Blockchain technology has been discussed in business and commerce circles for almost a decade now. We have to be frank, not much has changed in terms of significant adoption. Why do you think that is?
Well, one of the most common misconceptions about blockchain technology is that it’s synonymous with privacy. But the reality is that public blockchains like Bitcoin or Ethereum are more of an open book than a safebox of user information.
As soon as businesses realize that blockchains are transparent by default, and every single transaction that takes place on them is visible to anyone using a block explorer, it’s reasonable for them to have concerns around what this means for their sensitive, proprietary, or competitive information. Even regular transactions could turn into a potential liability when anyone can piece together potentially sensitive information from their own computer.
Of course, this kind of transparency has its benefits. In an ideal world, it would fulfill the dream of a more accountable financial system. But for many potentially interested parties, there are also drawbacks of such a setup. The truth is that businesses need certain degrees of privacy in order to operate properly and maintain certain moats. Private stablecoins, in particular, are key to this type of adoption.
Let’s jump into private stablecoins in a second. First, I’d like to double-click on this problem of crypto not being as private as people might think. What does this mean for its adoption in a world that has both become much less private and at the same time much more concerned with it?
I think you’re right to point out that the world has become less private and that people are concerned. The existing problem with crypto is that, as things are now, it sort of extends the problem.
As crypto and digital assets become more widely adopted, the transparency that exists in public blockchains becomes more problematic. The perils of doxxing that now exist in terms of personally identifiable information will start to extend to personal financial information as well, leaving many vulnerable to bad actors.
And then we see web2 giants making things even worse. Google’s decision to index ENS balances and transactions comes to mind. And while these balances are generally held in pseudonymous accounts, their IRL identities are usually traceable by sufficiently interested parties, as some Web3 research projects have demonstrated.
We need to do something about this. That is where privacy-enhanced stablecoins and, more generally, privacy-enhanced tokens, come in.
What happens then, if we assume that the web3 community’s ambition to bring more and more financial activity on-chain, becomes reality?
This is already happening. We’ve solved the primary problem of adoption thanks to stablecoins, albeit sans privacy, and many people are fine with that. Today, we use robust stablecoins that let people work around crypto’s volatility for the kinds of on-chain activities like DeFi applications or remittances, such as we observe in many Latin American countries.
On the other hand, on-chain commerce will never fully take off without the same level of privacy that exists in traditional finance. Most users expect the same level of privacy and ease that they get with their banking app on their smartphone — and reasonably so. Most enterprises even more so.
Even though these banking services are not exactly private in that user data is visible to centralized operators and institutions, at least they’re only visible to these specific parties. In the current state of web3 – each transaction is public to everyone. In e-commerce, that means your competitors can see your sales numbers, most effective promotions, and much more while someone looking at your customers’ wallets will know about each and every item they bought.
One of the most common misconceptions about blockchain technology is that it’s synonymous with privacy
I see stablecoins are working great for e-commerce, in theory. But they actually make things less private for users and enterprises, even if they’re operating in a more decentralized way in the backend — and that’s hindering actual adoption.
Exactly. So we already have stablecoins as the bedrock of existing web3 e-commerce applications and we know they work — they’re pretty robust and usable. Now we need to move on to private stablecoins. This is our next step. We can’t compete with traditional finance without getting this right.
But there’s good news. We’re already starting to reap the benefits of all the great research and advances in Zero Knowledge technology that took place during the bear market. A lot of it has been centered around network scalability, but the good news is that this technology can also be applied to new features that protect users’ financial information. The most important of these is that it allows them to prove necessary information to people they transact with, all without revealing balances or transactions publicly.
It’s only a matter of time before this technology becomes more widely used with stablecoins. This will pave the way for on-chain commerce to really take off. And it will take off on the wings of enterprise adoption which will increase the volume of on-chain transactions by orders of magnitude. It’s also a win-win for everybody because private stablecoins can add security and privacy benefits that did not exist in traditional finance and web2 environments in the first place.
On-chain commerce will never fully take off without the same level of privacy that exists in traditional finance
That last part is especially interesting. What are those privacy benefits that didn’t exist in traditional finance?
The first example that comes to mind is in terms of personal security. With private stablecoins utilizing zero knowledge proofs, you can shield your assets and no one will know how you transact and how much you have–so you become less of a honeypot to bad actors.
But let’s take it back to enterprise adopters and the implications for them. Private stablecoins can provide competitive security and protection against espionage by obscuring transaction trails for stablecoins and securing sensitive business operations.
Enhanced privacy features using zk technology can also mask financial details of employees to prevent reverse-engineering of payroll data when salaries are distributed using stablecoins. This kind of non-custodial security solution could reduce vulnerabilities even further by decentralizing payroll management with employees controlling their own transactions.
Finally, we can look at the need for private stablecoins from a compliance perspective. We can program regulatory compliance into stablecoins in such a way that they’re tailored to meet legal standards, maximizing privacy and security at the same time.
In these cases, compliance can be proven to relevant authorities via zk proofs that don’t disclose any additional information publicly. This would create a healthier balance between transparency and privacy for stablecoin users in on-chain commerce.
The decentralized and open source nature of web3 means innovation is happening quickly
Yes, this all makes a lot of sense. Even in the bigger picture, private stablecoins go beyond on-chain commerce. They’re part of a broader and ongoing conversation around the need for financial privacy in web3.
Precisely. The decentralized and open source nature of web3 means innovation is happening quickly, right? The thing that’s taking a little longer is the implementation of these innovations by more established enterprise adopters and institutions who can be somewhat slower.
Likewise, many of the features that are being made possible by the integration of zk technology into stablecoins are a work in progress. So it’s understandable that many businesses aren’t jumping quickly into technology that’s just out of the oven, so to speak. But still, it’s absolutely crucial that we move forward with private stablecoins as soon as possible. Otherwise, a truly on-chain economy will be a permanent pipedream.