Privacy Without DeFi Is Boring, DeFi Without Privacy Is Predatory

Developers have traded riches for user privacy. It's time to return crypto to its roots.

AccessTimeIconAug 16, 2021 at 6:21 p.m. UTC
Updated Sep 14, 2021 at 1:40 p.m. UTC

In the pursuit of excitement and growth, the crypto community has largely relegated privacy to the back burner of blockchain innovation. Such a transition is not only antithetical to the very ethos of decentralization, but myopic and regressive in the extreme.

To succeed in replacing traditional finance, digital assets and the cryptographic protocols that support them must manifest decentralized architecture that both facilitates permissionless exchange and confers unequivocal fungibility to all financial instruments via privacy-centric protocols.

Alex Shipp is the head of business development at Offshift, a privacy-focused derivatives platform.

In reality, the subtle, systemic benefits of privacy – important though they may be – pale in comparison to decentralized finance's (DeFi) provocative double-digit APYs and non-fungible token (NFT) auction markets, which have reeled in the attention and capital of cryptocurrency’s mass market, leading elite developer teams and venture capital resources to follow in suit. Now, DeFi is advancing at the expense of privacy-focused initiatives, which only continue to sink further into the backdrop.

DeFi presents an enticing opportunity to make untold fortunes, while privacy-centric architecture can only offer broad social and economic benefits that take form over time and rarely pay. For now, the problem remains: DeFi and privacy stand diametrically opposed in the modern landscape of cryptographic innovation, as the presence of each demands the exclusion of the other. 

Edward Snowden’s words from Ethereal 2021 speak to the imperative of private decentralized finance (PriFi) more eloquently than any others could:

The internet already allows us to do tremendous things, but it’s being controlled – it’s being exploited. And the financial aspect is where a lot of this control is entering through […] we can permit people to act without permission and privately in this space, in which I think […] alt-coins need to be private, or they are failing. This is my position.

DeFi’s next frontier

PriFi platforms establish a tech-o-nomic standard that dissolves the existing trade-offs between DeFi and privacy. The PriFi Standard encompasses all of the following components:

  • A basis in decentralized, sound money
  • Truly decentralized financial applications
  • Uncompromising privacy
  • On-chain architecture

Close, but no cigar

To this point, there have been many earnest attempts to establish genuine PriFi platforms in the crypto space, but none has yet to hit the mark. 

Privacy coins

Monero, Zcash, and others have developed independent blockchains which confer privacy as a solitary value proposition. As per their intention, users remain siloed, unable to interact with the rapidly evolving DeFi landscape and totally isolated from operations involving credit and derivatives. Privacy coins allow individuals to store wealth securely in the event of an economic catastrophe; like bitcoin, they are havens, not solutions. 

Off-chain private DeFi

In the effort to bring privacy to DeFi, a number of projects have begun building privacy-centric DeFi platforms on standalone blockchains, a compromise of sorts between the privacy coin model championed by Monero and the DeFi innovation at the forefront of everything crypto. Unfortunately, in the pursuit of private DeFi, off-chain initiatives impose a host of trade-offs and limitations which can only be surmounted by conquering incumbent public blockchain ecosystems and absorbing their communities. 

In this regard, building a privacy-centric DeFi application off-chain is like giving out loans denominated in Alex-dollars (believe me, I’ve tried): It aims to fix a credit problem by inventing new money. The path to cultivating a robust user base for one’s credit instruments is a long and arduous journey on its own. Building an independent blockchain, on the other hand, requires the development of a robust, battle-tested consensus mechanism, a globally decentralized ecosystem of validators, and a community of adept developer teams. Secret Network, Incognito and Haven are among the ambitious platforms building their own privacy-centric financial universes from ground zero. More power to them. 

On-chain mixers and tumblers

Applications like Miximus and Mobius divide and shuffle public tokens through a network of random addresses in order to dissociate them from their original owners. Though useful tools, these types of applications operate with digital assets that are fully public, and which ultimately land at new public addresses. They are neither a complete nor a sustainable PriFi solution, as they do not provide for truly private ownership. 

Layer 2 private DeFi

Aztec Protocol, whose EIP 1724 was one of the first to publicly conceive on-chain privacy, supports certain applications of decentralized finance in the Ethereum ecosystem. However, by virtue of employing a ZK-Rollup, Aztec’s obfuscation process takes place on a layer 2 with a code that is closed source, and by default not trustless (see: Offshift’s proprietary research). If monetary and economic history have revealed a single, incontrovertible lesson, it is that systems that can be exploited will be exploited. Unequivocally, we need a robust, comprehensive and inclusive PriFi solution, one that is fully decentralized, that is uncompromising in protecting user privacy, and that operates fully on-chain - on layer 1 in the Ethereum and Polkadot ecosystems. There are to be no if’s, and’s or bridges.

The way forward

Technically speaking, PriFi composes a suite of emergent, decentralized applications that facilitate advanced, on-chain financial operations while fully protecting user privacy and minimizing tradeoffs with transparent, public incumbents in the DeFi space. PriFi applications release privacy from the burden of mutual exclusivity, so it can become an accessible and affordable feature that does not demand technical savvy. 

Pragmatically speaking, modern internet infrastructure is both a gift and curse. While blockchain-based systems have produced tremendous advancements in the realms of property ownership, money and finance, they sit atop highly exploitative systems designed to streamline surveillance, systematic wealth extraction and censorship. PriFi is the one-stop, one-click, opt-out that any freedom-oriented individual can access and use. 

Really, it’s all or nothing. Without PriFi, the prospects of sound credit – and therefore of a world where individuals are endowed with freedom and communities with stability – there is very little that will be able to curb the encroaching wave of authoritarianism from enacting technocratic systems of mass surveillance that absolve privacy and ordain censorship and centralized control as global norms. 

PriFi means returning crypto to its privacy-centric roots without holding back innovation, so developers, engineers and entrepreneurs at the cutting edge can create and build freely without disconnecting from the purpose that seeded their journey in the first place. PriFi means stepping forward boldly into uncharted territory without leaving your principles nor your people behind; it means adventure without recklessness, innovation without sacrifice, freedom without chaos, evolution without regression. 

Privacy without DeFi is boring. DeFi without privacy is predatory. PriFi is the way forward.


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