How does confidential transaction technology work?
The technology implements new address formats and new transactions. The transaction format includes scriptPubKey, Pedersen commitment scheme, and ECDH (Elliptical Diffie-Hellman Curve) random code.
The ScriptPubKey contains the confidential transaction address (CTA) and the math condition. According to which Bitcoin can only be spent if the ownership of the private key of the address is confirmed by a signature.
The confidential transaction address is the hash of the blinding key plus a regular Bitcoin address.
The function of the blinding key is to hide the bitcoin address and the transaction amount from the public ledger. In addition, access to the blinding key allows to see the address and the amount of bitcoin in a confidential transaction.
Pedersen’s engagement scheme is the hash of all Bitcoin output plus the blinding key.
ECDH is the key to exposing the entire confidential transaction. It is used to transmit encrypted data to the recipient of the transaction, who will recognize the exit of the Bitcoin transaction and the blinding factor of the confidential transaction.
An example of how confidential transactions work.
Alice’s wallet contains two bitcoins, one of which she wants to send to Bob.
After receiving Bob’s address, Alice creates a blinding key and concatenates them into a single hash. This creates a confidential address. No one except Alice and Bob knows that the confidential transaction address is associated with Bob’s.
Alice then creates a confidential transaction. Using the same blinding key and the output of a bitcoin, she creates a Pedersen link. Thanks to this, the amount that Alice sends to Bob is hiding. But both can see it. Both have a blinding public key. Alice has it because she created a blinding key, and Bob can derive it using the private key from his bitcoin address.
Alice then creates a scriptPubKey with the confidential transaction address. She creates this one with Bob’s bitcoin address, with the mathematical condition that a bitcoin can be spent. The transaction is then recorded in the public ledger.
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