A panoramic analysis of the privacy track: defending privacy may also encourage crime, the revolution has not yet succeeded

Original title: "A Panoramic Analysis of the Privacy Track: Defending Privacy or Encouraging Crime, the Revolution Has Not Yet Succeeded"

Original Source: IceFrog

Foreword:

On September 19, Coinbase launched the programmable privacy network Aleo. It is not surprising that a star project backed by a top investment institution is launched on a top exchange, but if we further consider that the privacy track in which Aleo is located has been under regulatory pressure, this ordinary token launch becomes unusual.

Especially considering that Coinbase is the most compliant exchange in the world, it is even more worthwhile to explore how the industry is developing as the privacy track becomes increasingly niche, the crises and opportunities, and the prospects and opportunities. This article will sort them out in detail one by one.

1. Industry Overview: Niche Market, Progress but Little Development

1.1. Development Overview

If the core of the blockchain world is decentralization, then privacy protection and security are a rigid scenario application extending from this core, and are also the existing spiritual concept of crypto-genesis. Naturally, they have become an important branch and direction of Web3 development.

Bitcoin, the earliest cryptocurrency, was originally designed in part to achieve anonymity. Users are distinguished by a string of alphanumeric characters called public keys to ensure user privacy. However, with the development of blockchain and the continuous rise of applications such as Defi, the demand for asset security far exceeds the demand for privacy. In addition, the continuous emergence of on-chain analysis tools has gradually weakened the privacy characteristics of blockchain.

Despite this, compared to the privacy problems of Web2, Web3's blockchain technology is still an important means to solve privacy protection, especially as the Web3 world gradually becomes mainstream. Privacy protection is not only an important issue in the crypto world, but also one of the keys to expanding the user base.

Privacy in the blockchain world is mainly about solving the privacy protection problem caused by the open and transparent nature of the blockchain. However, in the early stages of development, some crypto fundamentalists directly launched crypto native privacy coins. The extreme anonymity and privacy protection characteristics of privacy coins have become a model for protecting user privacy first, but at the same time, they have also become a hotbed for illegal activities such as money laundering, financing terrorism, tax evasion, and drug trafficking.

As a result, between the "privacy guardian" and the "criminal shelter", the privacy track has been controversial and the regulatory heavy punch has continued, but both investment institutions and users still have continuous calls and investments in the privacy track. The track is becoming increasingly niche, but technology and progress have never stopped.

1.2、Definition, characteristics and technology of sub-tracks

The privacy track can be roughly divided into four major sectors: privacy coins, privacy transaction networks, privacy computing networks, and privacy applications. The main characteristics of the sub-tracks are as follows:

From the above sub-tracks, it can be seen that there are corresponding solutions and projects for privacy from crypto-native tokens to data calculations, transaction processes, and specific needs, but in terms of its development, the overall scale and development are not satisfactory.

From a technical perspective, privacy coins are mainly composed of ring signature technology, hidden addresses, ring-protected confidential transactions and other technologies. After years of development, the technology is relatively mature and the threshold for technology development is relatively low.

Privacy public chains mainly rely on zero-knowledge proof (ZK); trusted execution environment (TEE); secure multi-party computing (MPC) and homomorphic encryption technology (HE). ZK technology is essentially a data obfuscation tool; the latter three technologies are encrypted data processing technologies. In terms of technical maturity and difficulty, all four technologies are significantly higher than the technology of privacy coins. Among them, TEE technology is relatively mature, MPC technology is more used in custody and wallets, and homomorphic encryption is another technology that is popular among institutions after ZK.

2. Analysis of mainstream projects in the track: Privacy coins occupy the mainstream, and privacy protocols are on the rise

2.1. Privacy coin track

The pioneer of the privacy track, launched in 2014, its characteristics refer to natively supporting privacy-oriented cryptocurrencies, which can realize completely private transactions. The outside world cannot view the specific transaction type, amount and other information of the two parties to the transaction. The disadvantage is that it usually does not support smart contract functions and related applications.

Listed token projects:

· Monero

Monero, the originator of privacy coins, enables private transactions by hiding the addresses used by participants, making transaction details (such as the identities of senders and receivers, and the amount of each transaction) possible.

Listed in 2014, after nearly ten years of development, from a market value of approximately US$1.41 million at the time of its initial listing to a current FDV of US$3.1 billion, an increase of approximately 2,200 times, it has become the leading project in this track.

