- The lack of privacy has become one of the major obstacles preventing the wider adoption of Decentralised Finance (DeFi)
Believe it or not, decentralized finance has emerged as a financial auditor’s dream, with its blockchain-powered, transparent and tamper-proof money trails ensuring that every transaction can be easily monitored. If blockchain had been around in the 1920s, it’s likely that the FBI would have put him away for tax evasion much sooner than they did.
Yet, what’s good for auditors isn’t necessarily so welcome for end users. The lack of privacy has become one of the major obstacles preventing the wider adoption of DeFi, with institutions only too aware that the transparency of blockchain transactions reveals far too many secrets.
Although DeFi was built for anonymity, and all anyone can see are anonymous wallet addresses, there are all kinds of techniques that can be employed to identify the individual behind them and target them for phishing attacks. Moreover, blockchain’s transparency is very often exploited by bots that engage in so-called “front-running” attacks, which use their knowledge of pending transactions to execute their own first and profit from the price changes caused by the original transaction.
This has led to urgent demands for increased privacy in DeFi, not only at the wallet layer, but at the core of the trading experience, and fortunately, most platforms have been quick to oblige.
1: dApps Get Programmable Privacy
One of the recurring DeFi privacy trends is the idea of programmable privacy, which is perhaps best exemplified by the recent relaunch of Aztec Network’s Ethereum Layer-2 scaling solution. With programmable privacy, decentralized application developers can hand control over privacy to their end users, for instance by giving them the choice of whether or not to mask their transaction details, such as amounts and sender and receiver addresses.
Aztec Network wants to make privacy a standard feature of all blockchain applications, and it does this by shielding transaction data using a zero-knowledge proof model with improved shielding. Public transactions are executed in the Aztec Virtual Machine, while private transactions are handled in a client-side environment. zk-SNARKs, which are cryptographic proofs that allow one party to prove they possess certain information, without revealing the information itself, are used to encrypt user transactions, but developers can still implement what’s known as “selective disclosure”, making details of transactions available to select regulators to ensure compliance.
2: Mixnets Causing Network Traffic Confusion
The demand for increased DeFi transaction privacy can be seen in the growing adoption of Nym’s Mixnet, which is a decentralized network of independent nodes that aims to anonymize user data. With the Mixnet, data packets are encrypted and routed in a way that makes it almost impossible to trace the origin or destination of communications.
It’s important to understand that Mixnet is not just for crypto, but can help to mask all kinds of communications, including messages, file transfers and web browsing activity. It’s accessible via the NymVPN applications, which offers a “fast mode” for general secure browsing, and a slower “anonymous mode” for cryptocurrency transactions.
Nym’s Mixnet is based on a five-layer network, consisting of a gateway, three mix nodes and an exit gateway. Data is encrypted at each layer, so the nodes only know the packet’s origin and destination, but have no clue about its content. To further enhance security, Mixnet can generate additional “noise” in the shape of multiple dummy packets, which has the effect of obscuring traffic patterns.
3: Anonymity Expands To Every Protocol
The privacy-focused blockchain Secret Network is one of a growing number of blockchains to have implemented Railgun, a revolutionary smart contract system designed to enhance data privacy in crypto transactions. As with many blockchain privacy systems, Railgun leverages zero-knowledge proofs to obscure transaction details that can reveal the amount and types of tokens sent between two wallet addresses.
While it’s perhaps not so different from other ZK-proof systems, Railgun system is somewhat unique in that it can be integrated within existing dApps based on Secret Network, Ethereum, Arbitrum, Polygon or Binance Smart Chain. This allows users to transact securely on just about any DeFi application, including those that don’t make any efforts to protect their user’s privacy. As such, it becomes possible to engage in any kind of DeFi activity, including trading, staking, lending and liquidity provision, without revealing this to anyone.
Another major advantage of Railgun is that it operates without any central authority, instead being governed by a decentralized autonomous organization to ensure no single entity has control over it, or can make alterations to the protocol that might expose user’s secrets.
4: Privacy Comes To Advanced Order Types
The Layer-3 infrastructure protocol Orbs recently integrated its Perpetual Hub offering with PriveX, a decentralized exchange platform built on COTI, giving it the ability to support more sophisticated trading experiences on a network that’s designed for enhanced privacy.
PriveX takes advantage of COTI’s Garbled Circuits technology, which prevents bots from rearranging transactions to engage in front-running attacks by concealing users’ transaction intent until the moment they’re executed. Through its integration with Orbs, it can now offer this secure trading experience for the more advanced order types required for perpetuals.
The Perpetual Hub enables strategic, “intent-based trading”, where users can simply specify their desired outcomes and ignore the complexities of following the markets to time their trades with split-second precision. Moreover, Orbs provides deep liquidity through its integrations with multiple blockchain L1s, L2s, DEXs and centralized exchange platforms to facilitate this kind of trading with greater accuracy. It also supports high leverage of up to 60x, with optimized execution and liquidity routing ensuring that slippage is kept to a minimum. The end result is that PriveX can now offer a leveraged trading experience with a level of privacy that sets it apart from rival perp trading platforms.
Privacy-First DeFi Is The New Normal
Privacy in DeFi used to be something of a novelty, but the above innovations demonstrate that is fast becoming a vital requirement. As more users become aware of the risks associated with front-running and phishing attacks, technologies such as ZK-Proofs and mixnets are helping to make private transactions a core part of the DeFi trading experience.
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