Privacy increasingly influences the development of the decentralized finance (DeFi) and Web3 ecosystems. Users are worried about the safety of their personal information and financial transactions, even though decentralized technologies are pushing innovation in this area. Here’s when privacy-focused technologies begin to shine.
Bitcoin and Ethereum, two well-known traditional blockchain systems, are open, but this openness can sometimes make users' privacy less safe.
To make decentralized systems work with the need for safe, private transactions, privacy-focused solutions have been made.
Privacy-centric networks and zero-knowledge proofs are two technologies that are being worked on to protect user data and make operations more decentralized and reliable.
Concerns about privacy in DeFi are largely caused by the fact that blockchain technology is very open. Anyone who is allowed to see the ledger can see all the transactions that happen on public blockchains.
This openness may make things more open, but it also causes a lot of worry for people who want to keep their financial information private. Financial transactions involve private data, and leaking it could have unexpected effects, such as making investment strategies public and making companies more vulnerable to cyberattacks.
Maintaining privacy without giving up security or decentralization has become a central theme of innovation as the DeFi market grows.
Technologies that put privacy first are especially important in fields like decentralized finance (DeFi), where assets worth billions of dollars are traded every day. Users need to know that their transaction history, wallet balances, and membership in decentralized autonomous organizations (DAOs) will be kept secret. Privacy-focused technologies and protocols make sure that financial transactions are safe and that users remain anonymous. These are important issues as DeFi becomes more popular. Privacy is at the heart of Web3's plan to challenge traditional, centralized data frameworks. The company envisions a decentralized internet where people will have control over their own data.
Many complex cryptographic techniques are at the heart of these improvements. They are meant to protect user privacy while keeping the decentralization and security that blockchains offer.
Layer-2 scaling mechanisms, complex zero-knowledge proofs (ZKPs), and safe multi-party computation are some of the solutions that have been thought up. Based on the use case, each technique offers a different level of privacy and usability, but they all try to provide strong privacy features in a decentralized way.
1. Zero-Knowledge Proofs (ZKPs)
The Zero-Knowledge Proofs (ZKPs) technology is one of the most innovative ways to protect privacy in the Web3 space. With ZKPs, one person can show another person that a statement is true without giving away any other information besides the statement itself. Numerous DeFi platforms are using this cryptographic tool to protect user privacy and keep transactions valid.
ZKPs work by making a "proof" that can be checked without showing the actual data. This lets DeFi users do business privately while keeping the blockchain's decentralized nature.
Privacy-focused blockchains like Zcash use zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge), which is one of the most well-known uses of ZKPs. Scalable privacy is provided by zk-SNARKs, which enable encrypted transactions that don't slow down the blockchain.
A report from Electric Coin Company says that Zcash's use of zk-SNARKs has proven that privacy can exist on a public ledger without making it harder to compute.
Institutional investors are very interested in ZKPs because they allow for private transactions that are in line with regulations. One example is Ernst & Young's Nightfall project, which uses ZKPs to make private transactions on Ethereum possible while still following compliance rules. As more people use them, ZKPs are becoming an important part of privacy in DeFi. Analysts think that ZKP-based applications will grow very quickly because the crypto community as a whole wants more advanced privacy solutions.
2. Tornado Cash
Tornado Cash is a decentralized, non-custodial privacy solution built on Ethereum that lets users hide where their money came from.
When you deposit Tornado Cash, your assets are mixed with other assets in a pool, making it hard to find certain assets and their original wallet. That's why this protocol is one of the most popular privacy tools in the DeFi ecosystem: it lets users break the on-chain link between the recipient and destination addresses.
Tornado Cash uses zk-SNARKs to prove that transactions are real without discussing any private details. When users put Ethereum or other supported tokens into Tornado Cash's pool, the assets are mixed together. Users can then withdraw their money to a new address, which makes it very hard to find out where the money came from. The protocol has become popular among DeFi users who care about privacy, and millions of dollars' worth of Ethereum have been sent through its pools.
Through its daily transactions, Tornado Cash has been a major financial player in the privacy technology market. But the government is keeping a close eye on its use. The U.S. Treasury Department put restrictions on Tornado Cash in 2022 because they thought it helped launder money. Even so, Tornado Cash is still working because it is decentralized, and it is still providing privacy solutions in the DeFi space.
