Author's Perspective: Pavel Nikienkov, Co-founder of Zano
Satoshi Nakamoto is undoubtedly a genius, but he left significant vulnerabilities in terms of privacy. Today, digital predators are reaping benefits in this area. The original blockchain and its many derivative technologies possess characteristics of transparency, immutability, and decentralization. These traits may sound like the ideal elements of a financial system, but that is not the case in reality.
Privacy is a core component of any secure financial system. There is a fundamental contradiction between blockchain technology and privacy protection. The need for privacy is crucial, and the right to be forgotten has been recognized by law. However, blockchain technology, by its nature as an immutable and permanently public data ledger, fundamentally contradicts this principle.
Perhaps you don't care, thinking that others can only see a string of random letters and numbers, but this has real implications for on-chain transactions.
Consider a typical scenario: you go to Uniswap to purchase a certain token, place an order, execute the transaction… only to find that the amount of tokens received is far below expectations. After checking the transaction history, you discover that there was a large buy order just before yours that drove up the price, and immediately after your order was filled, there was a large sell order. You have just become a victim of "front-running," and likely not for the first time.
Front-running? You might think, "I was a track star in school; no one can outrun me!" Let's take a step back and explain what front-running is.
Maximum Extractable Value (MEV) refers to the maximum economic value that blockchain miners or validators can extract during the block production process by adjusting the inclusion, exclusion, or order of transactions.
The blockchain network is essentially maintained by a decentralized network of nodes known as "block producers," which serve as an immutable ledger. In proof-of-work blockchains, these nodes are miners. In proof-of-stake networks, they are called validators. Block producers are responsible for periodically aggregating pending transactions into blocks, which are then verified by the entire network and added to the global ledger. While the blockchain network ensures the validity of all transactions (such as preventing double spending) and continuously produces new transaction blocks, it does not guarantee that transactions will be processed in the original order they were submitted to the blockchain.
Since each block can only accommodate a limited number of transactions, block producers have complete autonomy to choose which pending transactions in the memory pool will be included. In this memory pool, block producers store unconfirmed transactions off-chain, which will be included in their blocks. Therefore, block producers have ample operational space to engage in rent-seeking behavior and indiscriminately extract MEV. Data shows that at the beginning of 2021, the cumulative value of MEV extracted on Ethereum reached $78 million, rapidly soaring to $554 million by the end of the year. Currently, the total MEV extracted on Ethereum has exceeded $600 million.
Fortunately, various methods have been developed in recent years to mitigate the MEV problem. These methods fall into two categories: new transaction ordering protocols and modifications to existing protocols to reduce the space for manipulation.
One solution that employs the former approach is Fair Sequencing Service (FSS), which ensures that transactions are ordered relatively, reducing the opportunities for miners and validators to front-run or reorder transactions. For example, Chainlink's Fair Sequencing Service utilizes decentralized oracles to maintain a fair transaction order. Another protocol is First In, First Out (FIFO), which processes transactions in the order they arrive in the memory pool. This method provides a straightforward solution to maintain ordering integrity, minimizing the likelihood of miners manipulating transaction sequences to extract MEV.
These methods share a common goal: to create a fairer and safer transaction ordering system, reducing the potential for manipulation. This goal is crucial for establishing the trust needed for decentralized ecosystems to move toward the mainstream.
Block producers rely on visible transaction data to manipulate transactions for profit. Privacy protocols address this issue, although their primary function has never been to eliminate MEV.
Ring Confidential Transactions (RingCT) obscure key transaction details, including transaction amounts, senders, and receivers. RingCT prevents miners from determining which transactions might be profitable and thus subject to manipulation, reordering, or front-running. When the details of specific transactions are hidden, MEV extraction becomes practically impossible, as miners cannot see potential arbitrage or front-running opportunities.
Similarly, stealth addresses are another powerful privacy tool that effectively mitigates MEV. They generate a unique one-time address for each transaction, concealing the identity of the recipient. Since these addresses are untraceable, miners cannot pinpoint high-value transactions, thereby eliminating the incentive to prioritize or reorder transactions for personal gain.
MEV relies on the ability of miners or validators to view transaction data to manipulate transaction order or inclusion. Privacy-centric designs target the ability of miners to view specific transaction details, making it extremely difficult to target transactions that may yield profitable outcomes.
The primary function of privacy technology is to protect our privacy in an evolving national ecosystem. According to a survey by the Bank for International Settlements (BIS), 94% of the 86 participating banks are researching digital versions of their national currencies. This figure is up from 90% in the BIS's 2021 survey of 81 respondents, which is the umbrella organization for central banks worldwide.
However, the overlooked second function is that privacy technology also helps combat predatory MEV arbitrage in the blockchain ecosystem by making footprints on the blockchain invisible.
Pavel Nikienkov is the co-founder of Zano. He is an expert in launching privacy-centric software products and has served as a project manager. He joined the blockchain privacy ecosystem over five years ago and has been an active contributor ever since.
Author's Perspective: Pavel Nikienkov, Co-founder of Zano
Related Reading: The Necessity of Cross-Border Cooperation to Promote the Development of Digital Assets
This article is for general reference only and does not constitute legal or investment advice, nor should it be considered as such. The views, thoughts, and opinions expressed in the article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Original article: “Privacy is the Ultimate Shield Against Blockchain Vultures”
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