Private stablecoins will be the bedrock of on-chain commerce
It’s not hard to see why the current open book nature of public blockchains is a cause for concern for many would-be users and enterprise adopters
Midjourney modified by Blockworks
One of the most common misconceptions about blockchain technology is that it’s synonymous with privacy. Instead, the reality is that public blockchains like Bitcoin or Ethereum are more of an open book than a lockbox of user information. They are transparent by default, and every single transaction that takes place on them is visible to anyone using a block explorer.
While this has numerous benefits — including fulfilling the dream of a more accountable financial system — it also has its drawbacks. When it comes to commerce and other use cases, some variations in how these blockchains are implemented might be appreciated by end users and enterprise projects alike. Private stablecoins, in particular, are key to this type of adoption.
Parity with TradFi is the least we can do
As crypto and digital assets become more widely adopted, the transparency that exists in public blockchains becomes more problematic. The perils of doxxing that now exist in terms of personally identifiable information will start to extend to personal financial information as well, leaving many vulnerable to bad actors.
Despite this, recent developments like Google’s decision to index ENS balances and transactions have made personal financial information on Web3 more public than ever before. And while these balances are generally held in pseudonymous accounts, their IRL identities are usually traceable by sufficiently interested parties, as some controversial Web3 projects have demonstrated.
What happens then, if we assume that the Web3 community’s ambition to bring more and more financial activity on-chain, becomes reality?
On one hand, we’ve solved the primary problem of adoption thanks to stablecoins, albeit sans privacy. Today, we use robust stablecoins that let us work around crypto’s volatility for many kinds of on-chain commerce activities, including popular DeFi applications.
Read more from our opinion section: Stablecoins bots are a feature, not a bug
On the other hand, on-chain commerce will never fully take off without the same level of privacy that exists in traditional finance because most users expect the same level of privacy and ease that they get with their banking app on their smartphone — and reasonably so.
It’s not hard to see why the current open book nature of public blockchains is a cause for concern for many would-be users and enterprise adopters.
Private stablecoins are the absolute bedrock of any Web3 analogue for commerce use cases. We can’t achieve parity with traditional finance without getting this right.
Taking on-chain commerce a step further than TradFi
We’re already starting to reap the benefits of all the great research and advances in zk technology that took place during the bear market. This is enabling new features that protect users’ financial information by allowing them to prove necessary information without revealing balances or transactions publicly.
The ongoing integration of this technology with stablecoins will pave the way for on-chain commerce to thrive. Moreso, it will add security and privacy benefits that did not exist in traditional finance and Web2 environments.
The first example of where these features can have an impact goes back to personal security. Private stablecoins based on zk technology (and current work on cost reductions for proof verifications) eliminate the need for expensive custodians through built-in security and anonymization features.
Then, we can look at the implications for enterprise adopters. Private stablecoins can provide competitive security and protection against espionage by obscuring transaction trails for stablecoins and securing sensitive business operations.
Enhanced privacy features using zk technology can also mask financial details of employees to prevent reverse-engineering of payroll data when salaries are distributed using stablecoins. This kind of non-custodial security solution could reduce vulnerabilities even further by decentralizing payroll management with employees controlling their own transactions.
Finally, we can look at the need for private stablecoins from a compliance perspective. We can program regulatory compliance into stablecoins in such a way that they’re tailored to meet legal standards, maximizing privacy and security at the same time.
In these cases, compliance can be proven to relevant authorities via zk proofs that don’t disclose any additional information publicly. This would create a healthier balance between transparency and privacy for stablecoin users in on-chain commerce.
A slow but steady path towards private on-chain commerce
The need for private stablecoins for on-chain commerce is part of a broad, important and ongoing conversation around the need for financial privacy in Web3. The decentralized and open source nature of Web3 means innovation is happening quickly, but the right implementation by Web3 projects can be somewhat slower.
Many of the features that are being made possible by the integration of zk technology into stablecoins are a work in progress. It’s absolutely crucial that we move forward with private stablecoins as soon as possible. Otherwise, a truly on-chain economy will be a permanent pipedream.
Matthew Niemerg is a co-founder of the Aleph Zero Foundation (Switzerland) and Cardinal Cryptography (Poland). With a Ph.D. in mathematics, Matthew’s profound expertise has been crucial in developing Aleph Zero’s foundational technologies. Since entering the blockchain space in 2014, he has provided key insights into economic incentives, protocol security, technological advancements, and adapting business models to thrive within the new decentralized paradigm. Matthew also extends his guidance to over 40 diverse projects within the Aleph Zero ecosystem, spanning DeFi, AI, digital identity management, gaming, and data confidentiality. Additionally, he served as an expert on the EU Blockchain Observatory Forum for three years, further contributing to the discourse on blockchain innovation and regulation. Under Matthew’s co-leadership, Aleph Zero has emerged as a distinguished Layer 1 blockchain in Europe, renowned for its focus on scalability, security, and speed. The project has earned significant accolades, including Deloitte naming Cardinal Cryptography, Aleph Zero’s core development arm, a top “Company to Watch” in 2023.
Christian Walker, Chairman and Co-Founder of Stablecoin Standard and Director of Partnerships at Archblock (formerly Trust Token), a stablecoin issuer and tokenization technology provider in Switzerland, has been in the crypto space since 2017 before moving into stablecoin startups in 2020. Prior to Archblock, Christian was Head of Partnerships at poundtoken.io, an Isle of Man regulated GBP stablecoin startup, where he developed the idea of uniting smaller stablecoin issuers to create a mouthpiece that was representative of the breadth of the industry. Before moving into crypto, Christian spent over a decade running travel and hospitality businesses, culminating in founding a socially responsible youth travel company in 2012. He holds an international MBA from Hult International Business School and undergraduate degree in Modern Languages and Business from the University of Salford.
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