Source: a16zcrypto
Translation by: AIMan@Golden Finance
From telegraphs and telephones to the internet, new technologies have always sparked concerns about the impending demise of privacy. Blockchain is no exception, and privacy on the blockchain is often misunderstood as creating dangerous transparency or a haven for crime.
However, the real challenge is not choosing between privacy and security, but rather building tools that can support both simultaneously—whether on a technical or legal level. From zero-knowledge proof systems to advanced encryption technologies, privacy-preserving solutions are continuously expanding. Blockchain privacy extends far beyond the financial sector; it also opens doors for applications in authentication, gaming, artificial intelligence, and more that benefit users.
With the recent signing into law of stablecoin legislation in the United States, the demand for blockchain privacy is more urgent than ever. Stablecoins represent an opportunity for a billion people to participate in cryptocurrency. But for users to confidently use cryptocurrency to pay for everything from coffee to medical bills, they need to ensure that their on-chain activities are private. Now is not the time to create myths, but to build.
The debate about privacy is not new, and neither is the answer: innovation, rather than myths and misunderstandings, will shape the future of privacy.
Myth 1: The internet is the root cause of modern "privacy issues"
Truth: Nearly a century before the internet emerged, the communication revolution of the late 19th century propelled the development of privacy rights in the United States. Technologies developed by entrepreneurs elevated the transmission of information (news, text, images, and other media) to unprecedented heights, including the first commercial telegraph, telephone, commercial typewriter, microphone, and more. Historian and professor Sarah Igo observed that in America at the time, "privacy conflicts developed alongside new modes of communication," raising new privacy questions: Could the media use someone else's name, likeness, or photograph for commercial purposes? Could law enforcement wiretap phone lines to eavesdrop on conversations, or use photography and fingerprinting to create permanent records or registries to identify criminals?
Shortly after these technologies were introduced, legal scholars began addressing the privacy challenges they posed. In 1890, future Supreme Court Justice Louis D. Brandeis and lawyer Samuel D. Warren published an article titled "The Right to Privacy" in the Harvard Law Review. Since then, privacy law has steadily evolved throughout the 20th century in the realms of legislation, torts, and constitutional law. More than a century after Brandeis and Warren published their legal commentary, the first widely used commercial internet browser, Mosaic, was released in 1993, leading to an increase in privacy issues related to the internet.
Myth 2: The internet can function normally without privacy
Truth: The early internet's lack of privacy protections severely hindered its broader adoption. Generally, before the internet emerged, people had a higher degree of privacy protection. As Simon Singh noted in "The Code Book," early cryptography pioneer Whitfield Diffie pointed out that when the Bill of Rights was ratified, "any two people could walk a few meters down the road, look to see if anyone was hiding in the bushes, and have a private conversation—something that certainly cannot be done in today's world." Similarly, people could conduct financial transactions based on goods or cash, enjoying privacy and anonymity that most digital exchanges today do not provide.
Advancements in cryptographic research have reduced concerns about privacy and spurred the development of new technologies that facilitate the confidential exchange of digital information and ensure reliable data protection. Cryptographers like Diffie anticipated that many users would demand basic privacy protections for their digital activities, leading them to seek new solutions capable of providing such protections—namely, asymmetric public key cryptography. Diffie and others developed new cryptographic tools that have become foundational to e-commerce and data protection. These tools also paved the way for other confidential digital exchanges, which are now applicable to blockchain.
The development of Hypertext Transfer Protocol Secure (HTTPS) is just one example of a privacy tool that propelled the internet's growth. In the early days of the internet, users (i.e., clients) communicated with web servers using Hypertext Transfer Protocol (HTTP). This web protocol allowed data to be transmitted to web servers, but it had a significant drawback: it transmitted data without encryption. As a result, malicious actors could read any sensitive information users submitted to websites. Years later, Netscape developed HTTPS for its browser, adding a layer of encryption to protect sensitive information. Consequently, users could send credit card information over the internet and engage in private communications more broadly.
With encryption tools like HTTPS, internet users became more willing to provide personal identification information—names, birth dates, addresses, and Social Security numbers—through online portals. This made digital payments the most commonly used payment method in the United States today. Businesses also bear the risks associated with receiving and protecting such information.
These changes in behavior and processes have spawned numerous new applications, from instant messaging to online banking to e-commerce. Internet activity has become a vital component of today's economy, bringing unprecedented communication, entertainment, social networking, and other experiences.
Myth 3: Transactions on public blockchains are anonymous
Truth: Transactions on public blockchains are transparently recorded on an open, shared digital ledger, making them pseudonymous rather than anonymous—this is an important distinction. Pseudonymity, a practice with centuries of history, played a significant role even in early America: Benjamin Franklin published his early works in the New England Courant under the pseudonym "Silence Dogood," while Alexander Hamilton, John Jay, and James Madison used "Publius" to signify their contributions to The Federalist Papers (Hamilton used multiple pseudonyms in his writings).
