Privacy Please - The Daily Gwei #448
Can we get a little privacy up in here?
There are 2 things in crypto that need to be solved before we can ever dream of having mass adoption: scale and privacy. Of course, we’ve seen a lot of good work being done on the former recently with many layer 2 protocols now live, but the latter is still in its infant stages with only a few breakout apps like Tornado Cash seeing regular use.
Privacy protocols on Ethereum such as Aztec and Tornado Cash aren’t the first attempt at creating private transactions - there have been dedicated blockchains such as Monero and Zcash that have offered privacy to users for years. Though, these have mostly failed to take off in any meaningful way and I think it’s because there is still too much friction involved with using them. For example, if you’re on Ethereum and hold ETH or tokens and want to do a private transaction, you could either use Tornado Cash, Aztec or some other Ethereum-native solution or you could trade your assets for XMR or ZEC.
Here is where the peak of the friction lies: for most people, trading existing assets for another will incur a capital tax event resulting in either a gain or loss that needs to be reported. On top of this, there really isn’t a way to trade ETH or ERC20 tokens for something like XMR or ZEC without going through a centralized intermediary (such as an exchange). If this friction wasn’t enough for you, there’s also the fact that XMR and ZEC aren’t accepted at many places or integrated with any apps so it’s quite useless for basically everything except payments (and even then it’s only useful for some select use-cases such as transacting on the dark web).
I think that the only way the majority of users will use privacy-preserving technologies is if all of this friction is removed and there really is only one way to achieve that: make private transactions the default. The reasons this hasn’t happened yet is because private transactions are more expensive than normal ones (in terms of computation aka gas), the technology is still in its infancy, and there hasn’t really been massive demand for this from individuals. Though I think that as more companies and institutions onboard into crypto, they will be demanding privacy by default which should accelerate the adoption of privacy-related technologies.
I think that all of us as individuals would take the private route if it was offered to us in a seamless and default way - but it’s still going to be quite some time until we get there. If you care about your privacy today, the easiest thing to do would be to have a fresh Ethereum address that you never share with anyone and just fund it via Tornado Cash - that way not even centralized exchanges know about the address. Though, in saying this, sophisticated chain analysis tools may still be able to de-anonymize these addresses using various heuristics - best to just keep this in mind too.
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.