It is without a doubt that blockchain technology has revolutionized the way we store and transfer data securely and anonymously. The concept of privacy has been at the forefront of crypto since its inception. Since 2009, Bitcoin transactions have allowed anyone to send monetary value anywhere in the world, with only an alphanumeric wallet address as form of identity. As this technology has been gaining more traction, crypto and blockchain have been more involved and regular in the lives of many. Privacy has been placed on the back burner to make way for other features, such as scalability and transaction transparency.
The Penumbra Protocol is a next-generation blockchain platform that provides superior scalability, privacy, and decentralization. Using cutting-edge technologies such as zero-knowledge proofs, atomic swaps, and sharding. The Penumbra Protocol offers users a secure and private way to trade digital assets without having to worry about the security and privacy of their funds.
What is Penumbra?
Penumbra is a privacy-focused network and a decentralized exchange (DEX) for the Cosmos ecosystem. Penumbra utilizes a novel private proof-of-stake delegation algorithm that enables private voting for on-chain governance, staking derivatives, and more. Although not based on the Cosmos SDK, Penumbra is currently being tailored for the Cosmos ecosystem, connecting to other Cosmos networks through the IBC protocol. Leveraging the ICS-20 transfer protocol on the IBC, Penumbra creates a shielded pool allowing private data replication between two interacting blockchains or the value exchange between two IBC-supported networks.
As a PoS network, Penumbra handles staking quite differently from other chains, as Penumbra doesn't provide stakers with staking rewards in the traditional sense. Penumbra tokenizes staking rewards as bonded or unbonded assets, allowing them to be represented by a single fungible delegation token, adjusting the price for the would-be staking rewards, corresponding to a share of that validator's delegation pool. As a result, delegators only receive "rewards" when unbonding their staked tokens. This delegation fungibility mechanism is in place because traditional staking reward issuance becomes convoluted. After all, in a fully private chain, there would be no public record of the duration and amount of each address' delegations.
According to development updates, Penumbra is, first and foremost, a DEX. To allow blockchains to recognize trade values and amounts without revealing compromising user information, Penumbra utilizes "sealed-bid batch swaps." As all swaps are executed in a single batch, Penumbra reveals a total sum of the batch to the receiving network rather than individual transactions only after transactions have been finalized, putting an end to the possibility of malicious attacks such as front-running.
How does Penumbra create a private blockchain and DEX? In short, using data modeling, advanced cryptography, and Zero-Knowledge tooling.
According to the Penumbra team, the DEX only supports concentrated liquidity positions akin to UniSwap v3. By allowing users to provide liquidity through the creation of anonymous concentrated liquidity positions, liquidity providers (LPs) focus their liquidity on a custom price range that the assets in the pair actually trade and enable users to privately approximate arbitrary trading functions without disclosing specific opinions about prices. The position functions as a constant-product market maker with greater "virtual" reserves within that price range. The pool collects liquidity from all positions and keeps track of which positions are still active as asset price changes. To approximate any trading function, LPs can create multiple positions.
So, why Penumbra? According to the network’s founder, Henry de Valence, there are several different use-cases for a privacy-first blockchain. First and foremost, Penumbra enables users to make private transactions. According to Henry de Valance: use-cases for Penumbra include:
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Prevent Front-running
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Private Trading
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Private Crowd Sourcing
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Private PoS delegation
Front-running is a type of attack in which a bad actor notices a purchase on the blockchain mempool, or transaction queue, and submits their own transaction with a higher gas price to "bribe" the miners into giving priority to the front-runner's transaction over the original transaction. The original purchaser is then left to pay a higher price for the token or digital asset. The attacker then sells the token at a higher price for a profit. The attacker effectively manipulates the market to "buy low and sell high." Transactions conducted on Penumbra are not visible to anyone except the trader due to Penumbra's sealed-bid batch auctions, which only reveal a net flow across a pair of assets rather than individual transactions, purportedly eliminating front-runner types of attacks.
As mentioned before, all historical trading data is private, giving traders full control over the accessibility of their data. This allows Penumbra users to not reveal their trading strategies or "alpha" to anyone. While users have their private keys to view and manage transactions, Penumbra has a tool to manage the disclosure of information and prevent bad actors from looking at transactions. Penumbra generates a separate view key, giving the user full control over their trading data and allowing users to comply with tax statements and other official documentation.
What makes Penumbra different?
Penumbra is actually the is actually the first IBC-enabled network, not built on the Cosmos SDK. Penumbra is unlike other blockchain networks that focus on general-purpose computation, Penumbra claims to be a more market-fit product for trading, focusing on the private interaction with a public blockchain while keeping transactions private across multiple IBC-enabled blockchains.
Penumbra is still under active development, launching weekly testnets with an active community of developers. If you would like to learn more about Penumbra, listen to the Frens Validator Crypto podcast, featuring Penumbra’s founding member, Henry de Valance, answering questions about Penumbra’s vision, goals, and current development process.
If you’d like to know more about the Penumbra, have a look at their official website or connect through Twitter, Discord, and Github. More Information & Sources
DISCLAIMER: This is not financial advice. All content provided is strictly for informational purposes only. Cryptocurrency investing and staking involve significant risk, with the possibility of loss of all staked digital assets. As general practice when investing, always DYOR.