An essential feature of the current capital markets ecosystem is ensuring that private transactional information (who holds a security and how much they hold) remains confidential at all times. This is where one of the key challenges with public, general-purpose blockchains comes into play — anyone can see the contents or holdings of any public address. And while users can easily have confidential transactions and balances with layer-2 solutions, they come with an unworkable compromise: to add confidentiality, they must sacrifice compliance. For these layer-2 solutions to maintain privacy of transactions, issuers are unable to configure compliance rules or report on ownership. On Polymesh, users are not forced to make the same choice.
Psst. Can you keep a Secret?
Institutions must protect the private and financial information of their clients to comply with privacy requirements and safeguard their financial interests. Today, participants are concerned about the unfair edge provided to algorithmic traders; the worry that these same firms could monitor movements of positions to infer potential trades is even more significant, and one that Confidentiality on Polymesh can protect from. Under these circumstances, securities firms may not be able fulfill large orders without revealing their intention, potentially costing their clients significantly more.
To further complicate the challenges, non-reporting issuers (a fancy name for a private company that does not have to report information to the securities regulator in their jurisdiction) do not want any information that leaks about who owns their shares or how many shares they may own. With a small pool of shareholders, many non-reporting issuers can be left vulnerable to actions affecting the control of a company should their shareholder information become public. The pseudonymous nature of general-purpose blockchains means tokenholders could be discovered and the target of unwanted attention or undue pressure by those looking to influence the security token issuing company.
With Confidentiality on Polymesh, issuers don’t have to worry about corporate information becoming public; information, like how many tokens a holder owns and when they are transferred, remains encrypted and private, the way it was intended.
How it Works
Achieving confidential transactions on a permissioned blockchain is no small feat. Neither is making Confidentiality seamless within the user experience. But for issuers on Polymesh, it’s just that; they are given the option to make transactions with their security token confidential during configuration. And for tokenholders, there’s no difference at all. What happens in the background is much more complex, with zero-knowledge proofs at the heart of technology. A blog post is not the place to try to explain the intricate details of PhD-level cryptography, but not to worry — we’ll be releasing a whitepaper in Fall 2020 that dives into all the details of confidential transactions on Polymesh.
Due to the sheer amount of work involved in creating this new approach to Confidentiality, confidential transactions are outside the scope of our Q1 2021 Polymesh mainnet release. Look out for the release of our whitepaper on the topic and in the coming weeks as well as an update on progress for a confidential transactions preview on our testnet in the fall.
The Polymesh Pillar Series
To understand how a blockchain built for security tokens could best address the challenges affecting adoption and acceptance of security tokens, we learned that it was not just Confidentiality acting as a roadblock. Governance, Identity, and Compliance were also elements that impacted the embrace of this technology by institutions, regulators, and issuers. That’s why each has been built into the core of Polymesh, removing challenges and bolstering security token adoption.
Check out the other blog posts in our series for more information on the other pillars and how they form the foundation of Polymesh.