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The Sword of Damocles in Blockchain:Privacy and Regulation

Author [Huobi Research Institute] Jimmy Qi, Stefanie Wei

Abstract

In the past few years, the development of the privacy segment has gone through roughly three stages, including the boom of privacy coins from 2014 to 2017, privacy computing from 2017 to 2020, and privacy trading networks, which siphoned tremendous capital from 2021 to the present. Even so, the privacy sector has never become a major player in the blockchain industry.

This article summarizes the overall development of the privacy segment in blockchain and the value of privacy, which, due to inelastic demand, is becoming more vital alongside the overall development of the blockchain industry. This article divides the privacy segment into three categories by their properties: coins, platforms and applications. The principles, advantages and disadvantages, and representative projects of various privacy protection technologies will be dissected within the scope of the three.

The privacy segment is still in its infancy. With the recent sanctioning of Tornado Cash, more privacy and regulatory issues are being discussed on a large scale. This article examines the regulatory attitudes and policies of various countries towards the blockchain industry and the privacy segment. Although statues specifically aimed at the privacy segment in blockchain have not been announced, existing data privacy protection laws and regulations and AML frameworks remain applicable. In terms of auditing, a regulatable privacy protocol is the consensus of the new privacy protection protocols; it is also the future. Applications-wise, transaction privacy and on-chain data privacy are the main working directions at present, especially in asset protection of whales and against Miner/maximal Extractable Value (MEV). With new application scenarios becoming available, such as DID and social, and traditional institutions entering the blockchain industry, the privacy segment will eventually prosper.

1. What is behind the discussion of privacy?

Privacy as a whole consists of two elements: (1) anonymous and (2) private. “Anonymous” protects the user from being identified, and “private” refers to concealing a user’s data and behaviors from others.

In this information era, all of our information and behaviors are presented in digital form. Compared to the influence of the paper media era, the Internet is capable of mass communication at lightning-fast speeds: so long any system that stores digital information is connected to the Internet, it immediately becomes meat on the plate for hackers around the world. Where critical information such as financial and personal health conditions are concerned, the breach of data privacy and security could prove even more detrimental.

1.1 Privacy on the blockchain and the diffusion process

Since the birth of Bitcoin, decentralization has been the fundamental attribute of the blockchain — the underlying distributed ledger can record on-chain data and transactions in a verifiable way effectively and permanently, achieving permanent storage of on-chain data that is transparent and yet cannot be tampered with. A user’s address can be identified by public key, which to a certain extent ensures the anonymity of the user on the chain, but with the continuous development of various applications and the emergence of on-chain data analyzing tools, on-chain address cannot guarantee the privacy of personal information. Meanwhile, the transparent nature of the blockchain has also made transaction data and on-chain activities of users visible to anyone, such that sensitive information may be easily accessible. For example, a large number of transactions could be intervened by whales as these are visible to all, which reflects the reality in the blockchain world: users are running naked.

The privacy segment was born relatively early in the blockchain world. It was first seen in 2013 when Nicolas van Saberhagen published the “CryptoNote” protocol, on which the Monero coin was born in 2014, followed by various privacy coins for on-chain anonymous transactions based on different anonymization technologies. With the evolving programmability and scalability of L1 chains, other private data belonging to users also demand protection, and privacy computing projects emerged accordingly, such as Oasis network, Phala network, Platon network and so on. In addition, a large number of projects at the L1 chain level for private transactions also started to emerge in 2021. Compared with other segments, the overall development of the privacy segment is relatively slower, but in terms of institutional fundraising, this segment never lost favor with top venture capitals (VCs). According to incomplete statistics, the total funding for related private transaction projects at L1 chain level has exceeded US$600 million since 2021 (Figure 1).

1.2The value of privacy

In current era of information, privacy and data protection have become one of the most frequently discussed issues of concern. Privacy is considered a fundamental human right, and data protection is therefore legislated in several countries to protect basic rights from a legal perspective as it may cause severe damage if data or privacy is leaked or misappropriated.

