Blockchain transparency is often sold as a benefit. It’s not. Main Street financial consumers will never adopt blockchain-based financial tools as long as blockchain is fundamentally transparent. Ordinary people have a secret they want to keep.
One of the most promising use cases for blockchain is decentralized finance (DeFi). Those building DeFi tools want DeFi to be more than a risk-loving crypto-rich skatepark. They want tools to solve the real financial problems faced by individuals and businesses, including 31.7 million small businesses in the United States.
This article is part of CoinDesk Privacy Week series. JP Koning, a columnist at CoinDesk, worked as a stock researcher at a Canadian brokerage firm and as a financial writer at a major Canadian bank. He runs the popular Moneyness blog.
Imagine a cash-hungry maker in Toledo, Ohio, having a good idea for a product. You can ask the bank for a loan, but instead rely on DeFi. For a moment, it tokenizes a lot of accounts receivable on the blockchain and deposits them as collateral on a decentralized lending platform in exchange for US dollar stablecoin. After a while, we will use a decentralized exchange to exchange these dollars for Euro stablecoins and send them to a French supplier to buy inventory.
This series of transactions is cheap and quick and promises to avoid the usual bank walled yard. Unfortunately, Toledo makers probably don’t care.
By default, all blockchain transactions are public. The government, your competitors, and your mother can all see what you are doing. Blockchain analytics companies such as Chainalysis and CipherTrace have a business of tracking, analyzing and interpreting all transactions and transactions.
Secrets are essential to commerce. Not only is it important for companies to protect their customers’ privacy, but long-term strategies must be exposed to the dark so that they are not split, countered or copied. Our Toledo makers do not want their intentions to be telegraphed by financial reserves on the chain.
As for individuals, they don’t want their friends and colleagues to know what their salary is or the type of porn they are buying. No one wants to be exposed. We like secrets.
Brick and mortar finance can already provide the secrets that Main Street needs. Individuals and businesses generally trust their old school bankers to keep information about their financial transactions secret from others. Not cash-level anonymity. Yes, there are leaks and hacks. Also, under certain conditions, bankers need to disclose information to law enforcement agencies. But in general, Main Street relies on the confidentiality and credibility of their financial providers.
So if you’re a Main Street user migrating to DeFi, you need to build your privacy first. But it’s not just about privacy.
Tornado Cash has become DeFi’s most popular tool in the world for achieving anonymity. Users can send funds to Tornado Cash smart contracts, where they are confused with other people’s funds and obfuscated. Later, the user can secretly withdraw the same amount to another address. A technology called zk-SNARKs is used to reduce the ability of third parties to track funds through tornadoes.
Unfortunately, tornado cash has become a popular place for thieves to clean up stolen funds. The presence of criminals hesitates to do business on the main street like a Toledo-based manufacturer. Depositing company funds in tornado cash smart contracts may be interpreted as mixing them with criminally derived funds. It’s probably not the risk of money laundering that legitimate money wants to take.
The best solution to bring privacy to DeFi is native anonymity. That is, all blockchain transactions should be opaque by default. That way, Main Street users can get the privacy they need without risking confusing coins with scammers. (An approach like the Aztec Network, a privacy layer implemented on top of the base Ethereum layer, could be a solution.)
Native anonymity solves the very realistic need for main street secrets, which leads to the next widely adopted hurdle: too much anonymity.
If main street financial users like Toledo’s makers can’t risk rolling coins with dirty money in tornado cash, they have unconditional access to everyone, including decentralized exchanges and thieves’ dirty money. There is no danger of mixing money with tools that allow you.
In order to enjoy the tool on the main street, DeFi tool makers need to eliminate some of the (potentially) native anonymity brought about by the blockchain by collecting and validating identification information from users. .. In this way, the tool eliminates criminals and ensures legitimate businesses that their clean funds are not contaminated with dirty money.
read more: How Binance, Coinbase and 22 other crypto exchanges process data
In short, DeFi tools need to be privacy admins, just like old-fashioned banks. Users must trust the tools and treat their personal information with caution, and only invade privacy when certain conditions are required, such as law enforcement requirements.
DeFi may have done a better job of protecting privacy than traditional financial institutions. By using zero-knowledge proofs to collect identities, DeFi tools may be able to control the spray of personal information needed to gain access. This can reduce the amount of information lost by hacking.
In short, if DeFi wants to attract users on the main street, it needs a strange combination of more and less secrets. Secrets are important to businesses and individuals. They don’t want their information to be naked for everyone to see. But Main Street doesn’t want complete anonymity. I would like to use a DeFi tool that removes enough secrets to ensure that dirty money is eliminated.
Only when this balance is achieved will companies like manufacturers in Toledo, Ohio enter the blockchain.
