Summary

In a recent talk at Breakpoint 2023, Nico Schapeler, the co-founder and core developer at Elusive, introduced the concept of 'sandwiching' as a way to enhance privacy in the blockchain. He delved into the importance of privacy in decentralized systems and outlined why traditional Web3 infrastructures struggle with privacy issues. Schapeler presented sandwiching as an elegant solution, requiring no changes to existing smart contracts, enhancing privacy without sacrificing the composability and collaboration that define decentralized systems. His insights open the door to new privacy-respecting models in the blockchain space.

Key Points:

Importance of Privacy in Web3

• Privacy is a significant concern for individuals and institutions alike in the context of Web3.
• Current misconceptions about crypto privacy underline the need for improved mechanisms within blockchain technologies.
• The decentralized nature of Web3 complicates the implementation of privacy compared to centralized systems in Web2, where a single entity can manage encryption and data access.

Technical Challenges of Privacy in Decentralization

• In decentralized networks, ensuring data encryption and rule enforcement for data modification across numerous nodes is complex.
• Schapeler emphasizes the role of Zero-Knowledge (ZK) proofs as a cryptographic method that can prove the veracity of a claim without revealing the data behind it.

Implementing Privacy with Sandwiching

• Traditionally, shielded pools handle privacy but often break composability and create issues such as liquidity fragmentation.
• Sandwiching introduces a shielded pool before and after a standard blockchain transaction, allowing the original transaction to remain unchanged while still providing privacy.
• This method offers various advantages, preserving liquidity, allowing funds within the shielded pool to be active, and requiring minimal adjustments to existing smart contracts.

Facts + Figures

• The traditional approach to privacy in Web3 involves shielded pools, which suffer from liquidity fragmentation.
• Sandwiching maintains liquidity by not requiring separate versions of smart contracts for shielded and non-shielded pools.
• Funds in traditional shielded pools are considered 'dead,' while sandwiching enables active use of those funds within DApp ecosystems.
• Sandwiching obviates the need for significant changes to smart contracts, unlike traditional shielded pool integrations.

Top quotes

• "Because if you're an individual, you don't want your bank accounts to be visible to the entire world."
• "What ZK basically allows you to do is it allows you to prove that a statement is true without revealing anything else about that statement aside from the fact that it is true."
• "Sandwiching works is we take an arbitrary transaction which is the filling of that sandwich and this very transaction could for example be a swap on a dex."
• "So instead of building on top of it, it's simply at the same horizontal layer because the funds now flow out of our shielded pool into the same dex that already exists and back out of that dex into our shielded pool."

Questions Answered

Why is privacy important in Web3?

Privacy is a key concern in Web3 as individuals and organizations require confidentiality for their financial activities and data. Without adequate privacy, entities' sensitive financial strategies and histories could be exposed to competitors or the public, violating data protection laws and personal preferences.

What are the challenges of implementing privacy in decentralized systems?

Decentralized systems inherently lack a singular authority to manage data privacy, making it difficult to apply encryption uniformly and enforce data-handling rules across various nodes. The distribution of data across numerous points in the network adds complexity to maintaining privacy.

How does the 'sandwiching' technique work?

'Sandwiching' involves placing a shielded transaction before and after an open blockchain transaction. This way, the transaction itself remains composably intact within the ecosystem but is anonymized by the shielded pools that bookend it, maintaining privacy without fragmenting liquidity or requiring significant changes to existing smart contracts.

What is a shielded pool, and what are its drawbacks in Web3?

A shielded pool is a smart contract designed to enhance privacy by allowing assets to move in and out obscured from public view. However, this traditional approach can cause issues such as liquidity fragmentation and the idleness of funds, as well as necessitating substantial modifications to existing DApps to integrate with it.

What advantages does the 'sandwiching' method offer?

Sandwiching mitigates the common problems faced by shielded pools in blockchain privacy. It retains full liquidity, permits funds within the pool to engage in various DeFi strategies, and allows existing smart contracts to function normally without needing extensive rewrites or audits.