Privacy is going mainstream

Developments from the latest quiet phase of the crypto market cycle point to privacy being front and center during this next bull run. Web3 is evolving in many different and promising directions — from much needed scalability to increased regulatory clarity — and privacy has always been one of its main priorities.

All the great work around privacy solutions built in the bear market will come to the fore in 2024. More importantly, privacy features that are unique to the space will become available to end-users.

All of the above should lead to one thing and one thing only: a stellar user experience.

What we learned in 2023: The need for (balanced) end-user privacy

This year, we saw a lot of investment in the research and development of privacy technologies like zero knowledge proofs (ZKPs) and secure multi-party computations (sMPC). The 2023 State of Crypto Report by a16z found that research papers in zk technology were at an all-time high. 

Most of the progress focused on developments like zk rollups, which make use of 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 issue first, since it enabled other applications further up the stack.

However, needs have started to shift towards applying these advances to end-user applications, as 2023 also taught us the importance of having the right kind of privacy in Web3. 

We’ve learned that privacy is not a given for blockchain infrastructure: Most blockchain networks offer pseudonymity, not exactly privacy. This was evident in the controversy around Arkham Intelligence, where a doxx-to-earn business model incentivized users to gather information about other users’ activity, possibly linking to their real-world identities. The project even ended up doxxing its own users.

On the other hand, there are also negative outcomes when privacy comes at the cost of transparency. We saw the result of privacy technology being used for illicit purposes with the Tornado Cash arrests. These were controversial because of the Office of Foreign Asset Control’s (OFAC) involvement in prosecuting mixing services, which led to a lawsuit filed in response by CoinCenter, questioning the legality of sanctioning code.

Here, striking the balance between privacy and transparency becomes crucial so that Web3 developments don’t become a boon for illegal activities. This has started a conversation around building applications that take note of this.

Where we’re going in 2024

Luckily, last year’s privacy research successes have also helped to advance the work being done in privacy for user-facing applications. Now that the scalability issue is being solved, many projects have started to work on privacy applications as well.  

Privacy features

There are many ways in which privacy technologies like ZKP and sMPC can be applied 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 contents, and the ability to specify what kind of on-chain information a user wishes to reveal to certain parties, respectively. 

In 2024, we’ll see a rise in existing end-user applications as well as new ones that make use of these features.

Privacy-preserving crypto DNS

We’ll also see higher-level applications of this technology. Some of these applications can 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 reveal their on-chain movements and funds selectively when sharing their addresses.

Private DeFi

Another important area for the application of recent privacy developments is DeFi. Many issues in these markets — such as the maximal extractable value (MEV) problem that leads to front-running and sandwich attacks in decentralized exchanges (DEXs) — can be solved with the right privacy features such as threshold encryption and MPC. Privacy would also allow to increase price efficiency via innovative order-matching systems.

The year privacy goes mainstream

Thanks to last year’s privacy developments, we’ve made indirect yet important strides towards Web3 adoption by way of scalability. However, end-user applications will have a broader impact in the coming year. 

Read more from our opinion section: Don’t give your life to Big Tech for free

Users will get a clear and tangible picture of the value Web3 can provide to their day-to-day lives when they can jump on a privacy-preserving DNS or a private DEX. These applications can provide them with features that are exclusive to a Web3 environment.

2024 may even be the year for privacy applications to cross over to non-crypto internet users, in a similar way to how NFTs became part of popular culture in the last market cycle. When this happens, it’ll be because the hard work of those who built in a bear market in 2023 finally paid off.

Start your day with top crypto insights from David Canellis and Katherine Ross. Subscribe to the Empire newsletter.