ETH News – Privacy Tech To Unlock Adoption

The current crypto bear market is a signal: the level of adoption needed to ignite the next bull market remains elusive. In the absence of certainty on the future of the technology and the markets, we are left speculating on the trends that will lay a path to the next bull market. A thesis that is gaining weight is that of privacy technology.

Previous waves of enthusiasm were sparked by the DeFi boom and the NFT craze, but neither was enough to unlock blockchain’s next adoption phase. Even with ETF approvals, the overall industry’s stamina seem to remain stagnant. The last ETHBerlin hackathon in May 2024, a cardinal Ethereum community event during which I gave a talk about information flow control and censorship in Ethereum, captured the prevailing community sentiment in its manifesto: “The blockchain space is going through a multi-dimensional identity crisis.” If that is so, the solution to that crisis may very well reside in the hands of privacy technology.

Blockchain’s Identity Crisis

The meaning of identity crisis in blockchain is twofold. First, our on-chain personal data are not secure. The lack of meaningful privacy on the blockchain puts our identity in the spotlight. Once your wallet address is known, all your on-chain activity, at least on Bitcoin or Ethereum becomes visible and often linked to real-world identities.

No other financial system or corporation operates with such level of transparency, and this can be detrimental when there are legitimate reasons for making subjective decisions not to disclose certain information. Corporations and research institutions, for example, must prevent misuse of users data and often need to keep decisions, strategies or reasoning private to protect themselves from competition. For blockchains to gain widespread adoption, it surely should offer at least the same level of privacy as in traditional systems, if not more.

Second, identity crisis refers to the psychosocial phenomenon best described by Merriam-Webster dictionary as: “a state of confusion in an institution or organization regarding its nature or direction”. Who are we, why and what are we building? The EthBerlin manifesto takes a stance: “We want to use our voice in the community to remind everyone that privacy should be a core feature of the technologies we are building.”

This identity crisis, in both its meanings, is also front and centre at Ethereum’s Devcon conference, which is scheduled to take place in November 2024 in Bangkok, Thailand. It features a track on “Cypherpunk and Privacy” focused on “the values that make Ethereum special”.

Privacy As A Core Feature

Never have we seen that many crypto privacy projects. The extensive list curated by the educational organization web3privacy now has more than 700 entries. According to CoinGecko, the top 100 privacy coins have a total market cap of approximately $6.3 billion. As the technology evolves, so will the realm of possibilities and the number of projects in the field.

This is despite crypto privacy being under the regulator’s and judiciary’s spotlights, in the United States but also in the Netherlands. After the U.S. Treasury imposed sanctions on Tornado Cash and arrested its founders, the blockchain privacy community had to confront the reality of the judiciary system. The sanctions themselves are under scrutiny in a lawsuit against OFAC brought by Coin Center and another backed by Coinbase, currently at the appeal stage. The legal proceedings against the developers of Tornado Cash are still ongoing in Amsterdam and in New York. On September 26, 2024, the judge in the US case against Tornado Cash’s developer Roman Storm ruled against the dismissal of the criminal proceedings and scheduled the trial for December 2024. We have yet to see the outcomes of these cases to understand the constraints, legal limitations and liabilities linked to working on technology that cannot be surveilled or technology that ends up being also used for harm.

This tension between technology and state oversight, through regulation and enforcement, while constraining, is also driving innovation. The focus on ethics and responsibilities is stronger than ever. Builders have gained awareness of the dynamics at play in the privacy sector and cannot avoid factoring those in their designs and products, making them increasingly resilient. As blockchain grapples with its identity crisis, privacy technology is crucial, not just for the present state of blockchain, but even more for its future mainstream adoption.