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At the time of writing this article, the total market capitalization of the privacy-focused cryptocurrency ecosystem constitutes a mere 1% of the entire crypto market.
It’s perhaps paradoxical that cryptocurrencies, a technological niche born to enforce individual freedoms, seem to be increasingly drifting towards increased transparency, surveillance, and centralized control. However, once one takes a good hard look at the status quo, the reasons for this start to become self-evident:
- Cutting-edge innovation in cryptography, required to achieve the goals of the crypto industry, tends to be developed in total secrecy, often for military purposes. Breakthroughs tend to happen outside of the crypto-economic bubble and take time to incorporate.
- Network effects and entire sub-industries have established themselves on top of transparent, less-than-ideal Layer-1 blockchains that enjoy unparalleled success and have paved the way for significant innovation.
- Technological, economic, and regulatory barriers limit efforts to fund and grow crypto infrastructure.
- The constant regulatory pushback against solutions that provide privacy to users.
A combination of the factors listed above and others you may think about (lack of interest in true fungibility, education about best privacy practices, inherited practices from Web 2.0, and a long et cetera) have created a cryptocurrency market stuck between two worlds: The possibility to deliver true decentralization and an inability to move away from successful, but long-term inadequate tools.
In this article, we’ll cover the existing efforts to bring privacy to the users of cryptocurrencies and of financial instruments in general, such as privacy coins, mixers, Layer-1 and 2 solutions, and dApp implementations. We’ll also review how Panther differentiates itself from them, as well as why, as such, Panther does not fit into any one existing category, therefore creating its own: Regulatory-compliant PriFi.
Timing is of the essence
We are currently at a historical breaking point, witnessing the power of uncensorable, borderless, permissionless payment systems. Noticing the power of true sovereign money, we’ve come to a breaking point in which our governments are forced to either endorse this technology or aim to create state-controlled versions of it. As such, it seems of vital importance to create sovereign financial instruments that retain fiat’s flexibility.
Deployed with the wrong intentions, these instruments could signify the tracking, surveillance, and even censorship of everyday citizens’ every financial move. And so, we’ve come to a breaking point with few solutions, but the increasing need to develop compliant instruments to transact digitally, but also privately.
Enter the world of privacy in finance: PriFi.
The screenshot you see above, taken from the forum BitcoinTalk, features Bitcoin’s creator, Satoshi Nakamoto, replying to Zooko Wilcox-O’Hearn, who would go on to lead the development of Zcash. Zcash, a privacy coin created to allow users to transact privately, utilizes zk-SNARKs and was followed by several privacy projects such as Firo (previously ZCoin), Monero, and Decred.
Privacy coins were born out of a concern for the transparency of Bitcoin and other Layer-1 blockchains. In cypherpunk style, the early developers of privacy coins attempted to create tools that anyone, anywhere could use to transact privately. After them, an increasing number of projects and ideas have been born to help the cryptocurrency ecosystem gain privacy features, some (including us, obviously) claim it should have always had.
Let’s take a look at these tools, how they can be used in the current blockchain ecosystem, their strengths and limitations.
Privacy coins: A solid foundation, but not enough in a multi-faceted world
With what some may argue represents improved fungibility, high privacy, and being digital stores of value (SoV), privacy coins could, to some, seem like the perfect answer to the need for digital payment privacy.
In reality, privacy coins are ill-fitted to be the next step in the evolution of financial systems. Regardless of their lack of price stability (a vital concern, nonetheless), the privacy mechanisms behind privacy coins are limited to their blockchains, siloing them within the crypto ecosystem. Some of the existing privacy coins aren’t even smart-contract capable, which further reduces their attractiveness. This makes them feel like a step back compared to what Layer-1 smart contract ecosystems have achieved.
The privacy mechanisms used by privacy coins within their own blockchains are also sometimes preoccupying, like in Monero’s case. For example, the Monero blockchain isn’t auditable: if a double-spending or infinite minting exploit were found, the illegitimate coins could not be identified and invalidated.
