Benefits of not improving privacy

Economics
1

Hi,

I had a look at this article : An incomplete guide to stealth addresses

It explains that Ethereum is currently a public blockchain : “anything that goes onto a public blockchain is public” and that “discussions on improving privacy” should occur.

Before discussing this issue, here are a few reminders :

  • most governments prefer control over freedom, and rush to regulate, whether they are autocratic or democratic
  • most people are broke and face a lot of difficulties. When they are asked to vote, they usually vote for a bigger government, likely to protect them : as a result, democracies are more and more regulated
  • most government don’t like decentralization and regulate heavily everything decentralized (the internet as a whole, social networks, P2P, cryptocurrencies, …)
  • the trend to regulate crypto is so strong that there is a weekly update about “regulation” on https://weekinethereumnews.com/
  • regulators like to sue everything that offers too much privacy, for example Tornado Cash

Such a situation is likely to change a little bit only in several years, perhaps 10 to 20 years, when major economies become so broke and dysfunctional (inflation, strikes, shortages …), that most people understand the benefits of liberty and innovation to increase wealth.

With this in mind, the current level of privacy is good :

If stealth options were implemented on Ethereum mainchain, you can expect all the Ethereum environment (including developers), to be surrounded by aggressive lawsuits from various regulators.

It would be a massive loss of value and wealth for every Ethereum owner.

Privacy is typically an issue that could be enhanced by external actors (some L2 rollups for example).

It’s better for L1 Ethereum to stay public the way it is, like an accounting book recording carefully every transaction.

2

If you want a regulated financial system, why not just using the existing legacy financial system? What benefits are provided by crypto if it capitulates to government pressure and oversight rather than providing value to end-users? Is there a direct value to end-users for not supporting privacy, or is the only value in attempting to protect the system against government attacks?

3 Likes
3

If you want a regulated financial system, why not just using the existing legacy financial system?

I like several aspects of cryptocurrencies, especially monetary creativity and innovation. And emerging technologies offer opportunities of wealth.

That being said, most goverments want cryptocurrencies to be more and more regulated. You can’t oppose this trend frontally.

The traditional economy knows this problem very well : the private sector, including big tech, suffers from overregulation

But even the largest companies can’t oppose governments directly. They use indirect tactics, just like lobbying, or exploiting loopholes in regulations.

There’s no need to provoke regulators, by developing the most controversial and risky aspect of cryptocurrencies, which is privacy.

I don’t want Ethereum to be treated like Tornado Cash :

“The U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) sanctioned virtual currency mixer Tornado Cash, which has been used to launder more than $7 billion worth of virtual currency since its creation in 2019.” “This includes over $455 million stolen by the Lazarus Group, a Democratic People’s Republic of Korea (DPRK) state-sponsored hacking group” “Tornado Cash was subsequently used to launder more than $96 million of malicious cyber actors’ funds”

“Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson. “Despite public assurances otherwise, Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors on a regular basis and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them.”

"Treasury has worked to expose components of the virtual currency ecosystem, like Tornado Cash and Blender.io, that cybercriminals use to obfuscate the proceeds from illicit cyber activity and other crimes. While most virtual currency activity is licit, it can be used for illicit activity, including sanctions evasion through mixers, peer-to-peer exchangers, darknet markets, and exchanges. This includes the facilitation of heists, ransomware schemes, fraud, and other cybercrimes. Treasury continues to use its authorities against malicious cyber actors in concert with other U.S. departments and agencies, as well as foreign partners, to expose, disrupt, and hold accountable perpetrators and persons that enable criminals to profit from cybercrime and other illicit activity. "

What benefits are provided by crypto if it capitulates to government pressure and oversight rather than providing value to end-users?

There are many aspects of cryptocurrencies to develop : increasing scalability, sharding, exploring possible connections with AI …

Puting privacy aside is not a capitulation, it’s just avoiding excessive risks in the current environment. Turning Ethereum into a big Tornado Cash would just endanger the whole project.

And privacy is an issue that could be implemented by external actors (some L2 rollups for example). They would be able to customize privacy better, depending on the needs of users.

Is there a direct value to end-users for not supporting privacy, or is the only value in attempting to protect the system against government attacks?

Protecting the project against government attacks is a huge reason. By reducing the risks of lawsuits, it gives time to implement important other aspects like sharding and scalability.

