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Ethereum co-founder Vitalik Buterin shared a possible solution to what he describes as the “greatest remaining challenge” on Ethereum – privacy.

In a blog Publish on January 20, Buterin recognized the need to provide a privacy solution because, by default, all information transmitted to a “public blockchain” is also public.

He then came to the concept of “stealth addresses” – which he says can potentially anonymize peer-to-peer transactions, non-fungible token transfers (NFTs), and Ethereum Name Service (ENS) records, thereby protecting users.

In the blog post, Buterin explained how on-chain transactions can be done between two parties with anonymity.

First, a user seeking to receive assets will generate and maintain a “spend key” which will then be used to generate a stealth meta address.

This address — which can be registered at the ENS — is then transmitted to the sender who can perform a cryptographic calculation on the meta-address to generate a stealth address, which belongs to the recipient.

The sender can then transfer assets to the recipient’s stealth address in addition to posting a temporary key to confirm that the stealth address belongs to the recipient.

The effect of this is that a new stealth address is generated for each new transaction.

Vitalik Buterin’s bar chart of how a stealth address system works. Source: Vitalik.ca.

Buterin noted that a “Diffie-Hellman key exchange” in addition to a “key masking mechanism” should be implemented to ensure that the link between the stealth address and the user’s meta-address cannot be seen publicly.

The Ethereum co-founder added that ZK-SNARKs — crypto-proof technology with built-in privacy features – could transfer funds to pay transaction fees.

However, Buterin pointed out that this could lead to its own problems – at least in the short term – saying that “it costs a lot of gas, hundreds of thousands more gas just for one transfer”.

Related: Crypto privacy is more at risk than ever – here’s why

Stealth addresses have long been touted as a solution to on-chain privacy issues, which have been worked since 2014. However, very few solutions have been brought to market so far.

This is also not the first time that Buterin has discussed the concept of stealth addresses in Ethereum.

In August 2022, it doubled stealth addresses as a “low-tech approach” to anonymously transfer ownership of ERC-721 tokens – otherwise known as NFTs.

The Ethereum co-founder explained that the proposed stealth address concept offers different privacy than the current United States Office of Foreign Asset Control. (OFAC) – Tornado Cash sanctioned:

“Tornado Cash can hide transfers of traditional fungible assets such as ETH or major ERC20 […] but it is very weak at adding privacy to dark ERC20 transfers, and it cannot add privacy to NFT transfers at all.

Buterin offered some advice for Web3 projects developing a solution:

“Basic stealth addresses can be implemented fairly quickly today and could be a significant boost to practical user privacy on Ethereum.”

“They do require some work on the wallet side to support them. That said, I think wallets should start moving towards a more native multi-address model. […] also for other privacy-related reasons,” he added.

Buterin suggested that stealth addresses could introduce “longer-term usability issues”, such as social recovery issues. However, he is convinced that the problems can be properly solved in the long term:

“Longer-term, these issues can be resolved, but the long-term stealth address ecosystem looks like an ecosystem that would rely really heavily on zero-knowledge evidence,” he explained.