No other privacy protocol has managed to engage Vitalik Buterin in monthly Ethereum transactions as Railgun has. Over the past six months, Vitalik has regularly interacted with Railgun using ETH, a fact he confirmed on Twitter, even giving Railgun a shoutout. The market responded quickly, with its token RAIL’s price briefly soaring from $0.8 to around $1.8, more than doubling in value.

In the long history of privacy protocols, many have come and gone, but few have remained. There are several complex factors involved, such as policies, costs, and adoption rates. In January 2022, Digital Currency Group (DCG) and Railgun DAO formed a strategic partnership aimed at bringing privacy to DeFi. As part of this partnership, DCG acquired and staked over $10 million worth of Railgun’s native token RAIL and donated more than $7 million in stablecoins to the project’s DAO treasury. In the first three months of this year alone, Railgun’s transaction volume exceeded $200 million, underscoring the significant features that attract numerous users.

Introduction to Railgun

Railgun is a privacy system built directly for blockchains, currently supporting Ethereum, BNB Chain, Polygon, and Arbitrum. It primarily utilizes zero-knowledge proofs to anonymize the use of smart contracts and DeFi. Railgun only involves the logic on the blockchain’s smart contracts, thus eliminating the need for L2 validators and vulnerable cross-chain bridges to achieve privacy. This enhances its security and decentralization. Additionally, Railgun is not an isolated ecosystem on a standalone privacy chain but can access all economic activities on Ethereum, avoiding the creation of a “ghost chain” fortress.

Railgun consists mainly of two components: firstly, an integrated wallet developed by the independent community, which is an EVM-compatible wallet. Secondly, a development tool TypeScript SDK, used to build Railgun’s privacy features into existing/new wallets or privacy-enabled DAPPs.

Privacy System

In blockchain transactions and transfers that are publicly visible, there are typically four key elements: sender, receiver, the name of the asset being sent, and the quantity of the asset. To achieve privacy, it is necessary to anonymize these four pieces of information. Railgun accomplishes this by using private balances to protect transaction information within the system. These private balances consist of anonymous funds and users, which remain anonymous to outside observers.

Given this context, the degree of anonymity of private balances in Railgun is crucial for the security of privacy. The overall privacy level of private balances in Railgun depends on three aspects:

1. The volume of individual private transactions and the total number of users;

2. The total TVL (Total Value Locked) in the smart contract;

3. The volume of DeFi transactions and private transfers.

Generally, the more funds there are in a privacy pool, the higher the degree of anonymization of the protocol, as the likelihood of linking depositors with assets is relatively small.

Moreover, Railgun also employs relayers and UTXO to enhance privacy. Transactions sent by users originate from relayers and cannot be traced back to public addresses. UTXO stands for Unspent Transaction Output, similar to the spending systems of BTC and Zcash. It represents the right to use currency and is implemented in Railgun as a Merkle tree (a type of organized and encrypted data tree that allows Railgun smart contracts to track ownership and balances through cryptographic proofs). The key difference here is that Railgun’s Merkle tree is completely anonymous and stored within the smart contract.

The final component is the SDK, used for the integration of private smart contract transactions and wallet protocols. Users have public chain addresses, a 0x address, and an obfuscated Railgun address starting with 0zk. Transactions sent from the 0zk address are completely anonymous and appear on blockchain explorers (like Etherscan) as originating from the Relayer address. The identification details are encrypted and hidden throughout the entire process using zk-SNARK proofs.

To make this clearer for the readers, let’s use a vivid analogy. Imagine Railgun users as the authors of letters, while ZK proofs act as fact-checkers for the contents of these letters. The Railgun smart contract is like a sealed envelope, and relayers are the mail carriers. External observers can only see that a letter has been mailed but cannot see the contents of the letter or who sent it.

Tokens and Governance

RAIL is the governance token of Railgun, usable on the Ethereum network. RAIL liquidity is available on SushiSwap and Uniswap, with optimal routing provided by Matcha. Staking RAIL allows for voting on governance proposals related to protocol upgrades and shielding/unshielding fees. Any wallet that stakes RAIL becomes a member of the Railgun DAO.

Rewards for Active Governance Participants

Active participants in governance receive a portion of the shielding/unshielding fees. To qualify as active, participants must meet four basic conditions:

Fully stake and lock tokens (with at least some tokens not exceeding the unlocking period);

Check the governance portal at least once to verify ongoing proposals;

Pay gas fees to claim interactions;

Not delegate their vote to another address, as the rewards would then go to the delegated address instead.

Every two weeks, 2% of the treasury is allocated to the claiming mechanism, meaning approximately 52% of the funds are directed to stakers annually. Active governance participants in Railgun receive a share of this allocation proportional to the amount of RAIL they have staked. For example, if you have staked 1% of all staked RAIL, you would receive 1% of the bi-weekly 2% distribution.

Once tokens are staked, withdrawing them initiates a 30-day unlocking period during which the user loses voting rights and does not receive rewards.

Tokenomics

On Ethereum, the total supply is set at 100 million, on BNB Chain it is 44,546,789, and on Polygon, it is 55 million. Both Polygon and BNB Chain’s Railgun have their own independent governance DAOs, therefore, they possess their own chain-specific tokens. RAIL (on Ethereum), RAILPOLY, and RAILBSC are different as they manage and receive rewards from Railgun deployments on their respective chains.

This governance structure, with a separate DAO on each chain, maximizes security and decentralization. It eliminates reliance on cross-chain bridges and allows each DAO to vote on issues specific to their chain.

V3 Upgrade

It is worth noting that Railgun is about to undergo a V3 upgrade to enhance privacy performance through architectural changes. Specifically, the upgrade will be optimized in five areas. The first is the adoption of a modular design to significantly reduce gas fees, allowing for individual upgrades and protocol customization (reducing DeFi transaction costs by 50%-60%).

Secondly, new options for Relayers will be introduced, where transactions can have their own alternative mempool for cheaper, more stable, and reliable transactions.

Thirdly, support for “intent” design will be provided, where users specify the desired outcome, and the resolver can execute the best transaction path across various protocols. This improves user experience by offering better prices and protection against MEV, while reducing complexity.

Fourthly, support for NFT access cards will be provided, allowing users to interact with leveraged DeFi protocols such as perpetual contracts, loans, and collateral-based stablecoin minting. These access NFT cards enable interaction and offer additional features like one-click transactions.

Lastly, support for the Connect feature, similar to WalletConnect, will be introduced, allowing users to log into dApps without integration. This feature is currently under development and is expected to be updated in the second quarter.

Conclusion

Vitalik has also tirelessly supported another privacy protocol; in October 2023, he invested in Nocturne Labs. Unfortunately, although the project launched its mainnet on Ethereum the following month, by the end of January this year, Nocturne announced the shutdown of its privacy protocol to pivot towards application development. The official reason given was the crypto industry’s transition towards Layer 2 and Account Abstraction (AA), with priorities far outweighing privacy. The primary concerns for users are cost and user experience, with privacy being a secondary issue for now.

This situation is reminiscent of the early days of the internet, where HTTP lacked privacy protection for a long period and did not provide encryption until security issues became more severe and technology matured, leading to the widespread adoption of HTTPS. Initially, due to its slow speed and complexity, HTTPS was only used on credit card or banking sites. It only became the default protocol for websites when computational costs decreased significantly, and sites could quickly implement HTTPS.

Privacy protocols still have a long way to go, and Railgun is making significant strides on this path.

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