There is also a direct value not to support any privacy. Currently, the Ethereum ledger is 100% public, clean and reliable. It registers every transaction like an accounting book. As a result, it can be used safely for traçability, elections, notarization, ticketing, copyright, conformity, …

All of these use cases would be weakened and compromised if stealth transactions could be implemented.

Ethereum is the leading public blockchain, and turning to privacy would result in a massive loss of trust and value.

,

4

Public blockchains will increasingly function like the traditional financial system without decentralized privacy. At best, some sort of centralized privacy will be implemented, that will lead to the centralized privacy provisioners instituting their own respective white/black lists, that create jurisdictionally defined walled gardens. That in turn would lead to significant friction/rent-seeking at the boundaries between jurisidictions, and lack of competition within jurisdictions.

Turning Ethereum into a big Tornado Cash would just endanger the whole project.

Stealth addresses wouldn’t turn Ethereum into a big Tornado Cash. They provide much weaker privacy than Tornado Cash.

But even the argument for baking in strong TC-level privacy at the protocol level is a strong one. Privacy will become increasingly criminalized over time, unless the status quo adopts it. Without normalized privacy, criminals will disproportionately use privacy technologies, making it far easier for opponents of privacy technology to rationalize measures to prohibit it.

Normalizing privacy at the protocol level would establish a ‘new normal’, that could plausibly forestall further efforts to combat crypto crime via hamfisted, civil-rights-violating prohibitions on privacy technology.

Arguably, the crypto sector waited too long already to implement protocol-level privacy, and allowed the precedent of the Tornado Cash sanctions to be established. It will take a Herculean effort to reverse the damage already done at this point.

All of these use cases would be weakened and compromised if stealth transactions could be implemented.

Stealth transactions wouldn’t weaken/compromise any of those use-cases. They are an entirely opt-in feature and provide full auditability of transactions even for those transactions that opt-in.

Ethereum is the leading public blockchain, and turning to privacy would result in a massive loss of trust and value.

Almost all of the value in Ethereum at the moment is speculative, and based on projected use-cases that will never materialize without permissionless/decentralized privacy.

Shying away from the fully developed vision of a decentralized financial platform would be akin to the cypherpunks in the 1990s giving into the surveillance advocates who opposed public access to strong cryptography, and acquiescing to the NSA’s proposal for a Clipper chip to give the government a backdoor to surveil all internet communications. It would have precluded the development of a global internet economy and the trillions-of-dollars / millions-of-lives-saved worth of productivity/quality-of-life-improvement that it generated.

5

Privacy will become increasingly criminalized over time, unless the status quo adopts it.

The global trend is to reduce privacy, whatever Ethereum does, because there’s a consensus of governments to increase population control.

Crypto is enhancing privacy to a certain extend, but every move concerning privacy has to be studied cautiously, with legal risks in mind.

Such a situation is likely to change a little bit in several years, perhaps 10 to 20 years, when economic conditions become so difficult than many people understand the benefits of liberty and innovation to increase wealth.

the crypto sector waited too long already to implement protocol-level privacy, and allowed the precedent of the Tornado Cash sanctions to be established

The crypto sector cannot “allow” anything. The crypto sector can innovate, and then authorities regulate, allow or forbid.

It will take a Herculean effort to reverse the damage already done at this point.

Ethereum can’t go against the consensus of governments, even with a “Herculean effort”.

It’s smarter to devote energy to develop other important aspects of the protocol, like data sharding, increasing scalability, and reducing the cost of transactions.

Stealth addresses wouldn’t turn Ethereum into a big Tornado Cash.

Yes, but stealth addresses would still exist.

Do you think individuals and organizations would use a protocol enabling stealth addresses and transactions to manage :

  • Voting ?
  • Traceability ?
  • Ticketing ?
  • Copyright ?
  • Conformity ?
  • Notarization ?

End-users are not experts. The common opinion would be that “Ethereum is a blockchain enabling stealth addresses and transactions”, and people would be reluctant to use it for sensitive projects, requiring the maximum level of trust and traceability.

centralized privacy provisioners instituting their own respective white/black lists, that create jurisdictionally defined walled gardens.

A move to “organize” privacy would be that some organizations, just like we see on Polkadot, work to link some addresses to the real identities of users. We can imagine some smart contracts being only usable by people who are white listed by a privacy provider.

This move will come, but has nothing to do with stealth addresses. It has to do with introducing permissions to access some applications, in order to comply with regulations or with the choice of devs.

