Confidential Transactions
Understanding privacy features in the Liquid Network
What are Confidential Transactions?
Confidential Transactions (CT) is a privacy technology implemented in the Liquid Network that keeps transaction amounts and asset types hidden from third parties while still allowing the network to verify that transactions are valid.
Originally proposed by Bitcoin developer Gregory Maxwell, Confidential Transactions use cryptographic techniques to ensure that only the sender and recipient of a transaction know the exact amount being transferred, while everyone else can still verify that no new money was created.
In Liquid, Confidential Transactions are enabled by default for all transactions, providing enhanced privacy compared to Bitcoin's completely transparent blockchain.
Why Privacy Matters
Financial privacy is important for various legitimate reasons, especially in the context of businesses and financial institutions:
- Businesses don't want competitors to see their transaction flows or customer relationships
- Traders don't want their positions and strategies visible to market participants
- Exchanges need to protect sensitive information about their hot wallet balances
- Asset issuers may want to protect confidential financial operations
- Users deserve basic financial privacy for their personal transactions
A Note from Satoshi
How Confidential Transactions Work
Confidential Transactions use advanced cryptography to hide transaction amounts while preserving the ability to verify that inputs equal outputs (preventing inflation).
1Pedersen Commitments
Instead of revealing the actual amount, a transaction contains a cryptographic commitment to the amount. This commitment is created using a mathematical function that combines the transaction amount with a random "blinding factor" (similar to a password).
The commitment mathematically "locks" the real value without revealing it, but still allows the network to verify that the transaction is balanced (inputs = outputs).
2Range Proofs
To prevent negative amounts (which could create money out of nothing), Confidential Transactions include range proofs. These are cryptographic proofs that demonstrate the committed amount is positive without revealing what that amount is.
Range proofs ensure that all transaction amounts are within a valid range, preventing users from creating negative amounts that could be used to counterfeit assets.
3Homomorphic Encryption
Confidential Transactions use a property called homomorphic encryption that allows mathematical operations to be performed on encrypted values without decrypting them. This enables the network to verify that the sum of all inputs equals the sum of all outputs without knowing the individual values.
4Asset Blinding
In addition to hiding amounts, Liquid also blinds asset types. This means that observers cannot tell which asset is being transferred in a transaction (whether it's L-BTC or another Liquid asset), further enhancing privacy.
Privacy vs. Transparency
What Remains Visible
- Transaction participants (addresses)
- Transaction structure and timing
- Number of inputs and outputs
- Transaction fees
- Block data and confirmation status
What is Hidden
- Transaction amounts
- Asset types being transferred
- Account balances
- Value of unspent transaction outputs
- Total supply of custom assets
Selective Disclosure
While transactions are confidential by default, Liquid provides mechanisms for selective disclosure. Participants can share "blinding keys" that allow specific third parties to view the details of their transactions. This is useful for:
- Regulatory compliance and auditing
- Proving transaction details to specific parties
- Allowing trusted partners to verify transaction amounts
- Exchange reporting and verification processes
Benefits and Limitations
Benefits of Confidential Transactions
- Business Privacy: Companies can transact without revealing sensitive financial information
- Protection of Trading Strategies: Traders can move funds without signaling their intentions to the market
- Security Enhancement: Exchanges can protect their hot wallet balances from being targeted
- Fungibility Improvement: All units of an asset are indistinguishable, improving fungibility
- Competitive Advantage: Users can conduct business without competitors analyzing their transaction patterns
Limitations and Considerations
- Transaction Size: Confidential Transactions are larger than transparent ones, requiring more blockchain space
- Computational Overhead: Verifying confidential transactions requires more computational resources
- Address Visibility: While amounts are hidden, transaction participants (addresses) remain visible
- Complexity: The cryptography behind CTs is complex and requires careful implementation
- Supply Auditability: For custom assets, verifying the total supply requires additional mechanisms
Comparison with Other Privacy Technologies
| Technology | Privacy Level | What's Hidden | Trade-offs |
|---|---|---|---|
| Liquid CT | Medium-High | Amounts, Asset Types | Larger transactions, addresses visible |
| Bitcoin (no privacy) | Low | Nothing | Full transparency, easy verification |
| CoinJoin (Bitcoin) | Low-Medium | Input-output linkage | Requires multiple participants, amounts visible |
| Zero-Knowledge Proofs | High | Addresses, amounts, transaction logic | Complex setup, computational overhead |
| Ring Signatures | Medium-High | Sender identity (via decoy inputs) | Larger transactions, statistical analysis risks |