Cryptographic Commitments

A cryptographic commitment is a fundamental building block in many cryptographic protocols. It allows one party to commit to a value (the *commitment*) without revealing the value itself to another party. Later, the committing party can *reveal* the value, proving they knew it at the time of the commitment. This is useful in a variety of scenarios, including secure computation, zero-knowledge proofs, and fair exchange protocols. It's a core concept in ensuring trust and integrity in cryptographic systems, particularly relevant in contexts like blockchain technology and secure multi-party computation.

How Commitments Work

The basic process of a cryptographic commitment involves two phases:

Commitment Phase: The committer chooses a value, *x*, and uses a commitment scheme to generate a commitment, *C*, based on *x*. The commitment *C* is sent to the receiver. The receiver learns nothing about *x* from *C* alone.
Reveal Phase: The committer reveals the original value *x* to the receiver. The receiver can then verify that the revealed value *x* is consistent with the commitment *C*.

A good commitment scheme must satisfy the following properties:

Hiding Property: The commitment *C* reveals no information about *x*. Knowing *C* should not help the receiver guess *x* any better than if they had no information at all. This relies heavily on the underlying cryptographic hash function.
Binding Property: The committer cannot change their mind after making the commitment. Given a commitment *C*, it should be computationally infeasible for the committer to find a different value *x'* that is consistent with *C*. This property often relies on the use of a one-way function.
Uniqueness: There should be only one possible value *x* that produces a specific commitment *C*. (Often implied by the binding property.)

Common Commitment Schemes

Several commitment schemes are used in practice. Here are a few examples:

Hash Commitment

This is the simplest scheme. The committer chooses a random nonce, *r*, and computes the commitment *C* as the cryptographic hash of the value *x* concatenated with the nonce *r*:

C* = hash(*x* || *r*)

During the reveal phase, the committer reveals both *x* and *r*. The receiver can then recompute the hash and verify that it matches the original commitment.

Advantages:* Simple to implement.
Disadvantages:* Relies on the security of the hash function. Susceptible to malleability attacks if the hash function is not collision resistant.

Pedersen Commitment

This scheme provides stronger security properties. It uses a group of elliptic curves and requires a public key. Let *G* be a generator point on the elliptic curve. The commitment is:

C* = *x* *G* + *r* *H*

where *x* is the committed value, *r* is a random nonce, and *H* is another point on the elliptic curve.

Advantages:* Hiding and binding properties are stronger than hash commitments, especially with a well-chosen elliptic curve. Zero-knowledge proofs are easier to construct with Pedersen commitments.
Disadvantages:* Requires more complex cryptographic primitives (elliptic curves).

Bit Commitment

A bit commitment specifically commits to a single bit value (0 or 1). A common scheme involves using a hash function:

C* = hash(*b* || *r*)

where *b* is the bit (0 or 1) and *r* is a random nonce.

Applications in Cryptocurrency and Trading

Cryptographic commitments have several applications relevant to cryptocurrency and trading:

Atomic Swaps: Enable direct exchange of cryptocurrencies without a trusted third party. Each party commits to their side of the trade, and reveals only if the other party also commits. This is a technique used in decentralized exchanges.
Secure Multi-Party Computation (SMPC): Allows multiple parties to jointly compute a function on their private inputs without revealing those inputs to each other. Commitments are used to ensure that parties cannot cheat or change their inputs during the computation.
Blind Signatures: Allow a signer to sign a message without knowing its content. The sender commits to the message before asking for the signature, ensuring the signer doesn’t see the message.
Verifiable Delay Functions (VDFs): Used to introduce a verifiable delay into a computation. Commitments play a role in constructing these functions.
Commit-Reveal Schemes in Auctions: Used in sealed-bid auctions to prevent bid manipulation. Participants commit to their bids, and then reveal them simultaneously. This ensures fairness and prevents someone from increasing their bid after seeing others’ bids.

Commitments in Technical Analysis

While not directly used in traditional technical analysis, the underlying principles of commitment have parallels in risk management and strategy execution:

Order Book Commitments: Large buy or sell orders (often called "iceberg orders") can be seen as a commitment to a certain price level. Volume analysis can help identify these commitments.
Trading Strategy Backtesting: Committing to a specific trading strategy and rigorously backtesting it is analogous to a cryptographic commitment - a pre-defined rule set that cannot be altered after the fact. Monte Carlo simulation can be used to test robustness.
Position Sizing and Risk Management: A pre-defined position sizing strategy is a commitment to a certain level of risk exposure. Kelly criterion and fixed fractional betting are examples.
Trend Following Systems: Committing to a trend following system requires adherence to pre-defined entry and exit rules, similar to the binding property of a commitment scheme. Indicators like moving averages and MACD are used to identify trends.
Range Trading Strategies: Establishing support and resistance levels represents a commitment to certain price boundaries. Bollinger Bands and Fibonacci retracements are tools used to identify these levels.
Breakout Strategies: Committing to a breakout strategy involves defining clear entry and exit points, similar to the commitment-reveal phase. Chart patterns like triangles and flags can signal breakouts.

Commitments in Volume Analysis

Commitments are often reflected in the volume profile:

Point of Control (POC): High volume at a specific price level indicates strong commitment from traders.
Value Area High (VAH) and Value Area Low (VAL): These represent price levels where significant volume was traded, indicating commitment.
Volume Delta: The difference between buying and selling volume can indicate the direction of commitment. A positive delta suggests buying commitment.
Order Flow Analysis: Analyzing the flow of orders can reveal hidden commitments and intentions of large traders. Time and Sales data is used for this.
On Balance Volume (OBV): A running total of volume, used to confirm trends and identify potential reversals. Indicates cumulative buying or selling pressure, representing commitment.

Security Considerations

The security of a commitment scheme depends heavily on the underlying cryptographic primitives used. It's crucial to use strong cryptographic hash functions and, for schemes like Pedersen commitments, secure elliptic curve parameters. Care must also be taken to ensure the randomness used (the nonce *r*) is truly random and not predictable. Any weakness in these areas can compromise the security of the commitment. Side-channel attacks are also a potential threat.

Property	Description
Hiding	The commitment reveals no information about the committed value.
Binding	The committer cannot change their mind after making the commitment.
Uniqueness	A given commitment corresponds to only one possible value.

Conclusion

Cryptographic commitments are a powerful tool in cryptography, enabling secure and trustworthy protocols. Understanding their properties and applications is crucial for anyone working with cryptocurrencies, blockchain technology, and secure computation. While not directly employed in traditional day trading, the principles of commitment – pre-defined rules, adherence to strategy, and verifiable actions – are analogous to sound risk management and execution in financial markets, and observing commitment through candlestick patterns and price action can inform trading decisions.

Asymmetric cryptography Symmetric-key algorithm Digital signature Hash function One-way function Zero-knowledge proof Blockchain Smart contract Cryptographic protocol Elliptic curve cryptography Nonce Atomic swap Decentralized exchange Secure multi-party computation Verifiable delay function Technical analysis Fundamental analysis Risk management Order book Volume analysis Candlestick pattern Price action Monte Carlo simulation Kelly criterion Moving average MACD Bollinger Bands Fibonacci retracement Chart patterns Time and Sales On Balance Volume Order flow Side-channel attack Day trading Cryptocurrency trading Futures contract Options trading Volatility Liquidity

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Cryptographic Commitments

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