Blockchain Payments and the Implications for Privacy

Dr. Arthur Gervais is a blockchain, security and payment expert. He is an assistant professor at the Imperial College in London and the co-founder of Liquidity.Network – a third-generation, off-chain payment solution that resolves and improves Ethereum scalability issues.

Given the recent spate of security breaches at Equifax, Aetna, Orbitz, and other big corporate brand names, online privacy is a burgeoning concern for global companies and for the public. In light of those breaches, and recent events like the Facebook/ Cambridge Analytica scandal where data was collected by a centralized source and sold to political campaigns, more people are becoming aware of the glaring issues related to online privacy.

Major fintech companies like Mint and Betterment have also been known to create services that link to customers’ debit/credit cards and banks accounts, which allow them access to data that used to be considered private. Unfortunately, it’s common knowledge that similar services profit from access to people’s data. Companies know what specific people are buying and continue to create targeted ads using these insights.

Even though these issues are major problems on their own, they’re also part of a much larger, conundrum: security. That’s because, in many instances, hackers have also been responsible for selling sensitive financial information or worse— stealing funds. The current security systems of many websites and banks are easily hackable due to the fact that information is stored in one centralized location.

What can help solve the online privacy issue?

Blockchain technology is already becoming one of the best online payment solutions in the world. In that context, here’s why blockchain technology has so much potential in protecting private data.

Blockchain: Privacy as a Priority

Currently, most people rely upon centralized entities to keep personal financial data secure. This increases the likelihood of hacks and even stolen funds. The fact is that we have to ‘trust’ sites like Facebook to keep our information private and not to use data for profit. Clearly, this ‘trust’ model has failed thus far, and spectacularly so.

The philosophy behind blockchain technology is simple: give people greater control over their own money and data. Blockchain, however, is inherently not private, as it distributes the data to all participating peers of the blockchain.

As blockchain security technology continues to advance, data security will only continue to improve, meaning that the potential threat of a hack will continue to decrease with time. Blockchain however, craves for dedicated privacy solutions.

Current Cryptocurrency Projects and Privacy

The biggest cryptocurrency projects like Ethereum (ETH) are still working on the creation of better privacy solutions – and blockchain design engineers face problems in doing so.

One of the biggest hurdles that blockchain projects face is how to ensure privacy while also allowing for fast payments. Other privacy-centric projects like Monero (XMR) do ensure greater privacy than ETH, but XMR’s transaction fees are very costly and payment completions times are quite slow.

That’s why a practical solution is needed to make blockchain transactions both faster and more secure.

Off the Blockchain Ledgers

One particularly vexing data privacy problem is that transactions on the Ethereum blockchain are publicly visible, to ensure the transparent and secure operation of Ethereum payments.

A number of companies are using off chain technology to provide faster and more private payments. These include the Lightning Network which is attempting to allow micro-payments with Bitcoin, and the Liquidity Network which has a similar goal on the Ethereum blockchain.

One of the biggest challenges for most cryptocurrency projects is how to occlude the exact details of payments from external auditors (i.e. large companies that can sell user data for profit) and also be able to verify the correctness of payments (i.e., complete transactions) in a timely manner.

The importance of off-chain ledgers has increasingly become a topic of focus for solutions-based technology companies.

Liquidity Network’s solution utilizes an off-chain ledger which is a complete re-design of Lightning’s off-chain technology, offering a much better solution than current P2P payments. For example, sending and receiving transactions between Ethereum wallets alone is not private at all because transaction history is publicly searchable via sites like Etherscan and Ethplorer.

Using off-chain technology, only Liquidity Network’s payment hub providers have knowledge about transactions. This provides an enhanced degree of privacy that is much better than existing on-chain, public ledger technologies that allows anyone to link P2P payments between two users’ ETH addresses. The off-chain technology further improves over the current privacy provisions of Lightning.

Real-World Benefits

Using an off-chain ledger also offers other additional key benefits over regular Ethereum P2P payments. One such advantage is that people can make small payments to friends and family quickly and without having to pay high transaction fees.

The current fiat solution for P2P payments is PayPal, which stores data (and funds as a custodian) in a centralized location and requires users to connect to a bank account or debit/credit card. Liquidity.Network can handle 50,000+ transactions per second (comparative to Visa’s peak throughput), while not being a custodian. Liquidity therefore aims to create a ‘trustless PayPal’ that can be used for everyday payments for products and services.

With this and similar solutions, payments can be sent from sender to receiver without having to wait on a “pending transaction” to be approved. Most importantly, there’s no requirement for users to link to a bank account or a debit/credit card, which makes it a far more secure solution than PayPal or any other current P2P payment application.

Restoring Privacy and Security

Blockchain technology offers a much-improved way of storing and sending data when compared to the current centralized system, which requires people to ‘trust’ that large corporations will make the right decisions regarding the protection of user privacy.

A decentralized blockchain payment solution is needed because it will not only offer a faster way to complete daily transactions, but it will also keep people’s data secure and private.

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