Effect Of On-Chain Privacy On Crypto

[TL; DR]

The public and transparent nature of crypto currency/ blockchain have been an issue since its inception.

Most importantly, the Decentralized finance (Defi) protocol lacks privacy.

The development of privacy and anonymity features by blockchain developers is on-chain privacy.

On-chain privacy improves the anonymity of crypto transactions.

On-chain privacy seals the details of the sender, receiver, and transaction amount.

Privacy is expected to be the distinguishing feature between the Decentralized finance protocols and the traditional financial institutions.

The on-chain privacy feature tends to benefit all, including the Government authorities.

The major effect of on-chain privacy in crypto is that it restores the confidence of crypto users who want to remain unknown and do not want their transactions accessible to other third parties.

The negative effect of the on-chain privacy feature is that it promotes terrorism financing and money laundering activities.

Blockchain protocols like Z-cash, Grin, and Beam are built with high-level on-chain privacy features.


The cryptocurrency ecosystem is expanding daily. According to Triple-A, over a 300million crypto users are spread across the globe, and over 180 businesses are already accepting cryptocurrency payments.

Undoubtedly, there are various reasons why the number of crypto users keeps increasing and the mass adoption of crypto tokens as an investment. However, some experts assert that one of the significant reasons is the privacy feature of cryptocurrency.

In this article, we shall identify the On-chain privacy mechanism in crypto and analyze the effect of this privacy feature on crypto.


What Is On-chain Privacy?

---

The public nature of cryptocurrency and blockchain has been an issue, and developers have been devising various ways to improve crypto transactions' security and privacy features.

Of significant concern is the Decentralized Finance (DeFi) protocol that lacks meaningful privacy. In recent times, developers have made headway, and blockchain transactions now have consistent privacy, which is called on-chain privacy.

On-chain privacy improves the anonymity of crypto transactions. The sender, receiver, and transaction details are protected and can not be accessed by third parties.

On-chain privacy gives a high level of anonymity to crypto transactions. It protects all three secrets in crypto transactions, including the senders’ addresses, transaction amount, and the receivers’ addresses.

On-chain privacy in crypto makes it extremely difficult to bypass the security features and unwrap the confidential details of crypto transactions.


Why Is Privacy Crucial In Crypto?

---

Most financial services and use cases of crypto tokens are available in traditional financial institutions. Sending and receiving money across borders can be done via traditional banks.

One of the major reasons why Decentralized Finance stands out is the privacy and anonymity feature. Many DeFi users and crypto holders do not want their financial accounts known by others, and they do not want their financial activities to be traced and their wealth exposed.

The privacy should be a natural feature in crypto. So when crypto enthusiasts see blockchain protocols and crypto platforms that deploy on-chain privacy, they tend to embrace it.

Similarly, Government institutions and international organizations tend to benefit from on-chain privacy in crypto. These organizations are involved in several activities, including charity, humanitarian activity, and fundraising.

On-chain privacy gives them the confidentiality they need to help and donate to various activities they would like to keep away from the public eye.

For instance, the impact of crypto donations on the ongoing Ukraine-Russian war can not be quantified. It is the anonymity feature of crypto that has contributed to the success of that fundraising.

Experts opined that several countries and international organizations that would not want to pick sides with Ukraine due to Russian sanctions have donated to Russia's crypto wallet.


Effects Of On-chain Privacy On Crypto

---

One of the selling points of cryptocurrency is its anonymity and privacy feature. Crypto tokens like Bitcoin have their financial value based on cryptography. Even though they are considered public blockchains, they are merely pseudonymous.

All transactions and the details will be saved permanently on the public ledger, which is accessible to some actors but shielded from the public. So, on-chain privacy is not full anonymity; it is just an upgrade to what used to exist and improves the confidentiality of crypto transactions.

The significant effect of on-chain privacy remains that the larger percentage of crypto users and investors do not want their transaction details known to the public, financial regulators, or the Government.

This reason is genuine at a time when Government authorities and international organizations like The European Union, the Russian Government, Iran, and a host of others are proposing various regulations to control the activities of the crypto market in their jurisdictions.

Some experts opine that on-chain privacy will hurt cryptocurrency. These experts and industry players buttressed that money laundering and terrorism financing have recently been on the rise.

Reports showed that cryptocurrency transactions continue to fuel these illicit activities and the anonymity of the transaction details makes it easy to keep perpetuating these illegal activities. It is easy to convert stolen funds from fiat into cryptocurrency and vice versa.

Likewise, it is easy to transfer funds from an unknown wallet to another unknown wallet used by terrorists for their operations without the identity of the financier (sender) and the terrorists (receiver) being unraveled.


Conclusion

---

On-chain privacy is a good innovation and will undoubtedly attract more users to the cryptocurrency ecosystem. While the effect is largely positive and would impact the cryptocurrency, it has its negative effect.

A deep understanding of on-chain shows that the transactions are not 100% anonymous or confidential; it only improves the confidentiality and restricts access by third-party actors. Some of the "original privacy coins with high-level on-chain privacy include Z-cash, Grin, and Beam.



Author: Valentine A., Gate.io Researcher
This article represents only the researcher's views and does not constitute investment suggestions.
Gate.io reserves all rights to this article. Reposting of the article will be permitted provided Gate.io is referenced. In all cases, legal action will be taken due to copyright infringement.