DEFINITION of Stealth Address (Cryptocurrency)
Stealth addresses prevent any possible public association of a transaction’s output with a recipient’s wallet address and conceal a transaction's actual destination address thereby hiding the receiver's identity on a cryptocurrency network.
BREAKING DOWN Stealth Address (Cryptocurrency)
A standard transaction on a blockchain needs a public address belonging to the recipient.
For example, if you wish to solicit charity funds, you may need to provide your destination public address to which cryptocurrency funds can be sent. However, this will reveal your destination address will be known, tracked, and will also lead to enough pointers about how and where you spent the collected funds.
This is a tricky situation, say for a merchant accepting cryptocoin payments. If his public address remains fixed and known, everyone would know about his customers, their demographics, and the various transactions.
Enter stealth addresses, which help by hiding the receiver's identity.
Say, a user named Ken on a stealth address-supported blockchain is holding five cryptocurrency tokens. Ken has complete control over the tokens as long as he holds them. If he wishes to send all of them to Paul, he will generate a transaction output, which will announce to the network that Ken is sending five tokens to Paul. Now Paul becomes the rightful owner of the five tokens.
Stealth address’s mechanism uses a combination of various public and private keys that are dynamic and for one-time use only.
Ken’s wallet will use Paul’s public view key and public spend key, and club it with random strings of data that generate the one time unique public key for Paul’s output. While others on the network can see a transaction getting recorded, no one other than Ken and Paul will be aware that it took place between Ken and Paul and involved five tokens.
Using his own wallet’s private view key, Paul will be able to locate the transaction on the blockchain, and retrieve it in his wallet. Using the one-time private key that corresponds to the one time public key for the transaction, Paul will gain the right to spend the cryptocoins. Nowhere in this process, are sender's or receiver's wallet addresses made public.
As these randomly generated, one-time use addresses are created for each transaction on behalf of the recipient, stealth addresses add an additional layer of privacy. Monero, which is known for its privacy and anonymity, is using stealth addresses as the basis for its transaction. (For more, see What Is Monero (XMR) Cryptocurrency?)