However, users demand their personal data be protected on the one hand, but on the other hand, choose to ignore the drawbacks of data leaks. For instance, Twitter, WhatsApp, etc. are popular social media platforms that millions of users interact with on a daily basis. Although user data is being retrieved all the time, and even resold by hackers, users are indifferent and still choose to remain active on these platforms; despite severe data leak incidents, no reduction on the number social media users has been discernable, for social media is somewhat monopolistic and users lack recognition of the value of their own data. In Web3, where most knowledge is new and privacy-related data is quite different, users with the intention to protect their data become even rarer.

Privacy, despite being crucial and profound, is not perceived to be as significant as it should be by users. If the costs of privacy protection are not low enough for common users, most would rather sacrifice privacy. In fact, the level of privacy protection should not be determined by cost but should be an area of major concern to any platform and designed as a feature. This is similar to smart phones: with the development of mobile Internet, mobile banking and online shopping, the privacy protection features of smart phones have become one of the selling points. In short, the significance of privacy protection and perception of value proposition are far less recognized in Web2.

2. The integration of privacy protection technology and Web3

Subsidiaries in the privacy segment have different emphasis without a clear boundary for classification. In this paper, privacy is divided into 3 major categories: privacy coins, privacy platforms and privacy applications.

2.1 Privacy coins

Privacy coins are cryptocurrencies that natively support anonymous transfers, their scope of privacy protection includes critical information that is not limited to the identity of sender and receiver, the transaction amount and the transaction IP. This information cannot be traced through the blockchain browser, i.e., it is invisible on the chain, but it is only visible to the two parties of the transaction or a third party designated by the participants. Characteristics of privacy coins include: (1) they normally do not work in smart contracts and related applications but for transfers; (2) such coins were born in masse from 2014 to 2017, and their overall development is more mature and abundant. Well-known privacy coins include Monero, Zcash, DASH, Litecoin, MobileCoin, Horizen, Verge, Decred, Firo, BEAM & Grin, etc. (3) the overall development of privacy coins has been mediocre in general; their trading volume is substantially lower than coins from most L1 chains, DeFi and projects from other tracks (Figure 2, data from Coingecko September 7, 2022 trading volumes).

Privacy coins adopt a variety of technologies to achieve anonymous transactions, mainly including the following four categories: (1) Monero coin with hidden address + ring signature, (2) Dash with the coin mixing mechanism — CoinJoin, (3) Grin and BEAM with Mimblewimble technology, (4) Zcash, Tornado Cash and ZEN with zero knowledge proof, etc. The technical features adopted by each privacy coin are listed below.

Monero coin (XMR) is the most well-known privacy coin, which employs the ASIC-resistant POW consensus algorithm and utilizes a combination of hidden address and ring signature to achieve privacy protection. Hidden address is also a one-time address that randomly generates a brand new and self-destructing payee address whenever a transaction is initiated. Therefore, the recipient’s privacy is protected. Ring signature technology works such that the sender signs the transaction by his own private key along with the public keys of everyone else in the group. In this case, a transaction may come from anyone who signed, thus protecting the sender’s privacy.

The current ranking and trading volume of Monero has been on a downward trend: 29th in ranking with daily trading volume hovering between US$50 million and US$100 million. Recently, MineXMR, the largest mining pool for Monero, was shut down on August 12 2022. As MineXMR controls 44% of Monero’s hashpower, the shutdown could also trigger a 51% attack on Monero.

Strictly speaking, privacy coins only fulfill the first condition for privacy, which is anonymity. Since privacy coins are not assembled by smart contracts, this is also a major constraint for any further development. For average users, privacy coins do not have universal application scenarios; in addition, privacy of regular transactions is not highly valued. Besides, some privacy coins present poor user experience, and often a lack of liquidity in the mixed coin pool exists. Institutions are the parties with inelastic demand for privacy; for them, the simplistic features of privacy coins are insufficient to meet their needs for on-chain interactions, such as NFT purchasing, lending, socializing, etc. This is also why privacy platforms exist.

