The lack of privacy protection is the original sin of all public blockchains – from Satoshi's original Bitcoin report to the latest benchmark and parallel networks running 100 million transactions per second with zeptosecond finality.
In general, user privacy conflicts with the nature of public blockchains: for a public ledger to function, some transaction data must be shared with nodes and participants in the network. The shortcut to getting these systems online quickly is to simply make everything public by default.
However, this ultimate transparency exposes users to surveillance, coercion, and unintended consequences such as leaking of trading signals. This is not commercially viable and erodes the individual's right to self-determination. True self-custodial cannot exist if users do not control their data; Privacy is about giving back to users the freedom to choose what they do and do not reveal to the outside world.
Here are seven common fatal flaws in cryptocurrency privacy tools:
Sin 1 – Centralized systems
In a decentralized world, centralization is… laziness. It is easier (faster and cheaper) to run the ledger on the bank's internal SQL database than to submit transactions on even the most performing blockchains.
However, decentralization equals flexibility. This is why cryptocurrencies have a market cap. Without it, users would be better off thanks to the speed and cost savings of centralized organizations.
This is even more important for privacy protocols, where centralization means that developers give themselves privileged access to user data.
Protocol creators should never Giving themselves admin keys that can freeze users or de-anonymize them. (RAILGUN uses mechanisms such as Show keys To provide non-discriminatory and user-controlled transparency when needed.)
Another central vector is the multi-tag threshold, especially for protocols that seek to bypass insecure bridges. Even when set up “correctly,” 3 out of 5 multiple scores are arguably worse in terms of trust assumptions than the bank next to you.
And when the multi-signature is not configured correctly….
Sin 2 – Lust to cut down trees
Privacy tools must take every measure to ensure that user activity, especially personally identifiable data such as IP addresses and browsing activity, is not tracked.
Privacy protocols should be designed with an overarching philosophy that uses only a lack of momentary judgment to de-anonymize users.
For example, Railway Wallet (which has integrated RAILGUN privacy technology) makes RPC calls by default to all users, so even if someone is not using a VPN (which they should be doing 🙁), their IP address will not be leaked to the RPC nodes.
Sin 3 – Encrypted State
Why not make the entire system private? It's tempting… but having a fully encrypted state is, in some ways, as undesirable as being completely public.
The crypto state creates a black box where users and observers do not know what the decentralized application is doing. It eliminates the most important security feature of blockchain: the possibility of public audit.
If the dApp is private, how can you verify that the economists and actors are behaving correctly? How do you properly respond to an exploit or malicious attempt if you don't know if something has happened?
User privacy is good, as is protocol transparency.
Sin 4 – Relying on specific manufacturing companies
Being “trustless” means that you do not have to trust a third party (for example, a company, agent, or bank teller) to ensure that the protocol works. The strength of zero-knowledge-based encryption is that it creates fewer dependencies, including dependence on manufacturers.
Consider, for example, if you created a privacy system that relied on the Software Guard Extensions that Intel built into its CPUs. The security of your system depends on one potential point of failure: confidence in Intel's ability to implement its product correctly.
Intel's incentives are to act appropriately, but reliance on SGX creates ongoing vulnerability and an unnecessary assumption of trust. There are also design considerations, as SGX requires specialized hardware that is relatively expensive, obscure, and difficult to maintain. In contrast, the ownership validation tool can be run on a Raspberry Pi.
Sin 5 – Rogue
Cryptocurrency exclusivity is a compelling story, but it's not a strong enough value proposition to justify creating an entirely new blockchain or blockchain (unless the niche chain delivers rigorous technical innovation).
Privacy regulations are most impactful when they are available on chains where there are users and financial activity. For better or worse, DeFi has coalesced around Ethereum, EVM, and a few other environments like Solana. Rigidity is king and therefore has benefited from safer research.
Creating a new execution environment and enticing developers and users is time-consuming and often unsustainable incentives. Meanwhile, billions of dollars worth are already sitting on public chains in desperate need of privacy.
Dedicated privacy chains also create additional security questions, such as the need for bridges – which have been proven time and time again to be the least secure element of blockchain networks. Other concerns include centralization of consensus, verification, and serialization.
Sin 6 – Complexity of construction
Developers are often viewed as geniuses (and some are). However, coding is difficult enough that forcing creators to learn and use a proprietary language, toolchain, or ecosystem is unnecessarily complex and counterproductive.
Contracts written in languages like Solidity or Vyper are portable between EVM-enabled networks. This is not the case for Rust and other WebAssembly series. They all have their own uptime standards. From the creator's point of view, this means that separate code bases must be maintained for each series even though they use the same language.
As a result, access to the product has become less difficult.
Sin 7 – Immature technology
“Magic Internet Money” is a really excellent meme. However, cryptocurrency developers are building financial technology that has real-world consequences and deals with real money.
Privacy technology has a dual duty to take into account the “truth of money” and “privacy” itself – that is, it must be secure against financial exploits and anything that might de-anonymize users. The vast amount of academic research that exists on technology exists for a reason.
Lest you end up like cornthe tried-and-true axiom is “never twist your encryption.”
Privacy technology, in particular, should be well tested and researched, with extensive audits by security companies, evaluations from privacy advocates, pen testing by white hats, and so on.
How else do we expect people – especially hopefully new mainstream users – to risk their identity and money on a complex technology platform?
Conclusion
Public blockchains are “by design.” It's not easy to create on-chain privacy systems while preserving the reasons for using cryptocurrencies in the first place, such as auditability and decentralization.
A great resource for evaluating the privacy levels of your chosen privacy tool is Web3 privacy Now an initiative Which has classified and registered many crypto privacy tools. You can check this out as an excellent first step towards protecting your online identity and money.
