The 5 Benefits of Private Finance (PriFi)

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When it comes to privacy for financial applications, some people say “Why would we need privacy if we have nothing to hide? Aren’t bad guys the only ones who need privacy?”

But right now, public-by-default chains offer less user privacy than Web2, and this has serious consequences. Crypto could create a new, more inclusive financial system, but we need the option to make our financial data private. This is possible through private DeFi (PriFi) applications.

Here’s a quick rundown on how privacy can solve several issues resulting from completely transparent DeFi applications.

1. Privacy makes DeFi front-running resistant

It’s not right that retail investor Jane just had $100 stolen from her — without even knowing it — while making a swap on a DEX. She’s never even heard of front-running but is, nevertheless, now included in the billions of dollars lost each year on AMMs built on public-by-default chains.

That’s because, on public-by-default chains, observers can see buy and sell orders before they’re recorded on-chain. If someone spots an order that will impact the price significantly, they can pump their gas fees to make sure their transaction is processed first and profit from the price change. But the result is higher losses and lower profits for everyone else.

This is mitigated with private DeFi since the data associated with the trade is private and thus cannot be observed before the block is completely processed.

📖 Learn more about front-running and how privacy-preserving smart contracts resolve it.

2. Private DeFi gives everyone access to the same financial opportunities

What would you do if financial institutions sanctioned crypto but the hyperinflationary environment meant you and your family were getting poorer each day?

Many individuals get left in the dust by the traditional finance system. In certain jurisdictions where crypto is illegal, transacting on public-by-default chains can be dangerous as your actions are tracked by anyone.

But with private finance, this is not possible, financially empowering those who do not live in economically free countries.

Imagine political refugees or other oppressed groups having access to SILK (a private-by-default stablecoin pegged to a global basket of assets and currencies built by Shade Protocol). Because SILK is private-by-default, someone in a broken economic system could gain exposure to the asset and use it as an alternative currency.

3. Privacy evens the playing field in decentralized finance

Privacy for DeFi applications evens the playing field between whales, retail, and institutional investors. The reality is, there are a variety of tricks of the trade in DeFi that are perfectly legal but smell foul to our human sensibilities.

For example, in traditional markets, big players can mine public data on-chain and then make transactional decisions that cause cascading liquidation. They dump their bags, the price plummets, leveraged traders get liquidated, and now that same big bag of money can be used to buy up the liquidated assets at a fat discount.

Is it legal? 100%. A better question is: “Is this how we want our markets to function?” Private DeFi prevents these kinds of exploitative practices because leveraged positions are private (collateralization ratios, etc.).

4. Having privacy protects you from data mining

Data is incredibly valuable, and if it’s as readily available as on a public blockchain, it will be mined.

This in itself doesn’t have to be a problem. But if your transactional data is linked to personal KYC data from exchanges this information can be used for nefarious purposes. Criminals have been leveraging it to target rich individuals, and organizations can use it to manipulate human behavior for not-so-great reasons.

Knowing this, the data harvesting in Web3 starts to look not so different from the well-known practices going on in Web2. What if someone had a list of all the digital assets you ever held, including the precise amount, every NFT you owned, and every swap you ever made? Anytime we use public chains, that info is public, and entities can collect it to gather valuable insights on you and the blockchain world.

However—with private DeFi, your data is kept private and thus protected from these dangers.

5. Private DeFi can be compliant and auditable

Privacy does not mean everything is always hidden and cannot be shared.

Programmable privacy, a feature that Secret Network’s Secret Contracts provide, gives users the possibility to share data that’s verifiably correct with third parties (e.g. your accountant or tax preparer).

This essential feature provides an auditability trail so that users adhere to local regulations and taxation while keeping their financial data safe.

Join the march of progress for Web3 privacy

Secret is on a march of progress championing privacy for Web3. There will always be people on the side jeering. But more and more champions are seeing the significance of the cause and running into the street to join us. How about you?

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