2.2 Privacy platform

Privacy platform refers to the underlying privacy infrastructure of the blockchain, which enables programmability and scalability on the platform. Privacy platforms mainly include privacy computing and private transactions. Privacy platforms are more likely to appear as privacy L1 chains; they are in the early stages of ecological development with high valuation. Privacy protection technologies based on zero-knowledge proof, multi-party secure computation (MPC), homomorphic encryption (HE), and trusted execution environment (TEE) safeguard the overall operation be it for privacy computing or private transactions. Among them, ZK, MPC and HE are cryptography-based privacy technologies, while TEE relies on hardware design. Privacy L1 chains support privacy-enabled smart contracts on the underlying architecture, but their native tokens are not privacy coins.

Privacy computing refers to providing protection throughout the entire process of data production: generation, collection, preservation, analysis, utilization, destruction, etc., so as to ensure that data could circulate among different subjects, being available but invisible, so the data provider does not divulge any raw data, hence meeting data compliance regulations and preventing privacy leakages. In addition to blockchain applications, privacy computing has been widely adopted in the big data, finance, pharmacy and AI industries. Platforms in the privacy computing category include Oasis Network and PlatON.

Private transaction mainly focuses on the handling of transformation from public on-chain application and transaction data (i.e., the type and quantity of coins held or traded) to private, and provides native supports by zero-knowledge-proof for users to conduct private transactions so private transaction data cannot be accessed by anyone outside the loop. Since 2021, many blockchain networks related to private transactions have emerged and received support from mainstream investment institutions, and it remains one of the most favored segments in the capital market. Outstanding projects of private transaction platforms include Secret Network and an Ethereum L2 network — Aztec Network.

The establishment of the privacy platform meets the common needs of Web3 for privacy and multiple chains. Firstly, the privacy L1 chain platform provides an environment for deploying privacy smart contracts and enriches various privacy-based applications; secondly, it provides the possibility of interoperability, allowing the privacy chain ecology to intermingle with the non-privacy chain ecology.

2.3 Three privacy technologies and applications

2.3.1 Zero knowledge proof (ZKP)

The purpose of ZKP is to prove the authenticity of a result to a verifier without any direct submission of information. Currently, in the crypto industry, ZKP technology is commonly used on the scaling solution of Ethereum L2. The operator of ZK Rollup passes the transaction information to the Ethereum mainnet by collecting and compressing it into a ZK proof, which serves as a proof of the validity of the transaction. This short proof takes up very little storage space, so ZK Rollup is considered the most promising L2 solution. ZK proof contains information on the identities of both sides in the transaction, time and assets; the complexity of information is private in the proof with a natural trustless mechanism. Therefore, the value of ZK technology is extended to privacy computing in addition to Ethereum scaling. There are three applications of ZKP technology in crypto: zkSNARK, zkSTARK and Bulletproof.

2.3.2 Secure multi-party calculation (SMPC or MPC)

Secure multi-party computing was first proposed by Qizhi Yao in 1982. The solution aims at how to design a function without a trusted third party that allows for the output to be securely retrieved without revealing any information at the forefront. In other words, it is a proposition to protect data and ensure the correctness of data when multiple parties are involved. This can be explained by the “millionaire problem” (Figure 3), where Alice, Bob, and Sam need to inform the protocol of their assets, and through a function, the protocol will directly produce the result without revealing information about any party.

In SMPC, the protocol ensures: 1. absolute privacy, where any participant is not able to know any additional information except the result; 2. correctness, where the protocol guarantees the correctness of the output to the participants; 3. mutual exclusivity of the inputs to prevent collusion; and 4. successful delivery of the output to all participants. It is evident from the above that SMPC requires a large amount of computation and communication, which is costly in terms of fees and bandwidth, and the costs accumulate still higher when more parties are involved. Therefore, computational efficiency and communication are the bottlenecks for SMPC development.

