Ethereum has made significant strides in improving speed and sustainability through the adoption of PoS and rollups. However, the focus now needs to shift towards enhancing privacy.
While public blockchains offer decentralization and transparency, they fall short in terms of privacy. The traceability of transactions and addresses on blockchains such as Ethereum and Bitcoin is gradually eroding anonymity. Additionally, the widespread adoption of Know Your Customer (KYC) policies by most cryptocurrency exchanges means that the majority of blockchain transactions can be linked to their original senders. Consequently, users’ activities, assets, and financial information are exposed.
Advanced on-chain analysis systems can easily monitor decentralized finance (DeFi) interactions, highlighting the importance of privacy alongside speed and scalability for cryptocurrency to achieve widespread acceptance. Consumers expect privacy at least equivalent to that of a bank account when conducting transactions. Despite the many benefits of digital assets, a lack of privacy remains a major drawback. For example, when paying for coffee using cryptocurrency, users risk revealing their income, holdings, and purchasing habits to merchants, peers, and others who could leverage their data. Furthermore, if salaries were paid in cryptocurrency, how many individuals would be comfortable with broadcasting their financial information to the world? Therefore, ensuring greater privacy in the crypto industry is essential for mainstream adoption.
The blockchain community is increasingly focusing on privacy
The blockchain community is increasingly focusing on privacy, particularly with respect to public blockchains such as Ethereum, which accounts for approximately two-thirds of DeFi activity. The need for privacy on Ethereum has grown with the widespread adoption of layer-2 solutions like Arbitrum.
In January 2023, Ethereum co-founder Vitalik Buterin acknowledged the need for enhanced privacy on the blockchain. He proposed a “stealth address system” to increase the privacy of Ethereum transactions. Stealth addresses would be created by wallets and would represent obscured public key addresses for receiving funds in a private environment. Access to stealth addresses would require a “spending key” code, allowing two parties to transact without being visible to the public. However, stealth addresses are not a complete solution as they do not account for full DeFi functionality. It remains uncertain when Ethereum will introduce privacy features or to what extent, but there are already solutions available that can offer a high degree of privacy.