Ethereum DeFi Monero Privacy: Incognito is a new privacy and interoperability project that seeks to anonymize the tokens of every other blockchain. As part of that goal, it is launching private versions of leading Ethereum (ETH) decentralized finance platforms.
Announced on April 24, the pKyber initiative is the first part of Incognito’s initiative to make DeFi private. First theorized in October, pKyber began full-scale testing on April 24. The team plans to release this to the Incognito mainnet on May 7.
How does it work?
Incognito is a standalone blockchain that focuses on private transactions. Its privacy technology is based on the same technologies used by Monero (XMR), including ring signatures, stealth addresses and confidential transactions.
Unlike Monero, Incognito focuses on interoperability with other blockchains and supports private tokens. As Andrey Bugaevski, ecosystem lead at Incognito, told Cointelegraph, the project’s goal is to create a universal sidechain for public blockchains to benefit from privacy features.
Bugaevski stressed that while Incognito does not support full smart contracts, it still allows the creation of tokens and a limited set of scripting instructions. These are enough to create trustless bridges with other smart contract platforms.
The pKyber platform uses Incognito’s shielding smart contract to interact with the Kyber decentralized exchange on mainnet. Users transact with pEthereum, a private token, to initiate a transaction with pKyber. Incognito’s “Broker” contract on Ethereum reads this data and initiates an Ethereum transaction on Kyber using its shared pool of public ETH.
Essentially, Incognito acts as a trustless proxy for private trading instructions, allowing a person to swap ETH for the DAI stablecoin without ever interacting directly with the Ethereum blockchain.
Incognito’s roadmap also includes integrations with 0x, Uniswap and the Compound lending platform, all to be finished before July 2020.
A young but surprisingly complete project
While DeFi integration is the latest Incognito update, the project achieved many milestones since the launch of its mainnet on Oct. 31, 2019. The project provides today a functional way of shielding Ethereum, Bitcoin (BTC), USDT, DAI, BAT, ZIL and several other tokens.
It is worth noting that this system, like any blockchain with opt-in privacy, needs to be used carefully when simply “mixing” funds.
Most of the features are accessible through a mobile-centric Incognito wallet, available for both iOS and Android. The wallet includes dedicated features like Incognito’s decentralized exchange, staking services and token shielding.
There is a proprietary token called PRV, whose primary purpose is to be used for transaction fees. But the fees can also be paid with the token used for the transaction. This was done to maintain usability, with Bugaevski saying:
“We’re not trying to build a new privacy coin. Nobody needs a new Monero or a new Zcash”
Unique non-privacy innovations
The PRV is used as a block reward for validators, as Incognito uses the Proof of Stake (PoS) model. Unlike many other PoS blockchains, it not run an initial coin offering or airdrop as a token distribution mechanism. While there is an initial “pre-mine” of 5 million PRV reserved for development and the team, 95 million more are expected to be created as block rewards.
This poses a problem for distribution, as a pure PoS model would simply have the team own nearly 100% of the supply.
To fix this, Incognito used an innovative solution where stakers can borrow 1750 PRV (about $700) as their stake and obtain part of the rewards from that loan. Currently staking can only be done on dedicated node devices, which simulate the acquisition of a mining rig.
The system is thus “rigged” to work like a Proof-of-Work system for the initial distribution, with Bugaevski explaining:
“The theme here is that every node in the network has the same power. So there is no way that you put more tokens, and you have more [staking] lots.”
The project also proposed an innovative solution to the trustless bridge problem in Bitcoin: decentralized custodians. Unlike custodial bridge systems currently used for tokenized Bitcoin, Incognito’s bridge would use a system based on economic incentives and collateral slashing — similar to MakerDAO — to completely decentralize custody.
This small project thus appears to have solved some of the more complex problems in cryptocurrency without really compromising on decentralization.