3. Aztec Protocol
As a layer-2 scaling solution that focuses on privacy, Aztec was made just for Ethereum.
The protocol lets people use Ethereum to make transactions without having to reveal the specifics of those transactions. Aztec uses zk-rollups, which combine several transactions into a single batch. This cuts down on gas costs by a large amount while protecting privacy through ZKPs.
Similar to zk-SNARKs, Aztec's architecture lets users protect their transactions and also allows for growth through zk-rollups. This is especially helpful in DeFi, where gas fees can get too expensive to pay.
Users can use DeFi in private without revealing private financial information by hiding transactions. The protocol has been built into a number of DeFi platforms, giving users more privacy options.
Financially, Aztec has gotten a lot of attention because it focuses on both privacy and scalability. A study by Messari says that if Aztec is adopted, Ethereum's gas use could drop by 90%. This would save billions of dollars in transaction costs every year.
4. Secret Network
Layer-1 blockchain Secret Network is made to provide private smart contracts, which are also called "secret contracts."
Traditional smart contracts are open to everyone and show details of transactions. Secret Network's contracts, on the other hand, hide the inputs, outputs, and state of the contract. This keeps private user data hidden from the public, making it possible for many decentralized apps (dApps) that care about privacy.
Secret Network is based on encrypted nodes and Trusted Execution Environments (TEEs), which let people work privately on blockchain data. The protocol encrypts user data so that nodes that are checking the transactions can't read it. Unlike most blockchains, which need to be seen by the public to be valid, this one has no such requirement. A study from Cornell University says that Secret Network's TEEs could change how privacy works in smart contracts.
When it comes to money, Secret Network has teamed up with a number of top DeFi platforms, such as Sienna, to offer private lending and trading services.
More people want privacy in DeFi, which is why Secret Network's focus on encrypted data has gotten more attention from institutions. This is especially true for hedge funds and private investors who want to keep their transaction histories secret from the public.
5. Railgun
Railgun is a yet another privacy system specifically designed for Ethereum, focusing on allowing private transactions directly within DeFi platforms.
Railgun uses zk-SNARK technology (see above) to shield users’ wallet balances and transactions, allowing them to participate in DeFi without revealing their financial data to the public.
The Railgun protocol integrates with popular DeFi platforms like Uniswap and SushiSwap, enabling users to privately trade assets without exposing their transaction history. This is achieved through the Railgun wallet, which uses zk-SNARKs to obfuscate transaction details.
According to the developers, the Railgun system is designed to work seamlessly with DeFi applications, ensuring privacy without sacrificing functionality .
From a financial standpoint, Railgun has seen rapid adoption, especially among users concerned with privacy in decentralized exchanges (DEXs). Its integration with major DeFi protocols has bolstered its position as a leading privacy tool, with millions in daily transaction volume. Analysts expect further growth as privacy concerns in DeFi continue to rise.
6. Orchid Protocol
Orchid is a decentralized VPN service that helps users in the Web3 and DeFi ecosystems protect their privacy.
While Orchid isn't a standard DeFi protocol, it does provide a privacy layer that can be added to decentralized apps (dApps) to safeguard user data. Orchid uses a decentralized network of nodes to provide bandwidth. Because of this, no one group can see what users are doing.
For technology reasons, Orchid combines blockchain with VPN services so people can pay for bandwidth with OXT tokens. That way, people can use the internet without worrying about being watched very closely and safely. Orchid is decentralized, which means that data is sent through many nodes while being encrypted. This makes it hard for people outside the app to see what users are doing.
Because OXT tokens can be traded on major exchanges, Orchid has positioned itself as a top privacy tool for Web3 users.
The VPN market is expected to grow very quickly, and Orchid's decentralized model is one of a kind for people who care about their privacy. More people will want to browse the web privately in DeFi, which will make protocols like Orchid even more popular.
7. Manta Network
Manta Network is a decentralized exchange (DEX) built on Polkadot that protects users' privacy from start to finish. Instead of revealing the sender's and receiver’s addresses, Manta Network tries to hide both the amount being sent and received.