2.3.3 Trusted execution environment

Cryptography-based privacy-preserving techniques rely too much on a large number of complex computations, and thus suffer from performance bottlenecks. Another class of privacy-preserving technique is the Trusted Execution Environment (TEE), which is based on a hardware-secured CPU to conduct memory-based isolated secure computation. The basic idea of TEE is to allocate a separate piece of isolated memory in hardware for sensitive data, and all computations on sensitive data are performed in this memory; no other parts of the hardware can access the information in this isolated memory except for the interfaces that receive full authorization. TEE is at the stage of mass adoption, e.g., fingerprint and facial recognition for smart phones.

The above three privacy protection technologies are currently most commonly seen in the blockchain field, and homomorphic encryption remains in the theoretical stage. ZKP and SMPC could prove security by mathematical hardness assumption with high credibility, but because of this, the higher security settings also lead to higher computational and communication complexity, which add more practical constraints. TEE combines both cryptography and security provided by hardware and system to avoid additional communication and computational overhead. Meanwhile, a drawback lies with how the security relies heavily on the deployment of hardware and requires continuous upgrades both hardware and software-wise. Moreover, TEE technology varies by vendor; the security standards are not well defined.

2.3.4 Privacy technology cases

Oasis Network is a privacy computing network at the L1 chain level that provides a Trusted Execution Environment (TEE) by Intel SGX, which is also seen in the Avalanche bridge. The layer of ParaTime is the execution layer of smart contracts, where privacy protection and compatibility with EVM take place. Oasis Network now has a complete ecosystem, including more operations in privacy computing and L1 chain ecosystems
(Figure 4).

Secret Network is a distinct private transaction network based on Cosmos, which launched its mainnet in September 2020, being the first blockchain platform to support programmable smart contracts for private transactions by default. Three key technologies are in place for data privacy: key management, encrypted protocols, and TEE. All hardware and software from authenticating nodes must be compatible with these technologies, but no party, including the nodes, can access the original information. Smart contracts on Secret Network are private by default, with inputs, outputs, and data state all encrypted. It ensures that transaction data remains secure and private during execution through a Trusted Execution Environment (TEE), where outsiders can only view the time of transaction through blockchain browsers, but none of the specific transaction information is available, even to the authenticator. No other party can access the desired information unless the user grants access by issuing a viewing key. This ensures that users have full control over their own private data on the chain, and the viewing key could be effective for sharing relevant transaction data in the case of tax filing and other scenarios. Currently, this L1 chain has formed an initial on-chain ecosystem, including applications such as that of a cross-chain bridge — Secret Bridge, private DeFi protocol, private transaction protocol, private Bitcoin protocol, and anonymous on-chain transactions on Opensea (Figure 5).

Aztec Network is a private transaction platform built on L2 based on zk-Rollup’s privacy technology, Plonk, and launched in November 2020. Zk.money and Aztec Connect are the main applications on Aztec Network, while Aztec can also become the private middleware to integrate L2 applications. Zk.money is a private payment application on L2, which allows Ethereum users to send and receive assets on L2 anonymously. Aztec Connect is a private cross-chain bridge, which allows users to interact with DeFi applications on Ethereum in an anonymous manner. In addition, Aztec has been integrated with several L2 applications, such as Aave, Lido, Compound and Element Finance, as private middleware,.

Privacy platform technology has seen adoption challenges for the fundamental reason that under the current intense competitive landscape for L1 chains, it is critical to achieve full privacy on the chain while also ensuring high performance of the chain per se. This is mainly reflected in: 1. The research and development process of the above three technologies has certain limitations in the blockchain, and it requires further development of underlying virtual machines to implement smart contracts; 2. In the competitive landscape of various chains, compatibility and interoperability with other platforms must be taken into consideration; 3. All activities on the chain require privacy computations, which may increase costs.

