The "largest remaining challenge" for Ethereum, according to co-founder Vitalik Buterin, is privacy. Buterin has provided a potential solution.

Because every data that is placed on a "public blockchain" is public by default, Buterin admitted in a blog post that a privacy solution was required.

He came up with the idea of "stealth addresses," which he claimed might potentially protect users by anonymizing peer-to-peer transactions, nonfungible token (NFT) transfers, and Ethereum Name Service (ENS) registrations.

Buterin outlined how anonymous on-chain transactions can be carried out between two parties in the blog post. A user who wants to receive assets will first create and preserve a "spending key," which is used to create a stealth meta-address later on.

This address is then sent on to the sender, who can execute a cryptographic computation on the meta-address to construct a stealth address that belongs to the recipient.

The sender can then transfer assets to the receiver's stealth address while also publishing a temporary key to certify that the receiver owns the stealth address.

As a result, for each new transaction, a new stealth address is produced.

Buterin stated that a "Diffie-Hellman key exchange" as well as a "key blinding mechanism" would be required to ensure that the link between the stealth address and the user's meta-address is not visible to the public.

The co-founder of Ethereum stated that transaction fees might be paid using ZK-SNARKs, a cryptographically secure technique with built-in privacy features.

Buterin stressed that this might create its own issues, at least in the short run, since it "costs a lot of gas, an extra hundreds of thousands of gas just for a single transfer."

Stealth addresses, which have been developed since as early as 2014, have long been hailed as a remedy for on-chain privacy issues. But only a small number of solutions have so far been commercialized.

Furthermore, Buterin has previously spoken about the idea of stealth addresses in Ethereum.

In August, he described stealth addresses as a "low-tech approach" for surreptitiously transferring ownership of ERC-721 tokens, also known as NFTs.

The Ethereum co-founder explained that the proposed stealth address concept provides privacy in a different way than the now-sanctioned Tornado Cash:

"Tornado Cash can hide transfers of mainstream fungible assets such as ETH or major ERC20s [...] but it's very weak at adding privacy to transfers of obscure ERC20s, and it cannot add privacy to NFT transfers at all."

Buterin gave the Web3 projects that are creating a solution the following advice:

"Basic stealth addresses can be implemented fairly quickly today, and could be a significant boost to practical user privacy on Ethereum."