Interpretation of Vitalik's investment in Privacy Pools: Can on-chain privacy and compliance be achieved?
Reprinted from panewslab
04/02/2025·1MAuthor: KarenZ, Foresight News
On April 1, on-chain privacy infrastructure 0xbow announced the official launch of the Privacy Pools main network. Privacy Pools draws on the research results of Ethereum co-founder Vitalik Buterin and others, providing Ethereum users with a currency mixing solution that can not only protect on-chain privacy but also draw a clear line with illegal funds.
This article will introduce the concept, origin, developer team, operational mechanisms and its potential impact on the industry.
What is Privacy Pools?
Privacy Pools is a new blockchain privacy tool designed to provide users with the ability to trade anonymously while ensuring compliance with the source of funds.
Unlike traditional currency mixing services such as Tornado Cash, Privacy Pools is designed with Zero-Knowledge Proofs (ZKP) and Association Set Provider (ASP) to prevent illegal funds from being mixed into the transaction pool while protecting user privacy.
This mechanism not only meets the privacy needs of ordinary users, but also responds to regulatory authorities' requirements for compliance, providing a feasible path for the DeFi ecosystem to take into account privacy and legitimacy.
Who proposed Privacy Pools? Who publishes it?
The concept of Privacy Pools originated in a 2023 research paper co-written by Vitalik Buterin, Jacob Illum (Chianalysis chief scientist), Matthias Nadler (Ph.D. candidate at the University of Basel), Fabian Schär (Professor of the Center for Innovation Finance at the University of Basel), and Ameen Soleimani (Privacy Pools).
This paper explores how privacy and compliance can be balanced on blockchain, proposes a new privacy-enhanced protocol based on smart contracts, Privacy Pools, explains how privacy pool technology acts as a neutral infrastructure to make public blockchains compliant with regulatory requirements across jurisdictions.
The Rrivacy Pools protocol is published by the 0xbow team. 0xbow is a startup project focused on blockchain privacy and compliance infrastructure. The main team members include:
- Co-founder Zak Cole: is also the co-founder of the BTCFi project corn, managing partner of Number Group and author of EIP-6968.
- Strategic Consultant Ameen Soleimani: is also the co-founder of Reflexer Finance and the co-founder of IranUnchained. He has worked in ConsenSys, Filter and other companies.
Investors in the project include Number Group, Vitalik, BanklessVC, Public Works and several angel investors.
After the Privacy Pools main network was launched, Vitalik and Ethereum core developer Tim Beiko both deposited 1 ETH into the privacy pool to show support.
How does Privacy Pools work?
The Privacy Pools architecture consists of a contract layer, a zero-knowledge layer, and an association set provider (ASP) layer. The contract layer manages assets and status, the zero-knowledge layer ensures privacy, and the ASP layer provides compliance capabilities.
Specifically, leveraging zero-knowledge proof allows users to prove that they belong to a group of approved depositors without revealing their complete transaction history.
ASP, on the other hand, plays the role of a compliance layer tool, approves deposits that meet predefined standards and verify that all private withdrawals come from approved deposits only. ASP consists of two parts:
1. Service Stack: A set of modular services that continuously monitor, record and classify on-chain activities, and evaluate its credibility based on users' on-chain behavior.
2. On-Chain Instances: including the Public Registry and the Zero Knowledge Proof Verifier. The public registry stores and manages ASP data through smart contracts, achieving seamless integration with the blockchain protocol; the ZKP validator is responsible for verifying zero-knowledge proofs to ensure that the transaction compliance verification process remains private.
The operating mechanism of ASP is to continuously monitor on-chain transactions and regularly update the "association set". Users can prove that their transactions are compliant sets by generating zero-knowledge proofs (ZKPs) without disclosing specific transaction details. Developers can use ASP to define rule-based access controls and filter user qualifications (such as excluding users related to illegal activities), thereby achieving a balance between privacy and compliance.
Privacy Pools allows users to encrypt transactions through the mixed currency protocol while still proving that their funds come from legitimate sources. The specific operation process is as follows:
- Connect wallet and create a dedicated wallet: Users connect to the Privacy Pools system through a compatible wallet to create a dedicated 0xbow wallet (this wallet is only used in the privacy pool).
- Deposit: Deposit ETH into the privacy pool. The initial version supports a deposit limit of up to 1 ETH and a minimum of 0.1 ETH. Once funds are deposited, 0xbow ASP will review the source of funds and will be accepted into the associated set if these funds are not from illegal activities. After the transaction is confirmed, the deposited funds become part of the anonymous set. Deposits will appear in Privacy Pools smart contracts.
- Withdrawal: Specify the fund receiving address. dApp will automatically generate zero-knowledge proof in the user's browser. After confirmation, the withdrawal transaction is completed and the funds are transferred to the designated address.
It is worth mentioning that initially approved deposits may be disqualified as ASP continues to update its rules. This means that even if users pass the initial screening, they may still be banned from withdrawals.
summary
The launch of Privacy Pools provides users with tools that balance privacy and compliance, and is expected to promote more institutions and enterprises to adopt blockchain technology.
By isolating illegal funds, Privacy Pools helps to alleviate regulatory pressures in the industry and clears obstacles to the development of the industry to a certain extent. In addition, other privacy protocols can integrate ASP mechanisms, enhance their own compliance, and promote the standardization of privacy technology. Of course, ordinary users can also participate in on-chain activities in a safer and more compliant way, redefining the "normal" of blockchain privacy.
However, Privacy Pools' path to success still faces many challenges, including the credibility of ASP, the ASP's centralized review boundaries, regulatory adaptability in different jurisdictions, and the attitude of regulators.
Reference source:
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4563364