Currently, privacy protection technologies for various projects are in their early stages, and the following aspects of these projects are worth being continuously monitored: (1) whether the cost of privacy computing fits with the economic model; (2) whether privacy technologies are friendly to developers; (3) whether unique applications exist in the ecosystem that incorporate privacy, especially in DeFi, NFTfi, and social; (4) whether interoperability with other platforms is feasible.

2.4 Privacy applications

Privacy applications in this paper refer to applications built on L1 or L2 protocols, which provide users or DApps with privacy protection functions for different scenarios as well as applications for on-chain anonymous transactions, such as communication, email, advertising data privacy protection and coin mixing protocols. The segment is crowded; Status, Dmail and Tornado cash are typical projects in this segment.

Status is an open-source decentralized communication platform that builds Whisper on top of devP2P technology and provides protected routing and messaging, ultimately enabling end-to-end communication encryption, including email encryption. Dmail is a Web 3.0 version of email system built on DFINITY; it integrates decentralized authentication, communication, asset management, data storage and other functions. By measurable random functions and non-interactive threshold signature of DFINITY, data privacy is shielded.

Tornado Cash is a private transaction application on Ethereum based on zero-knowledge proofs, which is also the most well-known Ethereum coin mixer that is capable of hiding sending address. Users could deposit ETH into the smart contract and withdraw via a credential that does not reveal the initial address. In fact, this anonymity still has limitations, reflected in three aspects: (1) users cannot bypass the network layer when accessing funds, so that the Internet Service Provider (ISP) can still record the timestamp when the information is sent and associate it with other information; it could be solved by network proxy; (2) if the time interval between deposit and withdrawal is too short, it may lead to connected transactions; (3) gas fee is a necessary expense to be cleared at withdrawal, which may expose the transaction; this can be solved by repeater network. Tornado Cash is accused of aiding Lazarus Group, which is a hacker group from North Korea, and other illegal entities in mass money laundering, posing threat to the national security of the United States; Tornado Cash was sanctioned by OFAC last month with on-chain assets of US$437 million frozen immediately.

2.5 Bottlenecks faced by the privacy segment

2.5.1 Not appealing for average users

Average users are not aware of the value of their privacy. We can empathize with privacy leak in Web2, such as harassing phone calls, ad push notifications, etc. But in the world of blockchain, we are deceived by the alleged “anonymity” of on-chain addresses; our “digital identity” will have nowhere to hide as the ecosystem is enriched by applications and data analyzing tools as the blockchain industry continuously evolves.

The overall development for the privacy segment is impeded, and this can also be partially attributed to the developing status of blockchain. The ecosystem of privacy related platforms is relatively barren; majority of users will not favor the monotonous privacy coins for the sole purpose of anonymity on transactions. Even if anonymity is desired, they would rather conduct anonymous transfers with coin mixers on Ethereum, extending anonymity to various assets of theirs. As a result, the low willingness to use capped the overall adoption rate of privacy coins.

2.5.2 Private transactions are the target of regulatory investigations

Private transactions, such as those enabled by privacy coins, do provide hackers with the convenience to safely veil the source of funds before entering the Centralized Exchange (CEX). It is untraceable for the sending and receiving of assets, which inevitably leads to some of the on-chain transactions being involved in money laundering and illegal activities, and regulation against private transactions has never been loosened: privacy coins, including the recent sanctioned Ethereum coin mixer, Tornado Cash, have been regularly been involved in sanctions or exchange delisting. The severe scrutiny from regulatory authorities has also posed a slow growth rate on the user base and ecological development of projects focusing on private transactions.

3. Privacy and regulation

3.1 Regulatory trends in various countries

Regulations on the privacy segment have grown stricter since the birth of Monero. the main reason, in our humble opinion, is that most of the projects in this segment will engage in the process to make on-chain transactions anonymous, thus, impeding regulatory authorities from discovering potential violations — hence, money laundering and illegal activities have grown increasingly rampant.