Using zk-SNARK technology, Manta makes sure that transactions are kept secret while keeping the Polkadot ecosystem safe and decentralized.
Privacy is built into every part of Manta Network's business, from trading tokens to staking and running the network. Its zk-SNARK implementation is like other privacy protocols, but it is designed to work with decentralized finance in particular.
This way, Manta lets people trade assets on its DEX without worrying that their private financial data will be leaked. Manta Network's whitepaper says that the protocol's privacy features are made to be as strong as possible without affecting the performance traders expect from a modern DEX.
Manta is one of the most promising privacy-focused DEX solutions in the Polkadot ecosystem thanks to the large amount of venture capital that has been put into it. As more people look for ways to keep their financial information safe, Cointelegraph analysts believe that privacy DEXs like Manta could become a big part of the DeFi ecosystem. Since 2024, the Manta token (MANTA) has been rising in value and popularity on the market, becoming more widely used and liquid on a number of cryptocurrency platforms.
8. Panther Protocol
Panther Protocol is meant to protect DeFi's privacy across multiple blockchains. The protocol allows users to mint private assets known as zAssets, which are collateralized 1:1 by the original token. Panther works with multiple blockchains, so it can protect assets' privacy on Ethereum, Polygon, and other major blockchains.
Cross-chain functionality gives Panther a special edge in the DeFi world, which is becoming more and more connected.
Panther’s privacy solution is built around a combination of zk-SNARKs and other advanced cryptographic techniques. Panther allows private staking, trading, and lending by letting users turn their tokens into zAssets. This way, the details of the transactions are kept private. Privacy is important for institutions to use DeFi, according to the Panther Protocol team. Panther is made to meet the compliance needs of financial institutions by offering both privacy and auditability.
Panther Protocol looks like a good way to protect privacy in multi-chain DeFi ecosystems from a financial point of view. Its token, ZKP, has been steadily rising in value, with more and more DeFi partners and integrations. When DeFi gets better, more people will want privacy solutions. Panther is ready to take advantage of this, especially in situations where privacy rules like GDPR must be followed.
9. Firo (formerly Zcoin)
Firo, a cryptocurrency that used to be called Zcoin, puts user privacy first by combining the Zerocoin protocol with Lelantus to make transactions anonymous.
Firo's Lelantus privacy protocol is one of its most innovative features. It puts up a wall between the sender and the recipient by letting users burn coins and then exchange them for new ones.
As an improvement over previous privacy solutions, Lelantus lets users hide both the amount of transactions and the sender's name. Because Firo puts a lot of emphasis on privacy, users who need strong privacy features for decentralized apps and peer-to-peer transactions often choose it. The Firo whitepaper says that the protocol's goal is to offer stronger privacy guarantees along with better efficiency and usability, which will make it better than many other privacy coins.
Firo has become a popular privacy coin in the business world thanks to its loyal users and growing network of privacy-focused partnerships. Even though Firo isn't as big as Zcash or Monero, it has made a name for itself with its unique privacy protocols and focus on DeFi applications.
10. Oasis Network
Oasis Network is a blockchain network that protects privacy and allows for secure data sharing and secret smart contracts.
Built as a layer-1 blockchain, Oasis prioritizes privacy, scalability, and cheap fees, with a focus on data privacy for decentralized financial and Web3 apps. Its distinctive combination of privacy-preserving mechanisms and rapid throughput makes it ideal for large-scale financial applications.
Oasis protects sensitive data with a combination of trusted execution environments (TEEs) and secure enclaves, allowing developers to write private smart contracts.
These contracts allow for confidential computations, which keep transaction details hidden from the public. The Oasis Network team has positioned it as a blockchain platform capable of unlocking new DeFi use cases while ensuring privacy and performance.
Oasis has collaborated with a number of DeFi initiatives to offer privacy solutions, and its token, ROSE, is used to protect the network and conduct transactions. Messari analysts have identified Oasis as an important participant in the privacy arena, citing its unique technical approach and focus on allowing privacy at scale for DeFi and data-sharing applications. With its collaborations and technological advancements, Oasis is poised to become a key player in the DeFi privacy space.