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Confidential Transaction

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Confidential Transaction (in short CT) is a type of protocol that conceals both the amount of Litecoin you send and the LTC address of the recipient.

Despite Litecoin's pseudonymous nature, it doesn't offer much privacy. With Chain analysis, Litecoin transactions as well as where previously spent, can be tracked as a result of its blockchain public nature.

Litecoin's lack of privacy reduces its fungibility, potential and restrains its ability of being a censorship resistant exchange medium. Confidential Transaction helps look into issues found in the public blockchains.


Confidential Transactions function by using a new address and a format. This format is made up of ecdh nonce, Pederson commitment and a scriptPubKey.

The ecdh nonce is the key that opens the complete CT. It is used in communicating encrypted data to the recipient of the transaction so that they can get some knowledge about the blinding factor of the CT as well as the LTC transaction output. The Pederson commitment is the hash of the total output of LTC plus a binding key, 

Finally, the scriptPubKey is made up of the Confidential Transaction Address (CTA) and a mathematical condition that the LTC can only be spent if there is a proof with signature to the ownership of the address' private key. The CTA is the hash of a blinding key in addition to a regular LTC address. This blinding key conceals from the public blockchain, both the LTC amount and address.


How does this work?

Let's take for instance, Josephine has 2LTC in her address and intends sending 1LTC to Joe. She then takes Joe's LTC address, creates a blinding key and then hashes both together. This creates a Confidential Address. 

Although this will be reflected on the public ledger, just Josephine and Joe know about the CTA being tied to Joe's Litecoin address. Josephine then creates the CT and a Pederson commitment making use of the same blinding key and the 1LTC output, to conceal the amount of LTC she's sending to Joe.

Just the both of them involved in the transaction can view the amount because they possess the public blinding key. Alice has it, simply because she created the key while Bob can access it with his LTC address' private key.

Next, Josephine creates a scriptPubKey using the self-created CTA which she did using Joe's LTC address including a mathematical condition that the 1LTC can be spent if Joe can provide the exact signature to the address’ private key.


Keeping Zero balance sums

One of the major principles in Litecoin is that it addresses must keep a zero (0) balance sum. This means that the amount of LTC leaving an address must be the same as that sent to the address.

However, due to the fact that CTs muddles amounts, it brings up two issues: First, it will be impossible to calculate the traditional way mining fee through subtraction and secondly, if the output from an address is the same as the input, it will be impossible to know the clients involved.

The first issue is easily solved by the public sharing of the mining fee while the second is somehow more complicated, but can also be solved through Pederson commitments.


Pederson Commitments

Pederson commitment is homomorphic in nature, because it has a unique mathematical property. Homomorphism has to do with a structure preserving map between two algebraic structures. This works well with cryptography because it helps in hashing data and in the usage of basic algebra. With this, you can provide the information and still conceal the data used.

CTs utilize Pederson Commitments' homomorphic property to make sure that LTC addresses keep the Zero balance sum.

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