Privacy coins, in some cases may allow their users to reveal their transaction history. However, privacy coins are seldom a positive prospect in regulators’ minds. Unlike Bitcoin and other cryptocurrencies, which continue to be seen in a good light by an increasing number of jurisdictions, privacy coin developers will likely continue to see pressure from governments, and their users progressively scrutinized.
Mixers: Obscuring existing coins’ histories
Cryptocurrency tumblers or mixers, such as Tornado, Void, and Swirl, aim to provide privacy on top of more transparent coins (mainly Bitcoin) to help their holders transact with them privately. Mixers obscure a cryptocurrency’s tracks by pooling together source funds from multiple inputs for a large period to send them to their destined addresses. Since funds are lumped together and distributed at random times, it is tough to trace exact coins.
Mixers typically require their users to contribute fixed denominations of single assets. For example, they may ask their users to only contribute exactly 0.5 BTC at a time. This alienates most users and constitutes a hurdle to their usage, as opposed to Multi-Asset Shielded Pools, which allow users to contribute any amount of several types of tokens. Mixers also often charge percentage-based transaction fees which, in the most popular networks, can be expensive.
Layer-1 smart contract blockchains: Creating privacy-friendly setups from scratch
Some may argue that, in an ideal world, networks like Bitcoin and Ethereum would be created to be fully private by default from Day 1.
Depending on how you see things, Bitcoin and Ethereum’s inherent transparency can be either a strength or a weakness. It’s, nonetheless, remarkable that protocols like Ethereum and Bitcoin have managed to survive and thrive despite the incredible difficulty of bootstrapping them in their earlier stages. An early attack, a governmental crackdown, lousy timing, or even plainly incompetent actors could have resulted in these networks not existing anymore or them not being as secure and reliable as they have turned out to be.
Protocols like Secret, Oasis, and Mina aim to create Layer-1 blockchains that sport the full capabilities of Ethereum and other smart contract chains without their inherent transparency. There are certainly perks to this, particularly in the DeFi field. For example, blockchains that are private by default make it harder to conduct MEV, sandwich, front-running or back-running attacks, which are a great hurdle for institutional players in DeFi. Since they provide the benefits that capital institutions are looking for in the DeFi ecosystem, these initiatives are often heavily VC-backed.
Crafting blockchains that are private by default is by all means an admirable goal. Nonetheless, in the Panther team’s view, it is less likely to succeed than some think for the following reasons:
- Isolation: The DeFi ecosystem (let’s remember that DeFi is the #1 use case, capital-driver, and reason for funding blockchain development nowadays) is spread between dozens of networks. Among these blockchains Secret, the most successful private Layer-1, barely makes the top 50 in terms of market capitalization. The top 5 blockchains by DeFi Total Value Locked (TVL) represent 75% of the market, Ethereum itself being 55% of it. Overcoming the market’s inertia to move billions in locked value into a new, unproven network is highly difficult, not to mention the end networks need to be adequately vetted and prove themselves beforehand.
- Scalability: Repeatedly, scalability has been an issue for smart contract networks, including Ethereum itself. Privacy-focused Layer-1s tend to underestimate the difficulty of scaling their operations as they try to meet two simultaneous needs: Running intense computation to maintain the privacy of their users and retaining an independent consensus model. Problems like those faced by Polygon and Solana, both of which have suffered the strain of being considered the go-to alternatives to Ethereum, should serve as cautionary tales for those promising high throughputs and smart contract features.
- Compatibility and composability: In a multi-chain world, it’s important that projects keep in mind the fact that they’ll have to be compatible with the existing ecosystems, if only to facilitate the migration of users and capital. Having to allow for compatibility then requires significant infrastructure that complicates the development of these projects. For example, even the number of successful chains with developed ecosystems that are compatible with Ethereum can be counted with one hand.
- Network effects and growth mechanics: Protocols that are private by default face the challenge of competing against others of their own kind while trying to prove themselves as alternatives to existing L-1s. Attracting users and TVL, and building state-of-the-art technology under heavy scrutiny by investors and the crypto community can prove itself challenging, and should not be discounted as a factor. The possibility for composability with existing solutions should also be considered as a driver for network effects.