In recent years, regulations on privacy coins have become more stringent at a national level, and countries such as Japan and South Korea have adopted a firm stance towards this matter. Japan introduced a self-regulatory program for the Association of Cryptocurrency Exchanges back in June 2018, stipulating a ban on trading anonymous currencies. In November 2018, Japan’s Financial Services Agency announced new standards for cryptocurrency exchanges in which an explicit ban was proposed for cryptocurrencies with high anonymity that are highly viable for money laundering. South Korea, on the other hand, is years behind Japan, releasing a legislative preview of the upcoming enforcement act based on the amendments to the Specific Financial Information Act in November 2021. According to the enforcement act, service providers of virtual assets will be prohibited from trading anonymous coins and handling virtual assets which may be implicit in money laundering, signaling the halt of privacy coins in South Korea.

In addition to privacy regulation at national level, some privacy coins such as Monero have also been subject to rigorous regulation in several countries, in addition to being delisted by multiple exchanges. Back in 2018, the U.S. Department of Homeland Security planned to design a new system for the purpose of monitoring cryptocurrencies with high anonymity, such as Monero and Zcash. In 2020, the IRS even offered a high bounty for cracking Monero. Monero was delisted by multiple exchanges in Japan and South Korea between 2018 to 2020, as well as by Bittrex and Kraken UK in 2021 and 2022, respectively.

Tornado Cash was sanctioned directly by the US Treasury OFAC in August 2022, which is not the first time a private transaction application has been sanctioned, but the impact is profound: it implies new changes in privacy regulation on the horizon. Platforms and applications for private transactions can both now achieve high levels of privacy from on-chain applications, and this differs from privacy coins that are only effective in anonymous transfers. More parts of the transactions and transfers processes have the potential to become anonymous, which poses more challenges for regulators.

Internationally, the FATF (Financial Action Task Force on Money Laundering) also coordinates the fight against crimes in various countries, and the FATF Travel Rule has become a regulatory rule that cryptocurrency assets and cryptocurrency service providers need to comply with. According to the Travel Rule, as long as there is a single logic, technology or mechanism that affects the determination of the identity of the sender and receiver, it is considered a privacy coin and should be subject to AML regulation.

The SEC has long been present in the crypto world since before Tornado Cash was sanctioned, not only regulating companies that offer digital currencies for sale without proper authorization, but also prosecuting tokens and fraudulent violations against U.S. securities laws. Many crypto projects have suffered from this particular stance of the SEC, including Telegram and XRP. In the non-privacy segment, government regulation is also ramping up. Such actions by the authorities are not merely about the privacy segment or the regulation of illegal transactions, but serve as a signal that the entire industry needs proper regulatory guidance.

3.2 Explorations on censurability of privacy protocols

Tornado Cash getting sanctioned by OFAC for money laundering and illegal on-chain illegal activities triggered a series of chain reactions in the entire cryptocurrency community; both centralized companies and decentralized on-chain protocols are now involved with discussions on compliance. Most DeFi protocols and centralized exchanges have called off the interfaces and transactions with addresses related to Tornado Cash, including Uniswap, AAVE, Kraken and Binance; Circle has also frozen the USDC from Tornado Cash-related addresses. Some large projects have started to worry about the side effects of censorship on their development, with more discussions centering around the upcoming PoS version of Ethereum and MakerDAO. The core Ethereum developers specifically discussed in detail the reciprocal strategy to the national-level regulatory censorship in a developer conference call on August 18, 2022. The majority of developers believe that complete decentralization and deregulation is the future of Ethereum, and Vitalik himself has stated that if regulators conduct censorship upon Ethereum nodes through node service providers in the U.S., it will be deemed as an attack on Ethereum. Rune Christensen, founder of MakerDAO, claimed a more radical proposal that DAI should no longer be pegged to USD and become a free-floating stablecoin, considering the fact that the actions of Circle on freezing USDC may cause severe damage to the collaterals of MakerDAO. Although the proposition received echoes, most people are opposed to it, fearing the instability as a result of DAI being free-floating could incur volatility.

