A blockchain's ability to function is frequently regarded as dependent on how transparent the system is. Every node on the network can now store a copy and confirm that no rules are being broken. Anyone can access an online block explorer for several distributed ledgers that enables users to browse blocks, transactions, and addresses.
This isn't ideal from a privacy standpoint. Every transaction in a system like Bitcoin may be traced back to a prior one. Since each coin may be connected to certain transactions, they are not strictly fungible. No one can stop you from transferring bitcoin, but if the funds were previously transferred through a blacklisted address, they may decline to accept your transaction.
In the worst situation, a lack of fungibility could have a significant negative influence on the system's core foundations. Older coins would be less desirable given their history, whereas clean coins might command a premium.
Bitcoin privacy is frequently overestimated. Users can also be tracked in addition to currency. They like the anonymity of using public addresses in place of names, but this has drawbacks as well. In an effort to deanonymize network entities, advanced analysis techniques can group addresses together with increasing precision.
Confidential Transactions is one enhancement that has been suggested to make transactions completely private.
The concept of Confidential Transactions (CT) was first introduced by Blockstream CEO Adam Back in 2013 and then developed by Gregory Maxwell, a Bitcoin developer. Maxwell described the issues (fungibility and weak pseudonymity) raised in the first section and offered a solution. The amount being sent might be hidden from the rest of the network so that only the persons involved in the transaction would be aware of it.
Normally, it's simple for a node to confirm that the amount received doesn't exceed the amount sent (when transactions are visible to everyone). If Alice wants to transfer Bob 0.3 BTC, she splits a previously unspent output (let's call it 1 BTC) into two parts: 0.3 for Bob and 0.69 for herself.
Simple algebra for other nodes is as follows: The transaction must be legitimate because 1 surpasses 0.3 + 0.69, all of the signatures are accurate, and Alice's inputs have not been used elsewhere. However, things aren't so minor when quantity are blinded. How can you even start to determine whether an unknown sum is greater than or equal to the sum of two other unknown sums.
Other cryptocurrencies and Bitcoin sidechains have both seen some variations of Confidential Transactions. For instance, Monero employs them along with devices referred to as ring signatures to achieve fungibility and anonymity. They are implemented on the Liquid sidechain for more privacy, and they are expanded on MimbleWimble for the same purposes.
Confidential Transactions trade off a larger footprint for the advantages they bring. Larger transaction sizes are not appealing to everyone, and scalability and throughput issues in the base layer of cryptocurrencies are common. However, privacy proponents contend that for cryptocurrencies to function as fungible money, transaction amounts and participants must be kept secret.