Layer-2 solutions, such as rollups, one of Ethereum’s scalability go-to’s, are particularly interesting for privacy. Aztec Protocol, the most popular of them, and other L-2 privacy solutions are noteworthy for using zkRollups to simultaneously scale Ethereum and conceal transactions. Although more robust than sidechains, this system carries several severe shortcomings, making it relatively experimental.
zkRollups write several transactions to the Ethereum mainnet at a fraction of the cost. Once they are written to Ethereum and confirmed, they become part of the main chain. Nonetheless, while assets are moved inside the L-2, they are temporarily susceptible to the L-2’s consensus, far less robust than Ethereum’s. It’s also worth pointing out that these consensus mechanisms are decided and sometimes enforced by the zkRollup’s developers. Aztec, specifically, is currently run in a centralized, censorship-susceptible manner. Rollups also make cross-chain functionalities difficult, as commitment intervals introduce a significant delay (sometimes multiple hours) for funds to return to the Mainnet.
Decentralized applications and privacy-focused smart contracts
Another approach to providing privacy to users of existing networks requires using smart contracts to infuse transactions with privacy. Some projects to highlight in this arena are Offshift, Haven, and Railgun.
Haven and Offshift adopt the counterbalance-token mechanism popularized by, but not originated by, Terra. $HXV and $XFT can be burnt to mint an equivalent amount of stablecoins, or in OffShift, any fungible asset with a price feed. This system comes with the non-negligible risk of a bank run caused by a de-pegging event or defective oracle price feed. This has gone wrong in the past, particularly in the case of Iron Finance, the pioneer of algorithmic stablecoin mechanisms.
On the negative side, Haven is a fork of the Monero blockchain, inheriting some of its faults, and Offshift runs on L-1s such as Ethereum and Polkadot. Offshift’s smart contract approach faces the complexity of only producing synthetics, not fully collateralized assets, which can be seen as risky by DeFi users.
Railgun, another leader in this field, adopts a model involving smart contracts and zero-knowledge proofs to achieve its privacy features. As such, it could be considered Panther’s closest competitor (albeit still different) in the PriFi scene.
Railgun-shielded assets do not interact across different blockchains, siloing Railgun assets in different blockchains from each other. The project adopts a model in which each chain where it is deployed has its own DAO and its own governance. Because of this, Railgun can be seen as a standalone decentralized application or smart contract that can integrate with DeFi, but hardly a way to infuse the crypto ecosystem with privacy. While applications and smart contracts can be useful tools in the short term, like mixers, they do not constitute a holistic solution in the longer term.
Bringing privacy into the DeFi and crypto ecosystems requires ticking a number of additional boxes. This includes elements such as allowing users to own their own data and who they share it with, unlocking the value that’s separated between multiple chains, and creating new trust models.
The Panther approach: Efficient, tailored to the market, and compliant
If we’re writing an overview of the Privacy Finance ecosystem, it’s not to speak negatively about our competition. Indeed, Panther stands on the shoulders of giants, and each contribution by the players we mention in this piece paves the crypto ecosystem’s road towards privacy.
Because of this, Panther actively seeks and gets involved in partnerships, both research- and development-focused, with projects contributing to the evolution of the privacy space (some of which you can even find in this article). The Panther protocol also uses several of the innovations by other privacy community members, and our criticism of their approach reflects on Panther’s beliefs rather than absolute truth. Indeed, what can benefit the development of privacy for the crypto ecosystem the most is to have the broadest possible diversity of approaches, opinions, and attempts at reaching our common goals.
Panther aims to be a mixture of what has worked for other protocols in the past, using tools that empower and take advantage of existing network effects in the industry. It is built around successful solutions to create a meta-protocol that serves different functions for different aspects of the crypto economy, and that stands in a category of its own.
In particular, Panther differentiates itself from the existing ecosystem, since it:
- Builds upon the success of Ethereum, Polygon, and other Layer-1 blockchains by creating a system that existing DeFi users can easily integrate into their practices. For example, the Panther Wallet will allow the collateral which backs zAssets to be easily used in existing DeFi applications in a privacy-preserving way.
- Panther’s unique setup is based on Polygon and the Ethereum Mainnet, which have their own solid and decentralized consensus algorithms, as opposed to developing Layer-2 solutions.
