Despite the massive surge in cryptocurrency values in the last 18 months, many enterprises remain wary of using public blockchains. One of the biggest reasons is a lack of privacy. Yesterday saw the unveiling of a new startup Espresso Systems that aims to address the issue, with $32 million in backing, including from five companies involved with the largest 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 a ridiculous suggestion, but that’s pretty much the situation with stablecoins on public blockchains. And one that Espresso hopes to address.
Private stablecoin payments
The ability to have private payment transactions must be appealing to stablecoin companies because many are now investors:
- One backer is quantitative trading firm Alameda Research which processes a very significant chunk of issuance transactions for the largest stablecoin, Tether
- Coinbase Ventures is an investor, and Coinbase backs Centre, which governs the USDC stablecoin, the second largest
- Paxos operates the third largest stablecoin on behalf of Binance, as well as processing crypto transactions for PayPal, and has a securities settlement solution in which several big banks are participants
- Terra operates the fourth largest stablecoin (not fiat-backed)
- And Gemini, the issuer of 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 both digital assets and associated transactions, particularly for stablecoins. Zero Knowledge Proof (ZKP) cryptography underpins Espresso’s technology, and three of the founders studied for cryptography PhDs at Stanford.
CAPE allows the stablecoin or asset issuer to define privacy policies around the sender and receive addresses, amounts and even the type of asset. It also supports credential verification and is working with Centre, which is designing identity standards.
While CAPE works 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 rolling out scaling solutions have resulted in several suitors to its throne in addition to many Layer 2 scaling solutions. So what makes Espresso so special?
Zero Knowledge Rollups (ZK-rollups) are regarded by many as the leading type of Layer 2 scaling solution. It involves batching transactions off-chain and then verifying a cryptographic proof of the transactions that is stored on-chain. But when it’s used as a layer two solution, it has some drawbacks, which are addressed by moving it to the core chain.
Firstly the layer 2 operator can influence transaction ordering which is a pretty major issue in any kind of trading. Blockchain is meant to be trustless. You really shouldn’t have to rely on the operator’s integrity not to choose who gets the lowest price.
Secondly, it’s the layer 2 proof that gets stored on the layer 1 blockchain, not all the transaction data. Certain ZK-rollups add some of the data as meta information. But if you want to query transactions, most layer 2 solutions need to be separately queried. One of the benefits of blockchain was to avoid the need for numerous API integrations creating spaghetti complexity. But here we are, separately querying multiple layer 2 solutions.
Hence Espresso can address these two issues while also enabling scalability, lower transaction fees and more environmentally friendly proof of stake consensus.
Haven’t others done privacy before?
Espresso certainly isn’t the first to implement privacy solutions on Ethereum. EY has introduced multiple privacy solutions based on Zero Knowledge Proofs. It also collaborated with Microsoft and ConsenSys on the Baseline Protocol. And more recently, enterprise blockchain firm R3 said it would experiment 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 such as Monero and Zcash which are treated with suspicion. But Espresso’s route is more similar to a regulated environment.