Austin Hill, chief instigator of the highly regarded Blockstream project, believes confidentiality of data on blockchains will lead to hitherto unseen levels of confidence in the financial system itself.

Hill, whose background is in zero knowledge proof applications and cypherpunk technologies for privacy in electronic cash, thinks blockchain users should be able to have their cake and eat it: the efficiency of a shared ledger system without sacrificing the privacy of transactions therein.

Confidential Transactions is one element within the sidechains project, which Hill says has garnered a lot of interest from Wall Street. He explained how retaining privacy through some cutting edge encryption can leverage the real time audit capabilities of the blockchain, strengthening integrity generally in many use cases.

Hill told IBTimes: "In some use cases you might want to prove a leverage ratio for an asset class and the issuing of new assets against a base asset. You may want to say - we do not have insurance contracts that are above and beyond our core assets, or we don't have fractional lending going on above a certain ratio.

"You could prove that without having to show what the underlying assets are. So using these technologies I think there's a lot of potential for removing systemic risk and improving confidence in our finance system."

Blockstream's Confidential Transactions does not disclose the value of a transaction but allows the network to check that inputs add up to outputs and things balance; the network understands that encrypted 3 + encrypted 5 = encrypted 8. The actual amounts are only disclosed to the sender and the recipient, and potentially their auditor. It uses one-way homomorphic encryption which uses less in the way of computational power than two-way homomorphic encryption.

"There is a small size trade-off in terms of the size of transactions. But traditionally one-way homomorphic encryption is a lot more manageable than two-way homomorphic encryption which is still very bleeding edge science. In fact there is a range of values that you can hide using this technology. You can do multiplication, you can do greater than/less than, you can do all sorts of mathematical operations.

"This is a very new area of cryptography. It's based off a lot of other research and is a very powerful tool for striking an appropriate balance between corporate confidentiality and leveraging public blockchains. We have seen a lot of interest among major companies who want to use this technology.

Blockstream aims to bring innovation to Bitcoin and follows the spirit of fairness of public blockchains. However, Hill and co-founder Dr Adam Back saw the huge potential beyond Bitcoin and Sidechains Elements have been developed accordingly.

"Sidechain Elements is like a Lego tool kit for building blockchains. It doesn't define what the end blockchain looks like, but it gives a whole bunch of new powerful tools that allow you to construct blockchains according to whatever rule set you desire. In some situations those are going to be public, openly available blockchains, in other situations they might be federated blockchains," said Hill.

Corporates trading with multiple partners and transferring stock, bonds or loan products would constitute such a private blockchain environment, due to corporate confidentiality and protecting customers' records.

"In many cases you may not want to reveal that information. There is an information advantage to people who data mine the blockchain, who may be able to do things like front running of transactions, where they understand the flow of money or the flow of transactions and they can then predict certain moves in a market place."

Blockstream recently announced Liquid, the first commercial deployment of sidechain technology which uses a pegged federated system to move bitcoin rapidly between exchanges in a rarefied environment of added privacy, without existing capital reserve requirements and risks.

Hill said: "The whole concept of Sidechains is that you can build multiple blockchains that are all interoperable. Confidential Transactions could potentially be included in the Bitcoin blockchain but I suspect that would take a lot of time and would be a major change because all wallets, everything that talks to the Bitcoin blockchain would have to upgrade and there would be a very long period of testing.

"In its current form the target is not to roll it [Confidential Transactions] into the Bitcoin blockchain, but rather let sidechains like the Liquid chain be able to deploy it, such that certain trading partners may want to have a network that has different properties than the Bitcoin blockchain.

"Participants who choose, who are part of this network and consortium can automatically transfer bitcoin in a very rapid way, but they also have the assurance now that bitcoin transfers from one exchange to another are not publicly available for other people to monitor.

"You can either deploy it in a federated model or eventually, once we actually make some changes to Bitcoin core, you will be able to do it based on merged mining, where you leverage all the same hash rates," he added.

"Right now we use a federated two-way peg, and eventually in the future we look forward to a time when the two-way peg will just be a normal supported feature in Bitcoin. So you won't need to use a federated peg, you could just automatically move coins from one network to another and that would be supported by all the miners."

Hill likes to use an analogy from the early days of the internet to illustrate Blockstream's goals. "Imagine you had to go to the Internet Engineering Task Force (IETF), the standards group, if you had a new idea for a service you wanted to build on TCP/IP - imagine you needed to get everyone to upgrade their protocol, every time you wanted to make a change. That would have completely slowed down and really hampered the speed at which we got things like streaming audio, steaming video, interactive websites.

"The idea is that people can now innovate in permissionless way. They can go out and deploy a sidechain that has the features they want, and we can let the free market decide which ones are popular."

As well as Wall Street's banks, Hill has also seen interest from other areas of financial services such as insurance companies. He also said he was familiar with what the R3 project is doing adding that "many of their customers and R3 themselves are looking at our tool kit and looking at some of our opensource work to see if fits their use cases".

Providing privacy to blockchains is a hot topic with a number of noteworthy players in the space such as MIT's Enigma project, ZeroCash and Hawk.

Hill said: "This is an exciting time. We are at the very beginning of the rise of these types of technologies. Some of this has been researched in academia before, but now we have not only a proving ground, but in Sidechains we actually have a model that can say, how will you get these deployed?

"Some are trying to bootstrap new networks, and that's a different approach. We believe fundamentally that it's much easier to build a parallel sidechain, where you are leveraging all of the existing work that's done and allow people to move coins in and out of that network freely. We think that gives a really good environment to make some of these technologies actually commercially viable."