The current downturn in the cryptocurrency market indicates that the level of adoption required to trigger the next upswing is still uncertain. With uncertainty surrounding the future of the technology and the markets, we are left to speculate on the trends that will pave the way for the next upswing. A growing theory suggests that privacy technology may hold the key.
Previous waves of excitement were ignited by the DeFi boom and the NFT craze, but neither proved sufficient to propel blockchain into its next phase of adoption. Even with ETF approvals, the overall strength of the industry seems to remain unchanged. The recent ETHBerlin hackathon in May 2024, an important Ethereum community event where I spoke about information flow control and censorship in Ethereum, reflected the prevailing sentiment in its manifesto: “The blockchain space is going through a multi-dimensional identity crisis.” If this is the case, the resolution to this crisis may well lie in the realm of privacy technology.
Blockchain’s Identity Crisis
The notion of an identity crisis in blockchain has two aspects. First, our on-chain personal data is not secure. The lack of meaningful privacy on the blockchain exposes our identities. Once your wallet address is known, all your on-chain activity, particularly on Bitcoin or Ethereum, becomes visible and is often linked to real-world identities.
No other financial system or company operates with such transparency, and this can be harmful when there are valid reasons for withholding certain information. For blockchains to achieve widespread adoption, they should offer at least the same level of privacy as traditional systems, if not more.
Second, the identity crisis refers to the psychosocial phenomenon best described by Merriam-Webster dictionary as: “a state of confusion in an institution or organization regarding its nature or direction.” Who are we, why, and what are we building? The EthBerlin manifesto takes a stance: “We want to use our voice in the community to remind everyone that privacy should be a core feature of the technologies we are building.”
This identity crisis, in both of its meanings, is also at the forefront at Ethereum’s Devcon conference, which is set to take place in November 2024 in Bangkok, Thailand. It includes a track on “Cypherpunk and Privacy” focused on “the values that make Ethereum special.”
Privacy As A Core Feature
We have never witnessed such a proliferation of crypto privacy projects. The extensive list compiled by the educational organization web3privacy now contains over 700 entries. According to CoinGecko, the top 100 privacy coins have a total market cap of approximately $6.3 billion. As the technology advances, so will the range of possibilities and the number of projects in the field.
This is despite crypto privacy coming under scrutiny from regulators and the judiciary, both in the United States and the Netherlands. After the U.S. Treasury imposed sanctions on Tornado Cash and apprehended its founders, the blockchain privacy community had to face the reality of the legal system. The sanctions themselves are being challenged in a lawsuit against OFAC brought by Coin Center and another supported by Coinbase, currently at the appeal stage. The legal proceedings against the developers of Tornado Cash are still ongoing in Amsterdam and New York. On September 26, 2024, the judge in the US case against Tornado Cash’s developer Roman Storm ruled against the dismissal of the criminal proceedings and scheduled the trial for December 2024. We are yet to see the outcomes of these cases to comprehend the constraints, legal limitations, and liabilities associated with working on technology that cannot be monitored or technology that ends up being used for harmful purposes.
This tension between technology and state oversight, through regulation and enforcement, while restrictive, is also fueling innovation. The focus on ethics and responsibilities is stronger than ever. Builders have become more aware of the dynamics at play in the privacy sector and cannot overlook them when designing and producing products, making them increasingly robust. As blockchain grapples with its identity crisis, privacy technology is crucial, not only for the current state of blockchain but even more so for its future mainstream adoption.
