Why Privacy Is the Key to Achieving Blockchain Mass Adoption

Ask web3 leaders about the biggest impediment to blockchain mass adoption, and their answer will vary according to the sector in which they operate. Wallet developers will talk about the need for better onramps and frictionless onboarding. Tokenomic experts will discuss the need for engineering use cases driven by greater token utility. And infrastructure specialists will elaborate on the value of enhancing institutional-grade custody and tokenization frameworks.

All of these answers are correct up to a point: make these things better and more people will come, both at a retail and institutional level. But there’s growing consensus that there’s another domain where progress must be made by adding a feature that’s not just suboptimal at present but virtually nonexistent – privacy. Naturally, the builders of privacy protocols are the most enthusiastic advocates of this thesis. But they’re not the only ones urging the adoption of better onchain privacy tools.

From gaming to DeFi and RWAs to SocialFi, blockchain builders are becoming increasingly strident in their calls for opt-in privacy that’s available on demand. Many take the view that privacy is not merely desirable but essential if blockchain is to go from being a useful technology to an essential technology that forms the bedrock of the entire industry. Is there validity in this thesis, or is it merely wishful thinking? Let’s examine the evidence.

Keeping Secrets on Public Networks

Blockchain's transparency, in which all transactions are publicly verifiable, has been a double-edged sword. While this ensures trust and immutability, in its raw state – everything is broadcast for anyone to inspect – users are exposed to such risks as surveillance, identity theft, and exploitation through transaction analysis.

Blockchain’s open design is a feature, not a bug, and for a long time, this wasn’t a major concern. In the early years, institutions weren’t interested in crypto, and retail users reasoned that the pseudonymous design of networks such as Bitcoin allowed them to hide in the crowd. As blockchain forensics tools have improved, however, this assumption of anonymity has been stripped away, leaving users exposed. Account balances; trading history; personal data: it’s all out there, indelibly recorded onchain.

The first wave of privacy protocols, such as Zcash and Monero, addressed this by shielding transactions, making it impossible to tell who was sending what to whom. While this solved the primary problem of privacy, it created several others. For one thing, there’s certain information that it’s desirable to make public since it informs smart contracts, prediction markets, DEXs, and other onchain services. For another, this first wave of privacy tools provoked the ire of regulators, who don’t look kindly on closed-door systems that allow nefarious actors to hide.

The solution has been to find a middle ground: a means of hiding some stuff and keeping other things private – or at least selectively disclosable. This appeases regulators, enabling businesses to strike a balance between compliance and privacy while keeping sensitive information out of the public domain.

The Protocols Pioneering Privacy 2.0

There’s now a new wave of protocols working to implement privacy 2.0: a version that is more nuanced and granular than anything that’s gone before – yet equally robust when it comes to masking sensitive information. While these projects are focused on distinct use cases and users, they’re all trying to land privacy in the Goldilocks Zone where everything is just right: scalable, compliant, secure, and computationally efficient. Because that’s the other issue with Privacy v1.0: transactions were slow and expensive, rendering onchain privacy a luxury that few could justify.

Among the projects leading this privacy renaissance is COTI, whose garbled circuits technology can be implemented on any network or dapp and is capable of processing encrypted data. This means that the veracity of outputs can be confirmed without needing to reveal the input – great for concealing wallet balances, trading algorithms, or personal data. At the same time as concealing this information from onchain observers, COTI enables it to be disclosed to specific entities such as regulators for compliance purposes. Just as crucially, garbled circuits are lightweight, supporting thousands of transactions per second at negligible cost.

Zama, meanwhile, is taking a different approach, using fully homomorphic encryption (FHE) to compute encrypted data without the need to decrypt it at any stage. This is great for things like LLMs for AI models and for processing sensitive data like healthcare or financial records without exposing customer information. With a $57M Series B in the bag that values the privacy protocol at $1B, Zama embodies the value now being placed on privacy and the eagerness with which shrewd VCs are backing the startups that are best placed to achieve this.

Then we have Midnight Network, which has given an established blockchain privacy technology – zero-knowledge proofs – a fresh implementation that’s much more lightweight and scalable. Its goal is to protect business and consumer data within applications, both onchain and off. From preserving intellectual property to securing personal data, Midnight is building the tools to keep this locked down while supporting compliance, enabling users to enjoy the best of both worlds: strong privacy coupled with optional disclosure.

How Privacy Makes Mass Adoption Possible

Without privacy, users face front-running in trades, doxxing of financial histories, and uninvited scrutiny that risks deterring participation. Privacy tools that allow for selective disclosure enable users to protect sensitive data while still enjoying the benefits of public blockchains. Corporate treasuries can be concealed while allowing institutions to compliantly transact onchain. Hedge funds can trade money markets without revealing their secret sauce. And consumers can pay with crypto without making themselves a target for extortion.

More than just a feature, privacy is a prerequisite for transforming blockchain from a useful technology into a global conduit for global commerce. It prevents users from losing money to sniper bots and MEV exploitation, enables secure lending and borrowing without exposing positions, and supports private marketplaces for rare items. You name it, privacy improves it.

While some aspects of blockchain design are qualitative, such as the quality of onramps and user experience, privacy is quantitative: you either have it or you don’t. And right now, blockchain doesn’t have it baked in. Once privacy protection can be enabled at the flick of a switch, we’ll start to see what blockchain is truly capable of. The tech is ready and so is the appetite for onchain privacy. It’s an argument that’s already been won. All that’s left to do is expedite its implementation. The sooner it happens, the sooner web3 can change the world.

Disclaimer: This article is provided for informational purposes only. It is not offered or intended to be used as legal, tax, investment, financial, or other advice