· Zcash

ZEC is a privacy-preserving cryptocurrency, also known as Big Zero Coin, which uses zero-knowledge proof technology to achieve anonymous transmission. The protocol sets a shielding option for transactions, and when this option is turned on, transactions can be completely anonymous.

Its token was issued in October 2016, and its market value has increased from 2.09 million US dollars in the early days to about 500 million US dollars today, an increase of about 240 times, but it has fallen by 90% from its peak.

· Dash

Dash (formerly known as CoinJoin), Chinese name Dash, has improved the anonymity of transactions with its unique mixing mechanism.

This project was also listed in 2014. When it was listed, its market value was about 1.1 million US dollars. As of now, its market value is about 290 million US dollars, an increase of about 264 times, but it has fallen by more than 90% compared with its peak market value.

The above three projects are the top 3 projects in the current privacy coin sector. Privacy coins are early attempts to add privacy attributes to cryptocurrencies. Although they have increased significantly compared with listing, the overall decline from the peak is deep and it is difficult to return to the peak.

· From the perspective of the privacy track as a whole, the currencies in the privacy coin sector have been on an upward trend since their launch. In January 2021, privacy coins occupied 96.6% of the dominant share of the track (market value of about 4.62 billion US dollars).

· With the launch of subsequent privacy-related protocols, by September 2024, this share dropped to 72.76% (market value of approximately US$3.6 billion).

· In contrast, the market share of privacy protocols increased from 3.4% in January 2021 (market value of approximately US$160 million) to 27.24% in September 2024 (market value of approximately US$1.348 billion). Currently, privacy coins still dominate the track, mainly because Monero alone occupies most of the market share.

2.2. Privacy Transaction Network

The underlying architecture supports the basic public chain of privacy smart contracts, which mainly processes the transaction data on the chain for privacy, and natively supports users to conduct privacy transactions through technologies such as ZK, protects the transaction privacy of users during the transaction process, hides user transaction data (transaction object, time, asset transfer quantity, etc.), and supports the development of more types of privacy applications on this protocol.

For the privacy issues of smart contracts, one type is based on the public chain infrastructure to solve the privacy issues of the public chain; the other type focuses on privacy computing and aims to develop basic public chains in vertical segments.

Privacy public chains include Layer1 privacy protocols and Layer2 privacy protocols. The former include Aleo, Iron Fish, Horizen, Anoma Network, Concordium, Espresso Systems, and the latter include Manta Network, Aztec Network, Zecrey, etc.

Layer1 listed projects:

The above are some of the listed projects. This sector was launched around 2017 after the privacy coin became popular. Compared with the early privacy coins, the technology has been updated and combined with the concept of privacy smart contracts. However, this type of project is several orders of magnitude smaller than the privacy coin in terms of market value and attention. Except for Horizen, which was launched the earliest, the rest of the projects have been in a state of decline, and even the Super Zero project has stopped operating, with poor overall performance.

It is worth noting that Horizen, the only project that has risen, announced the removal of the privacy function in June 2023, allegedly in order to reduce regulatory pressure.

In general, the positioning of early Layer1 projects was not recognized by the market, and coupled with regulatory pressure, the overall volume failed to form in the market.

Layer1 pending listing projects:

Compared to the Layer1 privacy protocols that have been listed in the early stage, the subsequent unlisted projects have shown higher potential, especially the participation of top investment institutions, which have provided high financing to support the continuous development and operation of the projects, but the main disadvantage is that the development cycle is generally long.

Currently, Aleo has announced its listing on Coinbase, and Anoma is about to issue tokens. There is no opportunity to participate. Only Espresso Systems is left. The project has released 5 test networks. You can continue to pay attention and participate in it when necessary.

Aleo, which has been launched, has received a super high financing of 200 million US dollars in the B round. The investment institutions are also top-notch. A16Z, Softbank, Polychain, Tiger Global, Samsung and other giants have participated in the investment. It is worth mentioning that Coinbase also participated in the investment, which may be one of the reasons why Aleo can be listed on the Coinbase exchange.

Layer2 Privacy Project:

An additional layer built on top of the existing blockchain Layer1 architecture. It does not directly change the underlying infrastructure, but implements privacy protection functions through technologies such as smart contracts, side chains, and state channels.

Based on the above projects, it is not difficult to see that although the project investment institutions are also top institutions in the industry, the listed projects have not caused a market boom.

· Manta Network has fallen by about one-fold since its listing;

· The Aztec Network project has been under development since 2018 and has been in development for 6 years. It is still in the developer testing stage and the development is too slow.

