Source: Cointelegraph Original: "{title}"
Author's View: Eran Barak, CEO of Midnight
Since blockchain emerged from its obscure fringes into the global discourse 16 years ago, it has made significant progress, recently even receiving ongoing support from Wall Street incumbents. Nevertheless, it is regrettable that this technology has yet to fully unleash its commercial potential. A core challenge remains: too much sensitive data is still publicly exposed.
The Core of the Issue
At the heart of the issue is the necessity for businesses to maintain the confidentiality of commercial data, while individuals strive to protect their personal information as much as possible. However, once data is placed on a public blockchain, it becomes irreversible and permanently exposed.
Even if businesses take every possible precaution to obscure data, mistakes made by others or vulnerabilities in the system may still expose sensitive on-chain data or metadata, including the identities of participants. This can lead to privacy breaches, compliance violations, or both, undermining the fundamental assumption of blockchain as a trusted technology and highlighting the importance of robust measures to protect sensitive data.
On the other hand, obscuring activities on the blockchain may open the door to money laundering, triggering negative reactions from the government. In such cases, a false impression arises that the government opposes Web3 privacy, while privacy is a fundamental requirement for businesses adopting this technology.
From any perspective, protecting on-chain privacy is a real and complex issue facing Web3. Until we address this problem, businesses should not and cannot bridge this gap.
The Government Does Not Oppose Blockchain Privacy
Entrepreneurs in Web3 are increasingly concerned that companies building decentralized applications and providing financial anonymity may find themselves in regulatory dilemmas. Consider the founder of Samourai Wallet being charged with money laundering, or the developer of Tornado Cash being sentenced to 64 months for similar reasons.
These responses have led to a consensus that the government opposes privacy on the blockchain.
But this is not the case. The government does not oppose privacy; rather, it demands that it be safeguarded across various industries. Data protection laws like the General Data Protection Regulation (GDPR) and the Health Insurance Portability and Accountability Act (HIPAA) aim to ensure that businesses protect our customer data from misuse and security threats.
The real issue revealed by these high-profile cases is that the measures Web3 uses to protect data provide opportunities for abuse, thereby facilitating criminal activities like money laundering, which understandably raises serious concerns for the government. The data protection capabilities of blockchain should not undermine cross-jurisdictional laws designed to protect the global community from terrorism, human trafficking, fraud, and other crimes.
The Question Arises: How to Properly Implement Privacy?
Selective Disclosure
When used on the blockchain, protecting sensitive data is often achieved by keeping data off-chain or encrypting on-chain data. However, the latter is not a lasting privacy solution, especially in the context of quantum computing rapidly breaking encryption technologies.
The emergence of Zero-Knowledge (ZK) technology offers users a new way to ensure sensitive data remains off-chain, instead proving the validity of the data through shared proofs. In Web3, ZK technology has become a transformative privacy-enhancing method that allows untrusted third parties to verify that a transaction occurred without sharing any information about the transaction.
Decentralized applications can implement privacy through selective disclosure, choosing whether to place data on-chain (full disclosure), place it on-chain and encrypt it (disclosure via viewing keys), or use zero-knowledge to only publish proofs about the data (providing utility without disclosing any information). However, selective data disclosure only addresses half of the privacy protection issue, as it does not consider metadata.
The Next Frontier of Privacy
Metadata—the information surrounding our data—is an important component that has been overlooked in the exposure of sensitive information on the blockchain. Even if the data itself is hidden, metadata can be used to make inferences, creating an additional vulnerable layer.
For example, transaction metadata can be used to infer investment and trading strategies, as well as other behavioral patterns. For businesses, this could impact their ability to grow and maintain a competitive edge. They cannot afford to have trade secrets and strategies, or even the identities of trading partners, publicly leaked.
Protecting metadata and eliminating inferential capabilities is crucial for security and can be addressed through the use of private tokens. However, this capability could also be abused and become a tool for money laundering.
If using private tokens is not the solution, and using public tokens does not provide sufficient confidentiality, then the way to tackle this challenge is to fundamentally rethink how Web3 protects metadata. We need to combine the advantages of both approaches to create a dual-asset system that utilizes both public and private tokens. Each asset operates independently and can have specific restrictions to prevent illegal activities like money laundering while retaining all other advantages.
A Robust Framework
A dual-asset system can achieve confidentiality without introducing metadata protection issues, enabling compliance and business policy enforcement. By combining this token economic structure with selective disclosure, privacy and compliance can coexist on the blockchain, which will have profound implications for adoption and innovation.
Author's View: Eran Barak, CEO of Midnight
Related: Now Is Not the Time to Restart Staking
This article is for general informational purposes only and is not legal or investment advice. The views, thoughts, and opinions expressed in this article are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
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