Blockchain users transact using wallet addresses associated with a unique alphanumeric string (i.e., keys) generated by a series of algorithms, rather than using their real names or identities. Distinguishing between pseudonymity and anonymity is crucial for understanding blockchain transparency: while the alphanumeric characters of a wallet address cannot be immediately linked to a specific user's identity, the level of privacy protection for key holders is far lower than many people imagine, let alone true anonymity. The function of a cryptographic address is similar to that of a username, email address, phone number, or bank account number. Once a user interacts with another person or entity, the counterparty can associate the pseudonymous wallet address with a specific user, thereby exposing the user's entire on-chain transaction history and potentially revealing their personal identity. For example, if a store accepts cryptocurrency payments from customers, the cashier can see the customers' previous shopping history at other stores and their cryptocurrency holdings (at least concerning the blockchain network wallet used for that transaction, as experienced cryptocurrency users may have multiple wallets and tools). This is akin to publicly disclosing your credit card usage history.
The original Bitcoin white paper explored this risk, noting that "if the identity of a key owner is revealed, the association may reveal other transactions of the same owner." Ethereum co-founder Vitalik Buterin has also written about the challenges of "making a large part of your life public for anyone to see and analyze," proposing solutions like "privacy pools"—zero-knowledge proofs that allow users to prove the legitimacy of funds and their sources without revealing the complete transaction history. Consequently, some companies are also researching solutions in this area, not only to protect privacy but also to develop new applications that combine privacy with other unique attributes of blockchain.
Myth 4: Blockchain privacy leads to rampant crime
Truth: Data from the U.S. government and blockchain analysis firms show that the proportion of cryptocurrency used for illegal financing remains lower than that of fiat currency and other traditional sources, with illegal activities accounting for only a small fraction of all activities on the blockchain. This data has remained consistent over the years. In fact, as blockchain technology has evolved, the incidence of illegal activities on-chain has decreased.
It is well-known that in the early days of the Bitcoin network, illegal activities constituted a significant portion of its total activity. As David Carlisle noted, citing researcher Sarah Meiklejohn, "the primary Bitcoin address used by Silk Road once accounted for 5% of the total Bitcoin in circulation at the time, and the site accounted for one-third of Bitcoin transactions in 2012."
However, since then, the crypto ecosystem has successfully integrated effective mechanisms to curb illegal financing, and the total volume of legitimate activities has increased accordingly. A recent report from TRMLabs estimated that in 2024 and 2023, the volume of illegal transactions accounted for less than 1% of total cryptocurrency transactions (based on the dollar value of stolen funds in cryptocurrency hacks and the dollar value of transfers to blockchain addresses associated with illegal entities). Chainalysis and other blockchain analysis firms have also released similar estimates (including data from previous years).
Similarly, government reports, particularly those from the Biden administration's Treasury Department, have revealed that the risk of illegal financing through cryptocurrency is lower compared to off-chain activities. In fact, recent reports discussing cryptocurrency from the U.S. Treasury—including its "2024 National Risk Assessment," "Decentralized Finance Illegal Financing Risk Assessment," and "Non-Fungible Token Illegal Financing Risk Assessment"—acknowledge that, in terms of transaction volume and value, most money laundering, terrorism financing, and proliferation financing are conducted using fiat currency or more traditional methods.
Moreover, many of the transparent features of blockchain (such as those discussed in Myth 3) make it easier for law enforcement to catch criminals. Because the flow of illegal funds is clearly visible on public blockchain networks, law enforcement can trace the movement of funds to "cash-out points" (i.e., points where cryptocurrency is withdrawn) and blockchain wallet addresses associated with wrongdoers. Blockchain tracking technology has played a crucial role in combating illegal markets (including Silk Road, Alpha Bay, and BTC-e).
For these reasons, many criminals have come to realize the potential risks of using blockchain to transfer illegal funds and thus stick to more traditional methods. While enhancing blockchain privacy may, in some cases, make it more challenging for law enforcement to regulate on-chain criminal activities, new cryptographic technologies are being developed that can both protect privacy and meet the needs of law enforcement.
Myth 5: You can choose between combating illegal financing and protecting user privacy, but you cannot have both
Truth: Modern cryptographic technologies can reconcile users' privacy needs with the information and national security needs of regulators and law enforcement. These technologies include zero-knowledge proofs, homomorphic encryption, multi-party computation, and differential privacy. Zero-knowledge proof systems may be the most likely to help achieve this balance. These methods can be applied in various ways to curb crime and enforce economic sanctions while preventing surveillance of U.S. citizens or the use of the blockchain ecosystem for theft or money laundering.