Should a protocol or project be censorship-resistant? From our perspective, the concept of censorship needs to first be clarified. Censorship is about ascertaining the legitimacy of the transaction rather than acquiring all information regarding the transaction. In other words, the transaction in itself should be under review rather than the identities of the parties involved; transactions can be audited for investigations on potential misconduct. Whether the review will have an impact on the proper functioning of the project depends on whether the project can be scrutinized while remaining absolutely decentralization to avoid glitches on a single point. For developers, censurability becomes a key consideration: to embrace the regulations by predetermined mechanism or to fight against it using cryptography.

There are a number of programs that provide restricted access to private data, as listed below:

From the table above, it is evident there are very few privacy protocols that can cater to regulation. According to incomplete statistics, there are more than a hundred projects in the privacy segment, but only about ten of them have published transactional data access solutions for compliance (including the privacy coins capable of conducting anonymous transfers as an option). Most of the privacy protection protocols do not provide compliance programs per se, but rather distribute the right of disclosure to users; users choose whether to exercise the right to audit or disclose information. This has become the consensus of the new protocols for compliance purposes, which may also become the mainstream for compliance and anti-money laundering.

We believe that censorship resistance and anonymity are not aligned with the intrinsic nature of blockchain technology, but decentralization is. The additional financial attributes of on-chain governance brought about by decentralization are bound to stimulate regulation of the whole blockchain industry. There is a certain paradox between the demand of data transparency on-chain brought by decentralization and the privacy protection needed in reality; to achieve privacy protection while meeting all the regulations is the mainstream and the necessary lesson for everyone in the industry.

4. Future development of on-chain privacy

In the blockchain industry, there are two main application scenarios for privacy: (1) transaction privacy, including the covered transfer of individuals or enterprises, darknet transactions, etc.; this part of the demand is mostly conducted by privacy coins. But due to the inevitable stronger regulation in the future, in addition to the technical barriers of each project not being high while competition remains intense, it is not a favorable option; (2) on-chain data privacy, especially necessary for the enterprise level and tycoons, could prevent shorting or dumping, especially in bear markets, where the financial status of institutions and protocols are completely exposed to public scrutiny. Specifically, on-chain privacy enables:

(1) Anti-MEV

Sandwich attacks are very tricky for large investors and institutions. It is truly MEV-resistant in a private trading platform where all transaction information is hidden and invisible to miners and arbitrage bots.

(2) Asset protection

Whales with blue-chip NFTs and large amount of assets do not wish to be analyzed by on-chain interactions. On the other hand, they are also concerned with becoming the target of hackers or specified attacks.

(3) Protection of on-chain interactions

Evolving future application scenarios, such as community governance voting, social networking, and lending & borrowing without collateral, require participation without detailed identity information provided. Privacy technology could experience mass adoption in these scenarios, which is rather promising for the future.

As traditional organizations join the blockchain industry, coupled with the vast development of on-chain DID and social applications, the breaking point for the privacy segment is coming. Until then, this segment should remain a focus. As for developers, censorship is currently off the table and unworthy of their time, as their ultimate scenario is not merely for money laundering; the value of the privacy segment lies beyond imagination.

About Huobi Research Institute

Huobi Blockchain Application Research Institute (referred to as “Huobi Research Institute”) was established in April 2016. Since March 2018, it has been committed to comprehensively expanding the research and exploration of various fields of blockchain. As the research object, the research goal is to accelerate the research and development of blockchain technology, promote the application of blockchain industry, and promote the ecological optimization of the blockchain industry. The main research content includes industry trends, technology paths, application innovations in the blockchain field, Model exploration, etc. Based on the principles of public welfare, rigor and innovation, Huobi Research Institute will carry out extensive and in-depth cooperation with governments, enterprises, universities and other institutions through various forms to build a research platform covering the complete industrial chain of the blockchain. Industry professionals provide a solid theoretical basis and trend judgments to promote the healthy and sustainable development of the entire blockchain industry.

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