Ethereum Launches Privacy Layer for Anonymous Transactions

Ethereum has introduced a new privacy layer that functions similarly to zCash, but operates entirely within the Ethereum blockchain, without the need for a separate Layer 2 solution. This new system builds upon the principles of Tornado Cash, a project that utilizes zero-knowledge proof technology to enable anonymous transactions. Unlike Tornado Cash, which is limited to fixed denominations, the new privacy layer supports arbitrary amounts, allowing users to split, merge, and transfer value flexibly and anonymously.

Ask Aime: What's the impact of Ethereum's new privacy layer on cryptocurrency anonymity?

The new privacy layer introduces two additional operations alongside deposit and withdraw: split and merge. The split function allows users to divide their stored amount into any two parts without revealing the new amounts to anyone observing the blockchain. This is achieved by including the amount as part of the hashed data in the commitment. The merge operation, on the other hand, allows two stored commitments to be combined into a single new commitment, enabling users to effectively store value in the smart contract itself.

To perform a split or merge, the user must prove that the total amount in the input commitments matches the amount in the new commitment. This is done using zero-knowledge proofs, which allow users to prove the correctness of value-preserving operations without ever revealing the actual amounts or participants involved. The result is a kind of embedded blockchain that operates entirely on-chain, without the need for a separate Layer 2. Users can store funds privately, send assets to one another using encrypted messages, and only withdraw when they need to interact with the public Ethereum layer.

This new privacy layer combines the privacy features of zCash with the smart contract capabilities of Ethereum, creating a powerful framework for anonymous, programmable value transfer. It is compatible with any EVM-based blockchain, making it a practical and scalable foundation for privacy-preserving applications in the broader Ethereum ecosystem. The system relies on zero-knowledge proofs, commitments, and nullifiers to ensure unlinkability between deposits and withdrawals, providing users with a high degree of privacy and anonymity.