The premise that “if it’s not on-chain, it’s not trustworthy” no longer holds up when we consider global finance’s operational and regulatory realities. To be adopted by large institutions, DeFi must offer more than transparency — it must provide privacy.
Trading strategies, portfolio movements and counterparty relationships are treated as competitive advantages. The risk is too high when exposed to a public blockchain. A hedge fund would not choose to broadcast its positions in real-time. Similarly, a market maker would not accept leaking their every move to competitors or arbitrage bots.
The data reflects this hesitation. Surveys suggest that more than half of institutional investors consider the lack of transaction privacy a significant obstacle to using DeFi protocols. Among asset managers, that number climbs even higher.
The issue isn’t ideology. It’s an operational necessity.
At the center of this debate lies a contradiction. DeFi advocates transparency, while traditional finance values privacy. To connect both, DeFi must evolve without losing its core principles. Fortunately, it can. The answer lies in private Layer 2 (L2) networks.
Initially introduced as a scalability solution, L2s have matured into something more versatile. Unlike L1 chains like Ethereum, where all activity is publicly visible by default, L2s can incorporate privacy-preserving techniques that shield sensitive data without compromising security or compliance.
Among the most promising tools are Validiums and zero-knowledge proofs (ZKPs). Validiums store transaction data off-chain but validate it on-chain, enabling high throughput and lower costs without sacrificing trust. ZKPs go further by allowing data to be verified without revealing its contents. In practice, a transaction can be confirmed as valid without anyone knowing what it involved.
Let’s dig a little deeper.
When trades are executed on public decentralized exchanges (DEXs), they pass through a mempool — an open waiting room where anyone can see them before they are finalized. This is where Maximal Extractable Value (MEV) attacks happen. Bots monitor the mempool to front-run, sandwich or reorder transactions for profit. MEV is not a fringe concern; it’s a structural flaw that costs users hundreds of millions of dollars annually and undermines trust in DeFi markets.
Private L2 chains eliminate this attack surface. Batching transactions off-chain and submitting only cryptographic proofs to L1 makes front-running and sandwich attacks structurally impossible. Without a public mempool, there’s nothing to exploit.
Information leakage is fatal for institutional and algorithmic traders alike. Maintaining the confidentiality of order flow, execution logic and trading strategy is non-negotiable. A private L2 chain preserves these protections while enabling self-custody and on-chain finality — a balance that traditional DEXs have not been able to offer.
Still, one concern persists: how do we ensure compliance if data is private?
Here, the solution isn’t to abandon privacy. It’s to implement programmable compliance. This model defines privacy as the default but allows for selective disclosure when required. Think of it as encryption with contextual transparency. Institutions can prove compliance with Know-Your-Customer (KYC) and Anti-Money Laundering (AML) regulations without exposing their complete transaction history. Audits and enforcement become targeted rather than pervasive.
Transparency and privacy are often framed as opposing forces in DeFi — but that’s a false binary. A more nuanced approach recognizes that controlled privacy is not rejecting transparency but its evolution. Systems can be designed to protect user-level confidentiality while still offering protocol-level auditability and regulatory oversight.
In short, privacy and regulation can coexist — if the infrastructure is designed for it.
We need a new architecture that acknowledges institutions’ legitimate demands without discarding the principles of decentralization. This isn’t about choosing between extremes. It’s about building systems that are flexible enough to allow both.
Technologies like Validiums and ZKPs already enable this. By separating data availability from verification, they let us build systems where sensitive information stays protected yet provably correct. Through programmable compliance, we gain regulatory assurances without making privacy optional.
The result is a hybrid framework: privacy by default, transparency when necessary, and integrity.
This kind of structure isn’t just a theoretical possibility. It’s already implemented in real-world settings, and the results are promising.
One such implementation, GRVT, is currently deployed by an exchange built on ZKsync’s Validium chain infrastructure. In this model, a dedicated appchain processes trades, settlements and account activity in a permissioned environment. Each batch of transactions is verified using zero-knowledge proofs and finalized on Ethereum. The cryptographic integrity is public; the transaction data itself remains private.
The setup demonstrates how institutional participants can access DeFi infrastructure while maintaining confidentiality. They retain control over their assets, preserve strategy secrecy and meet audit and compliance requirements. The architecture combines blockchain’s auditability with the data privacy expected in traditional markets.
It’s not a compromise. It’s a working example of how privacy, compliance and decentralization can converge.
More broadly, private L2 networks offer a path forward for DeFi’s next chapter. They preserve the ethos of decentralization while addressing the operational needs of institutional finance. They protect users from MEV, allow faster and fairer execution, and enable compliance without requiring surveillance.
What worked in the early days of DeFi — radical openness, public ledgers, total transparency — was correct for its time. However, it will not support the demands of a system that aims to manage institutional-scale capital.
DeFi doesn’t have to choose between transparency and privacy. It has to balance them.
Private L2 chains make that possible. They aren’t a step back from openness — they’re a step toward practical relevance. Without them, DeFi risks remaining a niche experiment. With them, it can become the infrastructure of modern global finance.
About the Author
Hong Yea is the Co-Founder and CEO of GRVT, the world’s first regulated DEX operating as a hybrid exchange. Before founding GRVT in 2022, he spent over a decade as a trader at Credit Suisse and Goldman Sachs. With experience spanning traditional and decentralized finance, Hong focuses on designing scalable, self-custodial infrastructure that bridges institutional requirements with blockchain innovation.
Connect with Hong on: X | Linkedin
免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。
