Transparent blockchains operate as follows: all participants maintain a copy of the (consensus-determined) application state. Transactions modify the application state directly, and participants check that the state changes are allowed by the application rules before coming to consensus on them.
On a shielded blockchain like Penumbra, however, the state is fragmented across all users of the application, as each user has a view only of their “local” portion of the application state recording their funds. Transactions update a user’s state fragments privately, and use a zero-knowledge proof to prove to all other participants that the update was allowed by the application rules.
Penumbra’s transaction model is derived from the Zcash shielded transaction design, with modifications to support multiple asset types, and several extensions to support additional functionality. The Zcash model is in turn derived from Bitcoin’s unspent transaction output (UTXO) model, in which value is recorded in transaction outputs that record the conditions under which they can be spent.
In Penumbra, value is recorded in notes, which function similarly to UTXOs. Each note specifies (either directly or indirectly) a type of value, an amount of value of that type, a spending key that authorizes spending the note’s value, and a unique nullifier derived from the note’s contents.
However, unlike UTXOs, notes are not recorded as part of the public chain state. Instead, the chain contains a note commitment tree, an incremental Merkle tree containing (public) commitments to (private) notes. Creating a note involves creating a new note commitment, and proving that it commits to a valid note. Spending a note involves proving that the spent note was previously included in the note commitment tree, using the spending key to demonstrate spend authorization, and revealing the nullifier, which prevents the same note from being spent twice.