Crypto’s future hinges on solving the privacy-transparency conundrum

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Identity theft and exposure of private user data were and still are serious issues plaguing web2. The impact of privacy breaches in cyberspace is nothing new. Yet it leaves the vast majority of internet users constantly vulnerable and inflicts real economic and reputational losses on individuals and organisations.

There is a misconception on web3 that privacy threats are not as dangerous as those on web2, or that they are almost completely non-existent. While centralized Big Tech companies use closed protocols that harvest user data to profit from advertising values, the decentralized nature of web3 feels less unstable.

This is because anonymity is a central tenet of blockchain technology; It enables network access by providing users with a pseudonym via an identifiable public key as well as a private key.

Yes, blockchain and decentralized technologies bring new approaches to identity management and data protection, such as cryptographic techniques, but they are far from a guarantee of complete privacy. Let’s assume that a user’s blockchain pseudonym can be linked to their real-life identity, which can happen through a variety of channels, including network protocols and IP analysis. In this case, the user’s identity can be completely removed.

Thanks to blockchain’s signature transparency, a user’s entire transaction history is publicly visible, which would likely raise significant privacy concerns. A person whose private key is compromised and whose identity is disclosed may face a wide range of personal threats, such as extortion by cybercriminals.

As traditional and decentralized finance move closer together, the need to balance privacy and transparency will become more apparent. Fortunately, progress has been made in this area as the web3 industry gets a much-needed clean-up after the crypto winter.

Decentralized identity solutions have emerged as a reliable arsenal that allows web3 users to protect their private data by allowing them to directly manage their credentials. With decentralized identity, users can use selective disclosure mechanisms to share only certain elements of their personal data (such as transaction history), thus reducing the damage if a privacy breach occurs.

For example, Galactica Network recently launched a layer 1 protocol backed by zero-knowledge KYC and impressive whitelisting policies that help create a compliant, privacy-preserving sovereign identity while providing a more robust identification area.

Similarly, ChainGPT recently released a web3 security extension called CryptoGuard, which protects against private key risks and prevents unauthorized access to transaction history, among other features.

Additionally, the Data Ownership Protocol, or DOP, was created to prevent public blockchain overtransparency by giving users the power to control their on-chain data. The Ethereum-based protocol leverages zero-knowledge encryption while operating within current and future regulatory frameworks and leveraging advanced technologies such as zk-SNARKs and Elliptic Curve Digital Signature Algorithm (ECDSA). DOP recently raised $162 million in token sales in April 2024, making it the 9th largest sale to date. The rise of DOP, along with a strong community of 2.7 million users, is a clear indication that Web3 users want a way to balance transparency and privacy.

Advances in privacy-focused blockchain protocols and applications highlight the creativity and evolution of blockchain, but more progress can still be made to overcome the challenges surrounding web3 privacy. The future of Web3 depends largely on effectively reconciling the contradictory nature of privacy and transparency. Walking this fine line while also anticipating privacy regulatory issues is a prerequisite for mainstream adoption.