· Zecrey was also established in 2021 and launched a test network in 2022. It is still in the test network stage.

2.3、Privacy computing network:

The underlying architecture supports the basic public chain of privacy smart contracts, but its native token is not a privacy coin. The concept was launched in 2018. In the same year, a number of projects focusing on privacy computing emerged. These projects are no longer limited to the privacy protection of on-chain data. Their emergence fills the gap in the privacy of data in the computing link. They are generally called privacy computing public chains. Representative projects include: Oasis Network, Secret Network, ARPA, PlatON, etc.

From the perspective of overall market value, after years of development, the overall market value of this sub-sector is less than US$500 million. It is small in scale and accounts for a small proportion, accounting for only about 10% of the entire privacy track.

The main development bottleneck of privacy computing is that there is no explosive application yet, and there are only use cases at the enterprise level, especially in specific technical practices. There are considerable challenges. However, privacy computing is naturally related to current AI and big data. Current AI applications have not yet deeply touched the privacy pain points. It is expected that with the development of AI, projects focusing on AI privacy computing are expected to usher in a new round of growth.

2.4. Privacy Applications

Privacy applications are software programs designed directly for user needs. Their core goal is to provide users with privacy services in specific usage scenarios. In essence, they are based on user experience and specific business needs, and integrate various privacy protection technologies to meet users' confidentiality needs for certain types of information.

For example, currency mixing applications and encrypted emails, representative projects include Railgun, Tornado Cash, Panther Protocol, Onion Mixer, etc.

The number of users in the privacy application track is relatively small, and some projects have stopped operating for various reasons. The main reason is that the demand for privacy applications is often not the core demand of ordinary users, and most representative currency mixing applications are also used for illegal purposes.

· Railgun: The US FBI said that the North Korean hacker group used the Railgun privacy protocol to launder more than $60 million worth of Ethereum stolen from the Harmony Horizon Bridge.

· Tornado Cash:Since its creation in 2019, it has been designated by the U.S. Treasury Department as a money laundering tool. It is rumored that it has laundered virtual currencies worth more than $7 billion. In August 2022, the U.S. Treasury Department will put some addresses that interact with the Tornado Cash protocol or Ethereum addresses related to it on the Specially Designated Nationals List, and the property and property rights of individuals or related entities will be frozen.

Combined with various reasons, this sub-sector is not a mainstream demand, mostly linked to black and gray industries, and the market value is at a low level in the entire privacy track.

III. Dangers and opportunities of the privacy track: rigid demand VS regulatory pressure

There is no doubt that the privacy track is still a niche in the current blockchain world, with an overall market value of about $5-6 billion, of which Monero alone accounts for half. Such a relatively niche track has attracted a large number of top investment institutions to invest and pay attention to it. The reason is intriguing. At least it shows that for the privacy track, investment institutions have given its future growth ceiling a very high space.

The regulatory hammer is not the privacy issue itself, but the fact that privacy tools have facilitated crime. Privacy coins were born in the early chaotic era, giving users full anonymity and untraceability in transactions, and have been favored by some geeks and crypto fundamentalists. After all, it truly solves the privacy pain points of users. However, it is accompanied by money laundering, dark web crimes, extortion, etc.

A token does not have criminal attributes, but it does open the door to crime, and it is natural to be subject to regulatory hammers. The following table reveals the privacy coins that have been removed from the shelves in recent years due to compliance and other reasons, as well as the regulatory requirements of various countries.

Exchanges have removed privacy coins:

National bans on privacy coins:

In addition to the above-mentioned exchanges delisting and national bans, privacy coins are still essential tools for hackers.

· Monero is often used as a tool for hijacking browsers for mining and extortion payments (in 2020, the ransomware criminal gang Revil attacked the US wine and spirits giant Brown-Forman Corp and demanded that Monero be used to pay a ransom).

· North Korean hackers use Tornado Cash for money laundering (Tornado was used to launder stolen funds, and the platform was accused of facilitating more than $1 billion in money laundering transactions), etc.

Apart from the regulatory level, from the perspective of real user needs, the transparency and privacy of blockchain are the natural opposites. From a certain perspective, it should constitute part of the blockchain impossible triangle together with security.

