What are hidden addresses and how do they work?

Crypto addresses, explained.

The purpose of crypto anonymous addresses is to enable privacy for each transaction, hiding the recipient's identity and transaction history.

Crypto addresses are a privacy-enhancing feature of blockchain technology that allows users to receive funds anonymously. Unlike conventional public addresses, private addresses provide unique one-time addresses for each transaction. The receiver's real address is kept secret when a sender transfers money using an encrypted address. The transaction is distributed to the network.

The recipient does not directly generate the private key from the hidden address; The wallet is designed to identify incoming transactions. It then uses the private key associated with the recipient's public address to identify and process these transactions. This process allows the recipient to access and control the funds received without exposing their primary address.

As a result, the privacy of cryptocurrency transactions is increasing significantly, users can expect to be monitored or checked for financial activity. Crypto addresses support the continued growth of private and secure transactions in the blockchain ecosystem by adding additional security.

Monero (XMR) is a prime example of a cryptocurrency that uses hidden addresses. It uses a variety of features including ring signatures and hidden addresses to provide users with enhanced privacy and anonymity. The receiver's hidden address is used during Monero transactions, making it challenging for outside observers to link the sender, receiver, and transaction amount.

Hidden addresses with normal wallet addresses

Hidden addresses provide enhanced transaction privacy with a unique one-time address, whereas standard wallet addresses lack such privacy measures and are often static.

Implicit addresses look like regular cryptographic addresses, typically consisting of strings of characters and numbers. The key differences, however, are their simultaneous use and the encryption methods they use to hide the connection between the recipient's real address and the hidden address.

In contrast, when using traditional wallet addresses, the repetition of the same address for multiple transactions allows users to track their financial activity. With the potential to provide sensitive information, this practice violates privacy by allowing third parties to track and analyze transaction histories.

Additionally, adversaries can use this pattern to identify sources of income, spending patterns, and overall financial behavior. Additionally, address reuse increases the risk of many attacks, such as phishing attempts and exposing users to malicious organizations.

How do hidden addresses work?

Crypto addresses enhance confidentiality by creating unique addresses for each transaction, which only the intended recipient can access and identify.

To understand how to use implicit addresses, let's go through an example: Bob and Alice are two individuals using hypothetical encryption. They decided to use hidden addresses to increase privacy. These cryptographic structures provide an additional level of identity that creates unique one-time addresses for each transaction.

Step 1: Bob generates and shares the hidden address

Bob creates two addresses (let's call them A and B) but shares A publicly only when he keeps private address B secret. This combination is the new “hidden address”, which is an apparently random string of characters unique to this transaction. Together, the pair (A, B) forms the secret address that Bob uses to receive money.

To complete the transaction, Bob provides the sender Alice with the generated secret address (public), the necessary information that Alice needs to create Bob's secret address.

Step 2: Alice calculates Bob's secret address and sends money.

Alice performs a cryptographic calculation using Bob's public secret address (A) and a random number (r) to generate a new address. A separate, one-time hidden address (temporary) is created specifically for this transaction as a result of this calculation. Alice sends the money to this address (P), increasing the privacy of the transaction.

Step 3: Alice publishes a temporary pubkey

Alice posts an ephemeral pubkey (let's call it E) to the blockchain, which Bob wants to access and claim its assets. A temporary public key is a temporary public key generated for a specific cryptographic transaction. This index key is not directly tied to the user's long-term public address.

Step 4: Bob withdraws money.

Bob tracks any transactions on the network that involve his hidden address. When looking at Alice's transaction to P, she uses the secret addresses (A and B) and the ephemeral public key (E) to determine the initial secret number (r). The use of ephemeral publickeys makes it challenging for outside parties to track and link multiple transactions to a single user, even if they appear on the blockchain.

In the process, the Diffie-Hellman key exchange protocol is used, which allows Bob and Alice to create a shared secret over an insecure communication channel. This shared secret is combined with Bob's private key to generate an anonymous and unique destination address. This procedure ensures that different transactions involving the same recipient are kept confidential.

Advantages and disadvantages of hidden addresses

Hidden addresses offer higher transaction privacy but can introduce complexity and slower processing times compared to standard wallet addresses.

Advantages of hidden addresses

Using an encrypted address has many benefits, including improved security and privacy in cryptocurrency transactions. Since each transaction uses a unique, one-time hidden address, hidden addresses support user anonymity by making it difficult for outside parties to track financial activity on the blockchain.

Anonymized addresses reduce the possibility of address reuse, which reduces the possibility of transactional links and protects the privacy of users' financial activities. In order for cryptocurrencies to remain fungible — that is, one unit identical to another — this increased privacy protection is especially important.

Disadvantages of hidden addresses

Despite the privacy benefits, hidden addresses are not a hindrance. A significant drawback is the complexity of their implementation, which can cause user errors and complicate wallet software. Transaction processing times may be slower than traditional transactions due to the additional computation required to create and withdraw funds from hidden addresses.

Additionally, cryptographic addresses are not widely accepted by all cryptocurrencies, limiting their usefulness in some environments. As with any new technology, it's important to train users to use encrypted addresses correctly to maximize their benefits and minimize their risks.