Zero-knowledge proofs are a cryptographic process that allows one party (the prover) to convince another party (the verifier) that a statement is true without revealing any additional information beyond the fact that the statement is true. For example, to prove whether someone is a U.S. citizen. Using zero-knowledge proofs, a person can demonstrate the truth of that statement without disclosing their driver's license, passport, birth certificate, or other information. Zero-knowledge proofs allow for the confirmation of the truth of a statement without exposing specific or additional information that could jeopardize privacy (whether it be an address, date of birth, or indirect password hints).
Given these characteristics, zero-knowledge proof solutions are among the best tools to help detect and prevent illegal activities while protecting user privacy. Current research indicates that privacy-enhancing products and services can reduce risks in various ways, including:
Deposit screening to prevent assets from sanctioned individuals or wallets from being deposited;
Withdrawal screening to prevent withdrawals from sanctioned addresses or addresses associated with illegal activities;
Voluntary selective de-anonymization, which provides an option for those who believe they have been wrongly placed on a sanctions list to de-anonymize their transaction details for selected or designated parties;
Involuntary selective de-anonymization, involving a private key-sharing arrangement between gatekeeper entities (such as non-profit organizations or other trusted organizations) and the government, where the gatekeeper entity assesses requests from the government to de-anonymize wallet addresses using private keys.
With the concept of "privacy pools," Vitalik and others have also advocated for the use of zero-knowledge proofs so that users can prove their funds do not come from known illegal sources—without having to disclose their entire transaction history. If users can provide such proof when converting cryptocurrency to fiat currency, then cash-out points (i.e., exchanges or other centralized intermediaries) will have reasonable assurance that these cryptocurrencies do not originate from criminal proceeds, while users can also protect the privacy of their on-chain transactions.
Despite critics' longstanding concerns about the scalability of cryptographic privacy technologies like zero-knowledge proofs, recent advancements have made them more suitable for large-scale implementation. By reducing computational overhead, scalable solutions are improving the efficiency of zero-knowledge proofs. Cryptographers, engineers, and entrepreneurs are continuously enhancing the scalability and usability of zero-knowledge proofs, making them effective tools to meet law enforcement needs while protecting individual privacy.
Myth 6: Blockchain privacy only applies to financial transactions
Truth: Privacy-preserving blockchains can unlock a variety of financial and non-financial use cases. These features highlight how privacy-preserving blockchain technology fundamentally expands the scope of secure and innovative digital interactions across use cases. Examples include:
Digital Identity: Privacy transactions enhance digital identity verification, allowing individuals to selectively (and verifiably) disclose attributes such as age or citizenship without exposing unnecessary personal data. Similarly, digital identity can help patients maintain the confidentiality of sensitive information while finely transmitting relevant test results to doctors.
Gaming: Cryptographic technology allows developers to hide parts of the digital world (such as special items or hidden levels) until players unlock them, creating a more exciting gaming experience. Without privacy tools, blockchain-based virtual worlds would be transparent to users, undermining their immersion; players who are well-versed in the digital world would lack the motivation to explore.
Artificial Intelligence: Privacy-preserving blockchain tools also open new possibilities for artificial intelligence, allowing for encrypted data sharing and model validation methods without disclosing sensitive information.
Finance: In the financial sector, cryptographic technology enables decentralized finance applications to offer a broader range of services while ensuring privacy and security. Novel decentralized exchange designs can leverage cryptographic technology to enhance market efficiency and fairness.
Voting: In DAOs, there is a strong desire for private on-chain voting to avoid potential repercussions from voting in support of unpopular measures or the groupthink that may arise from mimicking the voting behavior of specific individuals.
These are just a few obvious applications; similar to the internet, once privacy features are added, we expect to see many novel applications.
Conclusion
The debate about privacy—who controls it, how to protect it, and when it is stripped away—has existed for at least a century before the digital age arrived. Every new technology has historically sparked similar panics: telegraphs and telephones, cameras and typewriters have all ignited discussions that have impacted generations of society.
To believe that blockchain will only jeopardize privacy or that it is particularly susceptible to being used as a weapon for wrongdoing is a misunderstanding of history and technology. Just as cryptography and cryptographic protocols have enabled secure online communication and commerce, emerging privacy-preserving technologies like zero-knowledge proofs and advanced encryption can provide practical methods to protect privacy while achieving compliance goals and combating illegal financing.
The real question is not whether new innovations will reshape privacy, but whether technologists and society can respond to challenges by implementing new solutions and practices. Privacy will not be lost or harmed; it will continually adjust to meet the broader and more pragmatic needs of society. For this technological revolution, as with previous revolutions, the question is how to achieve it.
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