En Crypto: Ethereum´s Privacy and Front-Running Challenges and How Zero-Knowledge Proofs Can Solve it

An expert explains how they are using Zero-Knowledge Proofs (ZKPs) to solve Ethereum´s front-running and privacy challenges.

Ethereum, the decentralized, open-source blockchain with smart contract functionality, often comes under fire for its lack of scalability and high transaction fees. However, a less discussed problem that Ethereum has is privacy. Every single transaction that takes place on Ethereum is recorded publicly. This means, if you give someone your public wallet address, they can find out how much crypto you’re holding.

This also leads to the problem of front-running, the illegal practice of purchasing a security. Once a DEX transaction is broadcast to the network, even before it’s included in a block, it’s possible that another user, or more commonly, a bot, will spot the same opportunity. They swoop in, bid a higher gas price so that a miner will include their transaction in a block first, and take the profit away from the trader.

Dan Robinson, Research Partner at Paradigm, a crypto-focused investment firm based in San Francisco, has explained it recently in a Medium post.

Crypto innovators are trying to come up with solutions for this challenge. Lightening Cash, a project that uses ZKPs to provide users with an assurance of privacy in their blockchain-based transactions, is one of them.

The Tech Panda spoke to Ryan Nguyen, Founder and CEO of Lightening Cash, the first privacy protection asset transfer protocol on Binance Smart Chain. He is also the Co-Founder of HC Capital and HC Ventures. Nguyen says that front-running is a major problem with the Ethereum network.

Ryan Nguyen

Front-running is a means of stealing profits from people making large transactions on the Ethereum network. Front-running is only possible because Ethereum transactions are publicly recorded

“Front-running is a term that refers to a person or a bot, monitoring transactions on the Ethereum network and stepping in front of certain ones by paying a higher gas fee. People and bots participate in front-running, because if they can step in front of large transactions that will move the price of Ethereum up, then they can profit,” he explains.

He further explains that the reason why this is a problem is because it results in less profit for the party that gets stepped in front of.

“So, essentially, front-running is a means of stealing profits from people making large transactions on the Ethereum network. Front-running is only possible because Ethereum transactions are publicly recorded,” he adds.

What is Ethereum’s privacy problem?

Nguyen says that the core of Ethereum’s privacy problem is that every single transaction that occurs on Ethereum is publicly recorded.

“Therefore, if you provide someone with your public address, they have the ability to scan the Ethereum blockchain to figure out how much cryptocurrency you are holding in the wallet associated with that public address,” he says.

He also informs that Ethereum isn´t the only blockchain with this problem. Many different blockchains have this privacy issue.

These privacy issues are major concerns for people who hold large sums of cryptocurrency in an Ethereum wallet

“These privacy issues are major concerns for people who hold large sums of cryptocurrency in an Ethereum wallet. The reason is if cybercriminals and hackers know that you have a large amount of Ethereum, then you can become the target of a hack or another crime,” he adds.

In addition to privacy concerns, blockchains like Etheruem also have high fees and slow transaction times. Lightening Cash, on the other hand, has extremely low fees and fast transaction speeds. Further, it has built-in yield farming capabilities and native token buybacks. This makes it ideal for decentralized finance (DeFi).

How do Zero-Knowledge Proofs solve the problem?

ZKPs protect user privacy with a layer of encryption that allows data to be shared between parties without disclosing the actual data itself. This means that the validating nodes on a network can verify a transaction but without having to see or publicly record all the details of the transaction.

“They allow data to be shared from one party to another without the actual data having to be revealed. With ZKPs validating nodes on a blockchain, one can validate transactions without having to create a public record of all of the details of the transaction,” Nguyen reveals.

People who make transactions with cryptos that use ZKPs, experience a much higher degree of privacy and protection from the prying eyes of cybercriminals and other concerning entities

ZKPs essentially solve the privacy problems of cryptocurrencies like Ethereum.

“Thus, people who make transactions with cryptos that use ZKPs, experience a much higher degree of privacy and protection from the prying eyes of cybercriminals and other concerning entities,” he says.

Zcash, a digital currency with strong privacy features also uses ZKPs to encrypt data to generate private transactions. These companies boast of advantages such as fast throughput, low fees, and compatibility with the Ethereum Virtual Machine. They are solving the privacy challenges in Ethereum.

What is Lightening Cash and how does it differ from Zcash?

Lightening Cash is a protocol that helps users funnel transactions into DeFi protocols anonymously. Lightening Cash is similar to Zcash, a digital currency with strong privacy features.

“Both use ZKPs to encrypt data to generate private transactions. However, unlike Zcash, Lightening Cash operates on the fast-growing Binance Smart Chain,” Nguyen explains.

Lightening Cash boasts of several key advantages for applications, including fast throughput, low fees, and compatibility with the Ethereum Virtual Machine. Users who want to funnel transactions through Lightening Cash into their favorite DeFi protocol can do so using the their user interface. A small fee must be paid in LIC, which is Lightening Cash’s native token in order to do this.

Navanwita Bora Sachdev

Navanwita is the editor of The Tech Panda who also frequently publishes stories in news outlets such as The Indian Express, Entrepreneur India, and The Business Standard