Can privacy and compliance be balanced on the blockchain?

The "privacy" pursued by the encryption world often cannot regulate compliance, and is even suppressed by the government, how to ensure the on-chain privacy of encryption users under the premise of legal compliance? This article is based on an article written by Mr. Chu Yan and compiled by Foresight News. Vitalik's ideal encryptionWallet: cross-L2 transaction experience, account privacy, becoming a data Wallet. (Background added: Privacy Coin damn it!) International Academic Papers: The Government Responds to the Public Chain Majority Attack, Suppresses the Coin Price In November 2024, the U.S. Fifth Circuit ruled that the U.S. Treasury Department's Office of Foreign Assets Control (OFAC) sanctions against the coin mixer Tornado Cash violated the International Emergency Economic Powers Act (IEEPA). The Fifth Circuit held that Tornado Cash's smart contracts are decentralized, self-executing, uncontrollable code that cannot be owned, not property, and should not be placed on OFAC's sanctions list, and that OFAC's sanctions exceed its statutory authority. Although the Fifth Circuit's ruling in the Tornado Cash case is seen as a victory for the encryption industry, it has to be acknowledged that North Korean hackers and coin theft criminal organizations are indeed using Tornado Cash to launder coins and evade regulatory enforcement. So is it possible to guarantee the on-chain privacy of encryption users under the premise of legal compliance in the world of encryption? Today, let's share how Coinprotocol Railgun is compliantly protecting users' on-chain privacy. Railgun protocol execution mode Railgun is a smart contract-based privacy protocol that guarantees users on-chain private payments through Zero-Knowledge Proof and Merkle Tree, and uses "proof of innocence" to ensure the security of on-chain funds flowing into the protocol. This approach balances on-chain privacy payments with regulatory compliance. DCG Group, the parent company of Graydu, has invested $1,000w worth of Railgun protocolToken RAIL, donated more than $700w of Stable Coin to Railgun DAO, and invested resources through its subsidiary Foundry Labs to ensure the back-end pressure capacity of the Railgun protocol. Implementation mechanism 1. Token privacy Users use Railway Wallet to hide the tokens in their 0x Address to Railgun's 0zk Address, and after waiting for an hour, the Token balance in the 0zk Address can be used for transfers between 0zk addresses and privacy on-chain interactions such as Defi, and transfers between 0zk addresses do not need to wait and arrive in real time. Railway Wallet supports the privacy of ERC20 Token, ERC-721 and ERC-1155 Non-fungible Tokens. 2. Interact with the bottom layer of the chain through Broadcasters instead of protocol users to ensure transaction privacy After token privacy, users interact with on-chain through Broadcasters in the Railgun protocol, Broadcasters refers to the public 0x Address, which replaces protocol users to pay gas with the underlying Block chain. Complete the on-chain interactive operation. So throughout the on-chain interaction, users do not need to spend ETH/MATIC/BNB as GAS. Theoretically, any 0x address can be used as a broadcaster, and users can select broadcasters based on gas and availability. Broadcasters does not control the token in the user's address, only transmits interactive information, and cannot obtain detailed information such as the transmission address, amount, receiving address, and token type of on-chain interaction, ensuring the privacy and security of the transaction. Broadcasters receive 10% of the total GAS for the entire process. 3. Remove privacy after completing on-chain interaction After the user designates Broadcasters to complete the shielded transaction instead, enter any 0x Address to initiate the unprivacy interaction, thereby extracting their remaining tokens in the Railgun protocol. In token privacy and de-privacy operations, the Railgun protocol smart contract will charge a 0.25% fee and send it to the Railgun DAO's vault Address. These protocol proceeds will be distributed to protocol governors as well as stakers. Railgun uses Zero-Knowledge Proof to guarantee on-chain privacy Zero-Knowledge Proof (ZKP) is a cryptography technology that allows rovers to prove the authenticity of information to validators without revealing the details of the source. In the Railgun protocol, users can prove that they have the right to use tokens without revealing the type and number of tokens, and broadcasters and pools of funds can make the occurrence and receipt of addresses private. For example, Railgun users are like letter writers, ZKP verifies the contents of letters, Railgun protocol's smart contracts are sealed envelopes, and broadcasters are postmen. From the public on-chain can only see that the letter has been sent, but they cannot determine the content of the letter or the sender and recipient. Railgun uses the Merkle Tree to prevent double spending and ensure transaction security Merkle Tree (Merkle Tree), also known as a hash tree, is commonly used on an on-chain to verify the integrity of transaction data. Each block header contains the root hash value of the Merkle tree in order to verify that the transaction data in the entire block has not been tampered with. Since the incident of FTX misappropriating user assets, the current mainstream centralized exchanges have adopted Merkle Tree to verify the custody security of user assets and not be misappropriated. After the user uses the Railgun protocol to privacy the address, the token will be added to the privacy pool. Token balances in the Railgun protocol privacy pool are constructed from BTC-like UTXO login files, and the entire list of Railgun UTXOs forms a Merkle Tree data structure that verifies the balance status during a transaction. All tokens in the Railgun protocol share the Merkle tree, and each token privacy operation updates the state of the Merkle tree, generating a new Merkle root/leaf. This ensures that the number of tokens is sufficient when users transmit shielded transactions, prevents double spending, and ensures the security of transactions. The reason why Tornado Cash is sanctioned is mainly because the North Korean hacking group Lazarus Group and the coinMoney theft criminal group use it to mix coins and evade the tracking and detection of regulatory law enforcement agencies such as the FBI. Private Proofs of Innocence When introducing the implementation mechanism of the Railgun protocol above, it is mentioned that there is an hourly waiting period for users to privacy 0x Address. During the waiting period, Railgun will on-chain Anti-Money Laundering the tokens in the user's address to ensure that the funds in the user's address do not come from high-risk crimes and sanction the address. Railgun protocol's on-chainAnti-Money Laundering is not like centralized transactions...