Opinion: Midnight CEO Eran Barak
It has been almost 16 years since blockchain emerged from its esoteric ties to enter global discourse. Despite this surprising dominance, the unfortunate truth is that this technology has yet to realize its true business potential. The Core Challenge continues: Too much sensitive data is not openly protected.
The heart of this issue is that businesses need to keep their business data confidential and people strive to protect their personal information as much as possible. However, once data is placed on a public blockchain, it is irreversibly and indefinitely public.
Even if businesses take every precaution to hide their data, mistakes and vulnerabilities made by others in the system could expose sensitive on-chain data or metadata, including participants’ identities. This can lead to violations of privacy, non-compliance, or both, undermine the basic assumption that blockchain is trusted and highlight the importance of robust measures to protect sensitive data.
On the other side of that coin, by hiding activity on the blockchain, it opens the door to money laundering and triggers a negative government response. The case of this incident led to the false impression that the government was opposed to Web3 privacy.
From either angle, maintaining privacy on-chain is a real complex issue for Web3. Until we solve it, companies don’t think they’ll cross the groove, and shouldn’t expect them to.
The belief that governments oppose blockchain privacy is wrong
Web3 entrepreneurs grew up fearing that building decentralized applications and companies that provide financial anonymity could lead to regulatory issues. Look at the Samourai wallets that the co-founder has been charged with money laundering or tornado cash.
These responses led to the consensus that the government is totally opposed to privacy when it comes to blockchain.
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This cannot be far from the truth. The government does not oppose privacy, but rather requires it across the industry. Data protection laws such as the general data protection regulations and health insurance portability and accountability laws are in place to ensure businesses protect their customer data from misuse and security threats.
The real problem these well-known cases uncover is that Web3 measurements to protect data create opportunities for misuse and allow for the promotion of criminal conduct that raises concerns so serious that they can understand on behalf of the government. Blockchain data protection capabilities should not undermine established interjudicial laws that protect global communities from terrorism, human trafficking, fraud and other crimes.
This raises the question: what is privacy, what is done correctly, and what does it look like?
Selective disclosure
When it comes to blockchain use, sensitive data is usually protected by maintaining off-chaining of data or encrypting on-chaining of data. Given Quantum Computing’s rapid advances in cracking encryption, the latter is not durable privacy.
With the advent of Zero-Knowledge (ZK) technology, a complex encryption technology, users can instead guarantee sensitive data by sharing proofs about the validity of the data. In Web3, ZK is emerging as a transformative way to enhance privacy as untrusted parties can verify that a transaction has occurred without sharing information about the transaction.
Distributed applications can exercise selective disclosure by placing data on-chain on a fully disclosed (disclosure via viewing key) or by choosing to use ZK to publish only proofs about the data (providing a no-disclosure utility). Selective data disclosure solves only half of the puzzle. It is not designed to describe the metadata.
Next Privacy Frontier
Metadata, the information surrounding data, is a component of lacking exposure to sensitive information in the blockchain. It can be used to make inferences and creates an additional layer of vulnerability even when the data itself is hidden.
For example, you can infer investment and trading strategies, in addition to other behavioral patterns, through transaction metadata. For businesses, this meaning can be detrimental to the growth and capabilities of their competitors. They cannot afford to disclose the trade secrets, strategies, or the identities of other parties they trade.
The need to remove the ability to protect metadata and infer, is paramount to security and can be addressed using private tokens. However, such capabilities can be easily misused for money laundering.
If using private tokens is not a solution and using public tokens does not provide sufficient level of confidentiality, then a way to solve this challenge is to rethink Web3’s approach to fully protecting metadata. The advantages of both approaches must be combined to effectively create dual asset systems that use public and private tokens. Each asset functions independently. This means that certain restrictions can be placed to prevent illegal activities such as money laundering, while retaining all the benefits.
A powerful framework
The dual asset system has disease-free confidentiality that shields the metadata, usually allowing compliance and business policy enforcement. By combining this talknomic structure with selective disclosure, privacy and regulatory compliance could coexist with blockchain, which has an impact resonating with adoption and innovation.
Opinion: Midnight CEO Eran Barak.
This article is for general informational purposes and is not intended to be considered legal or investment advice, and should not be done. The views, thoughts and opinions expressed here are the authors alone and do not necessarily reflect or express Cointregraph’s views and opinions.
