Despite the massive increase in cryptocurrency values over the past 18 months, many businesses remain reluctant to use public blockchains. One of the main reasons is the lack of privacy. Yesterday saw the unveiling of a new startup Espresso systems which aims to fix the problem, with $32 million in support, including from five companies involved in the biggest stablecoins. The round was led by Greylock (Reid Hoffman) and Electric Capital.
Imagine if everyone could see your bank payments or PayPal transactions. It seems like a ridiculous suggestion, but that’s pretty much the situation with stablecoins on public blockchains. And the one Espresso hopes to address.
Private stablecoin payments
The ability to have private payment transactions must be attractive to stablecoin companies as many are now investors:
- One of the backers is quantitative trading firm Alameda Research, which handles a very large share of issuance transactions for the largest stablecoin, Tether.
- Coinbase Ventures is an investor and Coinbase backs Center, which governs the USDC stablecoin, the second-largest
- Paxos operates the third-largest stablecoin on behalf of Binance, as well as crypto transaction processing for PayPal, and has a securities settlement solution in which several major banks participate
- Terra operates the fourth largest stablecoin (non-fiat backed)
- And Gemini, the issuer of the Gemini dollar, is also an investor.
Espresso is launching a standalone blockchain as well as a solution for Ethereum: Configurable Asset Privacy on Ethereum (CAPE), a privacy offering for digital assets and associated transactions, especially for stablecoins. Zero Knowledge Proof (ZKP) cryptography underpins Espresso’s technology, and three of the founders studied for a PhD in cryptography at Stanford.
CAPE allows the stablecoin or asset issuer to set privacy policies around the sender and receive addresses, amounts, and even asset type. It also supports credential verification and works with the Center, which designs identity standards.
While CAPE is working on Ethereum, the startup is also working on its own Espresso Layer 1 blockchain.
Espresso – yet another blockchain?
Do we really need another layer 1 blockchain? Ethereum’s high fees and delays in deploying scaling solutions have resulted in several contenders to its throne in addition to numerous layer 2 scaling solutions. what makes Espresso so special?
Zero Knowledge Rollups (ZK-rollups) are considered by many to be the primary type of Layer 2 scaling solution. This involves aggregating off-chain transactions and then verifying a cryptographic proof of the transactions that is stored in chain. But when used as a layer two solution, it has some drawbacks, which are solved by moving it to the main chain.
First, the Layer 2 operator can influence the order of transactions, which is a pretty big issue in any kind of trading. Blockchain is supposed to be trustless. You really shouldn’t have to rely on the integrity of the trader to not choose who gets the lowest price.
Second, it is layer 2 evidence that is stored on the layer 1 blockchain, not all transaction data. Some ZK rollups add some of the data as meta information. But if you want to query transactions, most Layer 2 solutions need to be queried separately. One of the benefits of blockchain was avoiding the need for many API integrations creating spaghetti complexity. But here we are, separately querying multiple Layer 2 solutions.
Therefore, Espresso can address both of these issues while enabling scalability, lower transaction fees, and more environmentally friendly proof of consensus.
Haven’t others already made confidentiality?
Espresso is certainly not the first to implement privacy solutions on Ethereum. EY has introduced several privacy solutions based on Zero Knowledge Proofs. He also collaborated with Microsoft and ConsenSys on the core protocol. And more recently, enterprise blockchain company R3 said it would be experimenting with a layer 2 Ethereum solution that uses its Conclave privacy offering.
ZK snarks has been around on Ethereum for years, and there are completely private solutions like Monero and Zcash that are treated with suspicion. But Espresso’s route is more like a regulated environment.