Developments from the last quiet phase of the crypto market cycle indicate that privacy will be at the forefront during this next bull run. Web3 is moving in many different and promising directions – from much-needed scalability to greater regulatory clarity – and privacy has always been one of its top priorities.
All the great work around privacy solutions built during the bear market will come to the fore in 2024. Most importantly, privacy features unique to the space will become available to end users.
All of the above should lead to one thing: a great user experience.
What we learned in 2023: the need for (balanced) end-user privacy
This year, we have seen a lot of investment in the research and development of privacy technologies such as zero-knowledge proofs (ZKP) and secure multi-party computation (sMPC). THE State of Crypto Report 2023 by a16z found that research articles on zk technology have reached an all-time high.
Most progress has focused on developments such as zk rollups, which use these technologies for scalability solutions. ZKPs have proven to be an effective way to increase throughput and transaction speeds for Web3 applications: it made sense to focus on this problem first, as it enabled other applications higher up the stack .
However, the need has started to shift towards applying these advancements to end-user applications, as 2023 has also taught us the importance of having the right kind of privacy in Web3.
We learned that privacy is not a given for blockchain infrastructure: most blockchain networks offer pseudonymity, not exactly privacy. This was evident in the controversy surrounding Arkham Intelligence, where a doxx-for-earning business model incentivized users to gather information about other users’ activity, possibly relating to their real identities. The project even ended up doxxing its own users.
On the other hand, there are also negative outcomes when privacy comes at the expense of transparency. We saw the result of the use of privacy technology for illicit purposes with the Tornado Cash arrests. These have been controversial due to the involvement of the Office of Foreign Asset Control (OFAC) in the prosecution of mixing services, which led to a trial filed in response by CoinCenter, questioning the legality of the sanction code.
Here, striking a balance between privacy and transparency becomes crucial so that Web3 developments do not become a boon for illegal activities. This started a conversation around creating apps that take this into account.
Where are we going in 2024
Fortunately, last year’s privacy research successes have also helped advance ongoing work on user-facing application privacy. Now that the scalability problem is solved, many projects have also started working on privacy applications.
Privacy Features
There are many ways to apply privacy technologies like ZKP and sMPC beyond scalability.
We can start with low-level applications that enable features like zk attestations and selective disclosures. These allow users to validate on-chain information without revealing its content, and the ability to specify the type of on-chain information a user wishes to reveal to certain parties, respectively.
In 2024, we will see an increase in the number of existing end-user applications as well as new ones using these features.
Privacy-preserving cryptographic DNS
We will also see higher level applications of this technology. Some of these requests may even be considered rather urgent. There is a known market need for privacy-preserving domain name systems (DNS) where wallet activity for addresses is not publicly available by default. Users should have the prerogative to selectively reveal their on-chain movements and funds when sharing their addresses.
Private DeFi
Another important area for the application of recent developments in privacy is DeFi. Many problems in these markets – such as the maximum extractable value (MEV) problem that leads to front-end and sandwich attacks in decentralized exchanges (DEX) – can be solved with the right privacy features such as threshold encryption and the MPC. Confidentiality would also increase pricing efficiency through innovative order matching systems.
The year privacy went mainstream
Thanks to last year’s developments in privacy, we’ve made indirect but important progress toward Web3 adoption through scalability. However, end-user applications will have a broader impact in the coming year.
Learn more in our reviews section: Don’t give your life away for free to Big Tech
Users will get a clear, tangible picture of the value Web3 can bring to their daily lives when they can access a privacy-preserving DNS or private DEX. These applications can provide them with features exclusive to a Web3 environment.
2024 could even be the year that privacy apps become accessible to non-crypto internet users, similar to how NFTs became part of popular culture during the last market cycle. When that happens, it will be because the hard work of those who built during a 2023 bear market has finally paid off.
Antoni is co-founder of the Aleph Zero Foundation (Switzerland), an organization overseeing the development of the Aleph Zero blockchain, and Managing Partner of Cardinal Cryptography (Poland), a company focused on the core development of the Aleph Zero ecosystem.
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