You have probably used cash at some point in your life to make a private purchase. Maybe you used it to get some medication, make an anonymous donation, or buy a surprise gift for a loved one.
There should be no shame involved with keeping a few of our transactions private - not only from the eyes of the public, but from the tellers you occasionally visit at your local bank. After all, rich and powerful people keep their finances private in offshore bank accounts, so why shouldn't you be entitled to a little privacy as well?
In this article we are going to discuss the privacy limitations of first generation blockchains, the recent targeting of developers who tried to remedy that, and why privacy will need to be integrated by default into all future cryptocurrencies.
In the old financial system, banks oversee all of our transactions with a watchful eye. Our payments may be shielded from public view, but they are still visible to bank employees, and anyone else with access to our account.
On the other hand, cryptocurrencies are more anonymous, so long as your public address isn't linked to a bank account. By the way, we covered the pros and cons of transparent cryptocurrencies in a previous article.
In terms of their US dollar market cap, Bitcoin and Ethereum are currently the two most valuable cryptocurrencies. Therefore, some of the largest payments are made using these two networks, and a lot of people would prefer to keep their transactions private on these blockchains.
Neither Bitcoin nor Ethereum were engineered to be private by default, meaning transaction details can be traced through their public ledgers, and potentially linked to a real-world ID. To hide transactions from the public eye, some developers have created some privacy services atop Ethereum and Bitcoin for anybody to use.
These privacy services have attracted the attention of law enforcement, and in the last couple of years we have seen a few cases of privacy developers actually being arrested for their involvement. This was the case with Tornado Cash, a privacy protocol built on Ethereum, and more recently the Samourai Wallet team, who operated a non-custodial Bitcoin mixing service.
These arrests have been controversial, because it can be argued that these developers were merely writing open-source software, which is considered to be freedom of speech, a basic human right. Regardless, we can see that the authorities do not like financial transactions occurring without their oversight.
We need to recognize that as the old financial system continues to fail us, we will become more and more dependent on the decentralized financial (DeFi) system that is being built around us, and adapt to it accordingly.
The people who used to rely on the privacy provided by their bank in the traditional system will now be looking for ways to protect their wealth in the new DeFi world. The demand for private DeFi is only going to increase as time goes on, and more wealth flows into cryptocurrencies.
For that reason, we have protocols like Secret Network and Namada being built within the Cosmos ecosystem, allowing any individual to use DeFi protocols privately, regardless of race or social status. Given these developments, it will no longer be transparency for thee, and secrecy for me, but rather privacy for everyone.
As demand increases, we will see more cryptocurrencies operating privately by default. Moreover, decentralized exchanges like Uniswap for example, and other crypto projects will likely end up operating as DAOs (Decentralized Autonomous Organizations), so that there are no head office employees to be targeted for arrest.
However, since we have been accustomed to operating as centralized entities for centuries, it will take time for us to adapt to decentralization, and relinquish power of these protocols to the community, but I believe the transition to truly decentralized and privacy-enabled cryptocurrencies is the inevitable outcome.
If you learned something from this article, be sure to check out my other posts on crypto and finance here on the HIVE blockchain. You can also follow me in InLeo for more frequent updates.
Until next time...
Cash Purchase Image [1]
Bitcoin Arrest Image [2]
Secret Network Image [3]