- Does not put its whole focus on creating a decentralized store of value like privacy coins: It empowers existing tokens and currencies to be collateralized as zAssets, 1:1 representations of them. zAssets are private by default, but allow their users to selectively disclose their transaction history.
- Combines privacy and trust through a sophisticated and highly flexible disclosure mechanism. The protocol’s ZK Reveals model allows users to generate cryptographic zero-knowledge (or non-zero-knowledge) proofs that they can use to reveal information about themselves for purposes such as KYC. They can prove data to trusted parties without revealing their whole transaction history, wallet balance, or the full scope of their identity. For example, a user can prove they completed KYC for a particular procedure without revealing their identity, or that they are over a minimum age without revealing their birth date.
- Panther also aims to create an interchain ecosystem where these private interactions can happen even between holders of tokens in different blockchains.
- Takes inspiration from mixers for its Multi-Asset Shielded Pools, but, as opposed to what happens in mixers, Panther aims to support multiple assets. MASPs also allow for internal transfers. They also have the added advantage of allowing users to contribute any amount of their asset of choice, as opposed to fixed denominations of them, which happens in mixers.
- Uses smart contracts to provide privacy through Multi-Asset Shielded Pools but, unlike what happens in smart-contract networks mentioned above and mixers, Panther uses the ZKP token to incentivize users contributing to its privacy set. $ZKP also serves several other functions in the Panther ecosystem, which you can read about in our dedicated piece, all of them geared towards providing better privacy to users.
- Empowers interchain private transfers using zAssets and bridges to allow users to swap tokens between multiple blockchains privately.
- Aims to create decentralized applications and software development kits/APIs that connect with the existing DeFi and crypto ecosystem to infuse it with privacy, but always remitting to Panther’s bridges, MASPs, and smart contracts.
- Allows its users to create permissioned Dark Pools within which they can trade privately. Thanks to ZK Reveals, a user can prove that they meet the requisites to enter a permissioned pool (for arbitrage, privacy or any other purposes) and transact within it.
Panther aims to infuse the existing crypto ecosystem with privacy while retaining the properties that financial institutions and retail investors need to utilize DeFi. Its focus lies on creating the privacy that an entire economy on-chain would require while allowing users to comply with their jurisdictions’ laws. This is motivated by a desire to play by the rules while creating tools that empower users and protect them against both abuses of power and malicious actors.
At its core, Panther attempts to make compliant privacy in crypto a norm, rather than a rarity. And what sets it apart, undoubtedly, is the fact that it attempts to do so by setting new standards for how information should be used on-chain –but that’s a topic for another article.
Blockchains made it possible to create a robust, decentralized, and censorship-resistant approach to digital currency. However, they have so far failed to adequately deliver truly private financial instruments.
Ever since as early as 2013, privacy-focused solutions for crypto transactions have been in the market, but they haven’t been able to achieve what can only be described as regulatory-compliant PriFi — until now. Either because of a lack of composability, cross-chain capabilities, a lack of ability to leverage the existing DeFi ecosystem, or difficulty complying with regulations, no one has managed to create the privacy our ecosystem needs.
Panther builds upon the merits of many earlier privacy projects while supplementing their shortcomings. Its design is geared towards making efficient, compliant, and fully-composable private DeFi possible. Using ZK Reveals to enable compliance without compromising privacy, building infrastructure for private trading through permissioned Dark Pools, and creating a system to shield existing digital assets that are fully compatible with existing applications, Panther’s solution to bring privacy to DeFi is the most complete to date.
If you’re reading this at the time of publishing, you have learned about Panther relatively early on. It’s now up to you to decide whether you want to stay tuned to our developments in this mission to empower users all over DeFi.
It’s all about the vision, in the end!
Panther is a decentralized protocol that enables interoperable privacy in DeFi using zero-knowledge proofs.
Users can mint fully-collateralized, composable tokens called zAssets, which can be used to execute private, trusted DeFi transactions across multiple blockchains.
Panther helps investors protect their personal financial data and trading strategies, and provides financial institutions with a clear path to compliantly participate in DeFi.