What is a Bitcoin confidential transaction?

A Bitcoin confidential transaction is a cryptographic technique used to enhance the privacy and confidentiality of transactions on the Bitcoin blockchain. It allows users to conceal the amounts being transacted while still ensuring the integrity and validity of the transactions. Confidential transactions are achieved through the use of cryptographic techniques such as Pedersen commitments and range proofs.

Here's how a Bitcoin confidential transaction typically works:

1. **Pedersen Commitments**: In a confidential transaction, the amount being transacted is hidden using a cryptographic technique known as a Pedersen commitment. A Pedersen commitment is a mathematical construct that allows a user to commit to a value without revealing the value itself. It consists of two parts: a public commitment and a private blinding factor.

2. **Range Proofs**: Although the amounts are hidden using Pedersen commitments, it's important to ensure that the committed values are within a valid range, such as non-negative integers. Range proofs are cryptographic proofs that ensure the validity of the committed values without revealing the values themselves. They prove that the committed values are within a specified range, such as the range of valid amounts in a Bitcoin transaction.

3. **Confidential Transactions**: In a confidential transaction, the amounts being transacted are hidden using Pedersen commitments, and range proofs are included to prove the validity of the committed values. This allows users to conceal the amounts being transacted while still ensuring that the transaction is valid and cannot be tampered with.

Bitcoin confidential transactions offer several benefits:

- **Privacy**: Confidential transactions enhance the privacy of transactions on the Bitcoin blockchain by concealing the amounts being transacted. This reduces the amount of information that is publicly available on the blockchain and helps protect the financial privacy of users.

- **Confidentiality**: Confidential transactions provide confidentiality for sensitive transactions, such as those involving large amounts of money or business transactions. By hiding the amounts being transacted, confidential transactions help prevent unauthorized access to sensitive financial information.

- **Security**: Despite hiding the amounts being transacted, confidential transactions still ensure the integrity and validity of transactions through the use of cryptographic techniques such as Pedersen commitments and range proofs. This maintains the security of the Bitcoin network and helps prevent fraud and double-spending.

Confidential transactions have been proposed as a feature for Bitcoin to improve its privacy and fungibility. While they have not been implemented directly into the Bitcoin protocol, they have been implemented in various Bitcoin-based projects and sidechains, such as the Elements Project and Liquid sidechain, as well as in other cryptocurrencies inspired by Bitcoin, such as Monero.