With the development of blockchain to the present, especially with the introduction of smart contracts, wider applications have also brought more serious data leaks and subsequent hacker attacks, such as sandwich attacks, vulnerability attacks, etc. The solution to these problems also depends on the continuous innovation of privacy technology and projects. What is more noteworthy is that with the increase of the wealth effect of blockchain, whale users are very vulnerable to targeted hacker attacks or phishing, and privacy is an important and urgent need.

However, from the perspective of track development, there are currently more than 100 privacy track projects. In addition to the high technical threshold and long development cycle, there are also very few projects that can meet regulatory requirements at the protocol level, and most of them give the right to disclose data to users.

For the privacy transaction network track, balancing compliance and privacy is the first threshold that needs to be crossed. Once an effective solution can be formed, there is still a chance to enter the public market and win a good opportunity for development.

Take Aleo as an example. It uses ZK technology. By default, transaction details are hidden, but users are allowed to selectively disclose them when necessary. In addition, the project party also embeds compliance checks in the smart contract to ensure overall compliance with regulatory requirements.

In addition, from a technical perspective, the two most concerned technologies in the privacy track are zero-knowledge proof and homomorphic encryption technology:

· Zero-knowledge proof: Due to its wide application in the Ethereum ecosystem, I will not elaborate on it.

· Homomorphic encryption technology: It has better application scenarios in privacy computing, but in horizontal comparison, it has not yet seen a significant outbreak. It is not only far behind public chains such as Ethereum, but has not yet reached the level of early privacy coins. However, as the privacy computing public chain track that is most closely related to AI, it is expected to benefit from the continued development of AI.

Comparison of the current status of each track:

Fourth, Outlook and Summary: The balance between privacy and compliance has great potential

Privacy is one of the oldest needs of mankind. Neither Web2 nor web3 has actually been fully valued. In particular, the value of data itself has not become a strong consensus at present. This directly leads to the lack of strong willingness and motivation at the user level.

The undeniable reality is that on the one hand, with the improvement of on-chain tools, user assets and interactions are hidden, but at the same time we are also deceived by deliberately hidden address identities. These two are both contradictory opposites and pain points that need to be solved.

Since 2013, in order to solve the problem of insufficient privacy of Bitcoin, "mixed currency" technology has come into being. Since it only increases the difficulty of tracking, it does not achieve true anonymity, and relies on third-party participation, it has the defect of insufficient anonymity. Subsequently, privacy coins represented by Monero and Zcash have emerged. They use advanced zero-knowledge proof and ring signature technology to provide strong encryption privacy protection for native coins. At the same time, second-layer solutions such as side chains and channels have also been proposed one after another, but they are mostly limited to transaction anonymity and difficult to use in the field of smart contracts.

Since 2018, privacy computing projects have emerged. Most of these projects integrate the concepts of big data and AI, aiming to achieve a dual improvement in scalability and privacy. They are regarded as a new breakthrough in the privacy track. However, despite years of development, the overall ecology of the privacy computing public chain is still small, and the market value is low (accounting for only 10% of the entire track). At present, the total market value of the entire privacy track is about 5 billion US dollars as of September 16, 2024, which is slightly niche compared to other encrypted ecosystems.

From the perspective of past development, as a rigid demand of blockchain, the privacy track has development difficulties, including collective cognitive problems of users, technical development difficulties, and continued regulatory risks. This has limited its vigorous development to a certain extent, put forward high requirements for the project, and hindered its wider popularization.

From the data, the overall market share has also declined from 2021 to 2024. Due to the influence of black and gray industries, privacy coins are not expected to return to their peak in the short term. Privacy protocols and applications are limited to their practicality and value, and are not the ultimate solution. The much-anticipated privacy computing public chain has been cultivated for several years, and the overall performance is also very flat. However, with the vigorous application of AI, this segment may be expected to usher in an explosion. In addition, the concept of ZK privacy (privacy transaction network) with Ethereum as the core is worthy of attention. This field has gathered many star projects and obtained large-scale financing support from institutions. Most of them are in the development stage and have not yet been fully implemented. When the market situation improves, there may be better opportunities and value for participation.

On the basis of balancing compliance and privacy, the privacy track still has great prospects. This is not only due to the optimism and support of top institutions, but also from a long-term perspective, it solves the security of the most critical asset in the future world - data assets. It not only has long-term value, but also easily forms a high barrier from the business model, thereby occupying a favorable position. From this perspective, the privacy track is not limited to "money laundering". With the increasing maturity and mainstream of the blockchain world, the potential space is still worth looking forward to, and it will truly become the guardian of user privacy.

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