Privacy is a fundamental human right for all people as defined in the UN Declaration of Human Rights. The right to be left alone and the right to control the flow of personal information allows a person to have more confidence in expressing his/her personal social and political ideas and in spending their money. Privacy is a way to reduce what can be known about us and is essential in protecting ourselves against bad actors who might abuse our private information to interfere with our lives. In our current modern society, the issue of privacy is becoming extremely important as advancements in technology are enabling more surveillance on our private lives while at the same time creating more effective tools to hide our information.
The fully transparent public ledger and censorship resistance of the blockchain are some of the key innovations of blockchain technology which enable Web3 to disrupt the normally closed walled ecosystems of traditional web2 apps and enable groundbreaking new applications. This transparency however makes it possible for anyone to see the sending address, receiving address and amount of tokens sent once the transaction has been added to the blockchain. Therefore, it is very hard to maintain financial privacy in Web3 even though financial privacy is an enforced fundamental right in many countries.
A person’s social and political beliefs are often linked with their financial transaction history through donations, purchases and memberships. While people in developed countries might not have to worry about having their financial history leaked or exploited, there has been an alarming increase in authoritarian governments weaponizing financial information to crack down on their opposition. As a result, people living under these oppressive regimes have increasingly turned to crypto to preserve their wealth and transact freely outside of the controlled financial system. It is also not hard to imagine that one day these governments will eventually start cracking down on their opposition through crypto by abusing the transparent nature of the blockchain to track down and prosecute people.
We typically associate people who need blockchain privacy with malicious activity like money laundering because of the various headline making multi million dollar hacks of various crypto bridges and DeFi protocols. The powerful ability of web3 privacy tools to completely protect the sender and the astronomically high amounts of stolen funds laundered by notorious hacker groups like the Lazarus group has forced authorities like the US Treasury to sanction the Tornado cash smart contracts and all associated addresses in an attempt to stop criminal activity.
We completely disagree with the recent actions taken by authorities in sanctioning a neutral entity like a smart contract platform along with innocent users who used the platform for legitimate use cases or were dusted. According to the EFF, open source software like Tornado Cash are vital to the research and development of essential software which improves human society and therefore needs to be protected under Article 13 of the American Convention of Human Rights which guarantees the rights to freedom of expression.
However, due to the extremely damaging effects of criminal activity on the early Web3 industry, we do feel there needs to be collective action taken by the industry to develop practical and fair AML solutions to dissuade criminals from engaging in on-chain crime.
In spite of all these headline making problems, there is still a fundamental need for crypto privacy as web3 goes mainstream. Users will start to perform more transactions on web3 native applications like DeFi protocols, DAOs and social networks and expose more and more of their personal information on chain. These transactions can contain information like personal net worth, social connections, shopping history and media consumption which can all be negatively exploited by malicious parties. The issue becomes critically important once crypto addresses start to get associated with real world identities through KYC or wallet linking services.
Therefore, software which protects privacy is absolutely essential to protect user rights. Privacy in Web3 will require innovative new products and technologies to provide users a way to hide their identity while making it hard for criminals to hide their activity.
Currently, there are many different projects which are offering privacy solutions in Web3. Even though many of them rely on underlying ZK technology, each of them implements the core ZK technology in different ways to provide privacy. Through our research, we have mapped the ecosystem of privacy solutions based on the underlying blockchain technology used and the usability level of the private transactions.
Sovereign Chains
Roll-ups
Smart contract
Off-chain modular
We believe that existing privacy solutions in web3 have 3 fundamental issues which limit them from gaining mass market acceptance and adoption.
User experience
Bad actor abuse and compliance challenges
Limited functionality
We invested in Elusiv because of the team’s practical approach to solving for privacy by focusing on the user experience while also remaining compliant. For its Solana mainnet launch, Elusiv will be integrating its private transactions directly into the Solflare wallet, the second largest wallet on Solana, with a dedicated in-wallet widget, vastly improving the experience of transferring funds privately for users. Users will be able to both send and receive cryptographically secured private transactions in seconds while spending less than $0.01 per transaction. This can all be done seamlessly from a non custodial wallet without having to waste time moving funds to a dApp or dedicated private chain.
In light of the recent regulatory scrutiny on privacy solutions in web3, we believe there needs to be a middle ground built into privacy solutions to dissuade criminals and hackers from abusing these services with impunity. Elusiv has come up with a practical solution to these problems by integrating anti money laundering functionality into their technology. This allows the Elusiv network to reveal but not block transactions of addresses which have been flagged as malicious and is an important step in preventing criminal activity on Elusiv.
The underlying ZK technology and light client network which powers the Elusiv private transactions is also highly scalable and can be adapted to enable privacy on any L1. Through the upcoming Elusiv VM SDK, developers will also be able to integrate other generalized private transactions in their dApps to allow users to use private transactions directly in their favorite dApps soon.
We are also confident in the entrepreneurial and technically gifted co-founders from the Technical University of Munich who founded Elusiv after meeting each other at various Solana Hacker Houses and noticed a lack of privacy solutions on the growing Solana ecosystem, especially for Solana Pay.
Going forward, we believe web3 privacy will only get more important as more institutional and user data starts to get permanently stored on the public ledger with the inevitable increase in adoption of Web3-powered dApps like DeFi, social networks, DAOs, games and metaverses.
As part of our multi-chain infrastructure thesis, we think that privacy will work best as a modular layer on top of existing blockchains and dApps. The modular approach to privacy allows private transactions to be very user friendly by integrating directly into wallets and dApps while also being highly scalable to enable private transactions on multiple blockchains. It also gives the ideal balance of transaction speed/cost while allowing additional functionality like AML features and generalized private transactions to be added.
We are also very excited for the future of ZK technology which is already powering multiple use cases in web3. We might see more advanced functionality once the technology matures enough to allow interoperability between different ZK applications like bridges, scaling solutions and privacy tools.