Read the next wave of DeFi in one article: Security and Privacy

Since its appearance in 2009 in the name of Bitcoin, blockchain technology has inspired numerous applications of decentralized infrastructure. Although many of these blockchain applications have shown great potential, the most notable of these is that Decentralized Finance (DeFi) has quickly become one of the most powerful market segments for capital accumulation. By using a decentralized architecture to simulate traditional financial instruments, global crypto enthusiasts hope to establish a currency system that is not controlled by intermediaries. However, the transparency of public blockchain networks is still an obstacle to the widespread adoption of DeFi (the benefits of transparency are relative, especially when it comes to privacy).


Source: DeFi Prime

Privacy and regulatory pressure

Although the concept surrounding DeFi has been in full bloom, successfully developing and implementing a DeFi solution is still a difficult task. Despite this, various companies remain unwavering in their pursuit of economic transformation. According to the Deloitte Global Blockchain Survey 2019, 53% of organizations listed blockchain technology as a key priority, and 83% found this technology to have convincing use cases.

However, 50% of companies consider privacy-related regulations to remain worrying-the transparency of blockchain is both a wealth and a burden. To address this challenge, some industry insiders have begun to explore privacy protection mechanisms used in conjunction with distributed networks. These solutions are designed to take advantage of blockchain technology while adapting to growing regulatory requirements worldwide.

However, before the impact of these privacy protocols can be properly considered, it is important to understand the fundamental differences between decentralized frameworks and existing client-server infrastructure.


Source: Deloitte Global Blockchain Survey 2019

How decentralized networks can improve security

Although DeFi attracts a lot of investment and news reports, its basic framework is often not paid attention to. In addition to its ability to circumvent monopoly intermediaries, blockchain technology also has some security advantages over traditional client-server networks.

At the architectural level, the client-server network runs through a central server-all other network participants act as clients. In contrast, the blockchain network operates as a peer-to-peer (P2P) platform-enabling each participant to act as a client or server.


Source: Resilio

Due to this structure, the client-server network is vulnerable to a single failure. In turn, they are still susceptible to hacking and technical failures that can damage the entire system. In contrast, blockchain networks rely on a distributed network of machines (nodes) with identical copies of information. In this case, as hundreds or even thousands of other machines continue to operate, the failure of one device has little effect on network functions.

Although people have a long history of understanding security, continuous data leaks and service interruptions have become synonymous with client-server networks to some extent. Since the Cambridge Analytica scandal exposed by Facebook, consumers have become increasingly skeptical of centralized organizations that process their personal information.

Frequent data breaches in client-server networks

It can be said that affected consumers suffer the most after the data breach. However, corporate companies also suffer the consequences of damaged central servers. According to IBM's "Data Leakage Cost Report 2019", the average data breach cost for US companies has increased from $ 3.54 million in 2006 to $ 81.19 million in 2019, a 130% increase over 14 years. Unfortunately, security breaches will only become more frequent, especially in the financial services sector.


Source: "IBM Security-2019 Data Breach Cost Report"

For example, in March of this year, hackers gained access to Capital One's customer data and small business credit card applications dating back to 2005. In another recent case, First American Financial Corp. leaked approximately 885 million personal and financial records with a record history dating back to 2003. In Canada, the Desjardins Group has unknowingly disclosed the personal information of up to 2.7 million members, including their home addresses, names, email addresses and social security numbers.

Of course, these ongoing events help strengthen support for decentralized financial alternatives. However, the implementation of potential applications requires guidance from existing regulations.

Blockchain network achieves layered privacy

As blockchain technology and cryptocurrencies have a place in our daily lives, governments continue to work on appropriate regulatory countermeasures. Many recent privacy regulations, such as the EU's GDPR, California's CCPA, and Brazil's LGPD, only deal with the storage and transmission of "personal data."

There is a problem with this purposeful generic language when applying privacy regulations to blockchain platforms. Since not all blockchains are the same (private and public), and different levels of encryption are also used, compliance is still difficult to explain. As a result, companies seeking compliance must first go through an extensive due diligence process. In this way, these organizations can ensure that the appropriate privacy protection mechanisms are in place-helping to accelerate future expansion.

There are several privacy implementations in use throughout the blockchain ecosystem. Among them, zkSNARKS and its emerging iterative technology continue to lead the trend.


zk-SNARKS or "Zero-Knowledge Concise Non-Interactive Knowledge Argument" represents a proof structure in which one party (the prover) can prove to have certain information without revealing it to the other (the verifier) No interaction is required.


Source: Coindoo


Compared to earlier iterations of zk-SNARK, the constant size of zk-SNARKS or zk-ConSNARKS proved to have clear advantages. Early zk-SNARKS required the deployment of a large number of computing resources, while zk-ConSNARKS was more efficient, which made blockchain technology more attractive to developers who wish to take advantage of privacy protection trends.

Privacy and Decentralized Finance (DeFi)

As the DeFi platform continues to expand rapidly, regulatory influences are bound to accelerate the adoption of reliable privacy protocols. If the new regulations are intentionally retained, companies can take decisive action to support user safety. By combining the inherent security of decentralized technology with privacy protection mechanisms, these emerging projects can challenge existing companies, support their development, and promote the adoption of blockchain technology.

The writer is Zhengpeng Hou, founder of Suterusu. He is an open source code veteran with over ten years of experience in code contributions and building communities. Previously, he worked for Linux distribution companies such as Ubuntu and now works in the blockchain industry. He focuses on open source project development, IoT and cloud computing, and is a believer in decentralized technology.