribute dividends to multiple investors, need to protect allocation strategies and amounts, preventing investment strategy leakage
- DAO Governance Scenario: DAOs distribute rewards to multiple contributors, need to protect governance decision processes, meeting governance privacy needs
- Charity Donation Scenario: Charitable organizations distribute funds to multiple recipients, need to protect recipient privacy, meeting charity privacy protection needs
Requirement Analysis Summary:
The common characteristic of these application scenarios is: need to achieve one-to-many asset allocation while protecting privacy. Existing technical solutions cannot well satisfy this need, either sacrificing privacy, flexibility, or decentralization. Therefore, a new technical solution is needed to solve this fundamental problem.