Midnight: Charles Hoskinson’s latest coup?

What issues does Midnight address?

Privacy and data protection are a particularly hot topic in the crypto world. The problem: the more anonymous a digital process takes place, the more it escapes any regulations. Midnight aims to fill this gap by involving authorities through permits under certain conditions set by the protocol. Cardano founder Charles Hoskinson explains in an interview: “Anytime you engage in a regulated business, there is a privacy requirement because a regulated business requires you to disclose some personally identifiable information. And on the other hand, there’s a privacy law that says you have to keep it secret. The problem is, if you try to do that in a blockchain environment, the private information becomes public to everyone.”

That’s how Midnight wants to do the balancing act

Midnight addresses this problem with a number of new features. First of all, the blockchain relies on zero-knowledge proofs (ZK-proofs). A form of encryption and validation of transactions that allows one party to prove to the other that they know something without having to reveal the specific knowledge. A roughly simplified case would be, for example: Person B asks Person A for a password. Person A does not want to reveal this password specifically for data protection reasons. So Person A gives Person B information proving that Person A knows the password.

Flexible privacy?

The real highlight of Midnight, however, are private smart contracts. These work in such a way that “instead of a privacy coin, you have a confidentiality framework,” Hoskinson explains, and you have “smart contracts that are private, which is a big deal.” These are therefore smart contracts whose visibility can be defined by the protocol. The degree of confidentiality of the Smat Contracts should be flexible. So users can decide for themselves how much insight external parties have into their transactions, at least that’s the promise. This flexibility is intended to create greater compatibility with state regulations.

A comparison from the classic financial world would be, for example, the obligation to report transfers if they exceed a certain amount. In certain cases, these transactions are then checked more closely. With flexibly privatized smart contracts, authorities could be given more insight into the transaction data and link them to certain conditions. In this way, smart contracts can be adapted to legislation if desired. Midnight’s big promise is to bring regulated transactions to the blockchain without relinquishing the power of disposal of sensitive data from the users.

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Private smart contracts: the terms and conditions of the crypto world?

However, not everyone is optimistic about Hoskinson’s plans. Critics fear backdoors for regulators and see their data in far more insecure hands than the project suggests. Layer 2 solutions often offer security gaps. In addition, another problem that is already well known in Web2 could appear with the flexible Smart Contracts. If a person thinks a smart contract is too transparent because it gives too much insight to external parties, they do not have to enter into the contract and continue to make decisions about their data themselves.

However, a similar effect could arise as we know it from the terms and conditions, i.e. from consenting to certain terms of use of web applications. You don’t have to hand over your data, but the result is an exclusion from the system because everyone else is also using these applications. Most workplaces base their organizational structures on the use of such services. The decision to disclose his data is only apparently at the discretion of the individual. It will be particularly exciting to see whether such problems can be eliminated from the field with mechanisms such as zero-knowledge proofs in the specific application.

You can read here what new developments are still to come at Cardano in the new year.