Vitalik Buterin, the co-founder of Ethereum, recognizes the privacy problem in the most active smart contracting platform. He is proposing a stealth address system as a possible fix.

Vitalik Buterin’s idea radically differs from what Tornado Cash, a crypto mixer, and similar platforms offer. Instead of the sender having control, it would be the recipient in charge. This is crucially important because, in ordinary settings, the asset receiver would desire to keep transactions, financial or otherwise, private and away from the public’s prying eyes. 

By default, transactions in Ethereum and other public blockchains can be traced. This characteristic is available for all users, despite the basic levels of encryptions concealing the identity of the sender and receivers. 

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To counter the openness in Ethereum and cushion the privacy of asset receivers, stealth addresses would be created by the sender or receiver. However, the receiver will be the one in charge. At any point in the transfer cycle, the receiver will be free to create a spending key which he can then use to create a “stealth meta-address.”

This address is then sent to the sender, who does a small computation and creates a stealth address that belongs to the recipient. The recipient will always be in charge if they send assets to this address. 

Additional cryptographic data will be published on-chain to affirm that the receiver controls the stealth address. A key blinding mechanism is added to break the public link between the sending and receiving addresses due to the additional cryptographic data sent on-chain.

Vitalik also proposes the integration of ZK-SNARKs to boost privacy further when using stealth addresses. Integrating ZK SNARKs would increase the difficulty of linking transactors, a benefit for the receiving address seeking more privacy.

Vitalik explains in his research blog that the stealth address system provides a different kind of privacy offered by Tornado Cash. The co-founder notes that Tornado Cash is only suitable for individuals who want to send assets to their addresses. While Tornado Cash is widely popular and used by thousands to obscure ETH and ERC-20 transactions, it cannot hide the receiving address of assets complying with the ERC-721 standard, mainly NFTs. 

In early August 2022, the United States Treasury Department barred U.S. citizens from using the mixer. The Under Secretary of the Treasury for Terrorism and Financial Intelligence, Brian Nelson, said the Tornado Cash creators had failed to add adequate controls to prevent the tool from being used to launder money.

Treasury alleged that North Korean hackers and other agents had used the tool to launder billions of dollars since 2019. Most of the laundered funds came from Decentralized Finance (DeFi) and exchange hacks. 

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