The Liquid Network, a federated sidechain of Bitcoin, boasts a number of attractive features. One such feature is Confidential Transactions. In the context of Liquid, what are Confidential Transactions and how do they work?
What Is Confidential in Confidential Transactions?
In the Liquid sidechain, transactions are publicly viewable, but key information is obfuscated by default. Both transaction amount and asset type are hidden from public view, and these elements are only known to those directly involved in the underlying transaction. This is achieved with the use of confidential addresses, which include a base address and a public blinding key. When a transaction is executed, only the receiver can use their private blinding key to decrypt both the amount and type of asset sent. If the receiver wishes to allow verification or audit of a particular transaction, they can share their private blinding key with a 3rd party.
When a transaction is executed, only the receiver can use their private blinding key to decrypt both the amount and type of asset sent.
Private Solvency Proofs
Confidential Transactions can also be used for something called private solvency proofs. In an instance where proof of reserves is important, but an individual or institution does not wish to reveal more than the bare minimum of information, this a valuable tool. It is possible to prove that the aggregate of all assets held is above a designated threshold without ever revealing the allocation or weighting of assets or the total sum of all assets held. The auditor would only see the confirmation of adequate capital.
The aforementioned features are particularly useful in trading environments. Preventing the audit of large inter-exchange movements of capital protects traders from revealing their strategies and triggering front-running. Solvency proofs will allow exchanges to provide real-time proof of reserves without sacrificing customer privacy.
Confidential Transactions on Liquid, like the parallel Bitcoin blockchain, carry transaction fees. These fees have a set minimum of 1 sat/vbyte, but are dynamic and can change depending on network congestion.
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