Normalizing privacy at the protocol level would establish a ‘new normal’

The level of privacy of Ethereum is already good, since there is a pseudonomity. It wouldn’t be wise to change things without studying carefully legal implications and risks.

Almost all of the value in Ethereum at the moment is speculative, and based on projected use-cases that will never materialize without permissionless/decentralized privacy.

Ethereum is already permissionless and decentralized, to a certain extent, and the level of privacy is already good.

Shying away from the fully developed vision of a decentralized financial platform would be akin to the cypherpunks in the 1990s giving into the surveillance advocates who opposed public access to strong cryptography, and acquiescing to the NSA’s proposal for a Clipper chip to give the government a backdoor to surveil all internet communications.

Ethereum is supposed to be a decentralized financial platform, most users agree.

Surveillance is already here, and will remain, whatever Ethereum does.

As a conclusion, when hundreds of billions in asset value are at stake, it’s appropriate to go further than philosophical cypherpunk discussions, however interesting they are.

Ethereum is currently the “light” blockchain, with a very good traceability of every single transaction.

Changing this would hurt its value.

Besides that, any move concerning privacy should be studied carefully with law experts, having legal implications and risks in mind.

Preliminary discussions with western regulators may be a good idea before implementing any change about privacy.

6

The global trend is to reduce privacy, whatever Ethereum does, because there’s a consensus of governments to increase population control.

That’s unjustifiably defeatist. There is no immutable trend. No such trend prevented the cypherpunks from getting strong cryptography in public hands. And the government consensus itself is highly malleable, and sensitive to fickle public opinion.

Surveys repeatedly show that the public has very shallow understanding of most public policy issues due to apathy, which special interest groups exploit to get their desired policies implemented. It’s entirely plausible that a committed pro-privacy movement will lead to more attention being paid by the public to privacy, a sea change in public opinion on the value privacy.

The decentralization movement, embodied to a large extent by Ethereum at this point, should take the helm pushing to normalize privacy. The consequences of acquiescing to growing surveillance, and standing aside to allow society become totally subordinated to all-powerful centralized governments, would be disastrous for humanity. The stakes involved warrant fighting for privacy.

Such a situation is likely to change a little bit in several years, perhaps 10 to 20 years, when economic conditions become so difficult than many people understand the benefits of liberty and innovation to increase wealth.

I personally do not want to resign to gaining privacy only after a total economic collapse brought about by dystopian levels of centralized control. If we have tools available to combat these trends toward surveillance, like legal challenges to the OFAC sanctions, and new privacy technology on Ethereum that gives a greater number of legitimate actors in the economy a stake in keeping privacy legal, then we should use them.

the crypto sector waited too long already to implement protocol-level privacy, and allowed the precedent of the Tornado Cash sanctions to be established

The crypto sector cannot “allow” anything. The crypto sector can innovate, and then authorities regulate, allow or forbid.

It’s a figure of speech. The crypto space “allowed” the precedent to be set by introducing privacy too slowly. Had the crypto space embraced protocol-level privacy early on while it was still legal, then the buy-in into the privacy would have been enormous, and the legal/political challenge of instituting a ban like the one imposed on the Tornado Cash protocol may have been too great for the regulatory agencies in question, in democratic states, to consider.

Ethereum can’t go against the consensus of governments, even with a “Herculean effort”.

Governments are not all powerful, and there is no consensus in favor of banning end-user access to privacy, notwithstanding the OFAC’s extraordinary actions with respect to TC. These overly-cynical/pessimistic takes would have Ethereum abandon its principles without even a fight.

Do you think individuals and organizations would use a protocol enabling stealth addresses and transactions to manage :

  • Voting ?
  • Traceability ?
  • Ticketing ?
  • Copyright ?
  • Conformity ?
  • Notarization ?

The proposal to more widely use stealth addresses does not include any proposal to mandate stealth address use at the protocol level so this criticism makes no sense. People could use stealth address for payments AND choose to not use them when using Ethereum for the above use-cases.

The common opinion would be that “Ethereum is a blockchain enabling stealth addresses and transactions”, and people would be reluctant to use it for sensitive projects, requiring the maximum level of trust and traceability.

Strongly disagree. You can conduct a survey to see if there is any basis for your warnings.

This move will come, but has nothing to do with stealth addresses. It has to do with introducing permissions to access some applications, in order to comply with regulations or with the choice of devs.

Yes, and that doesn’t address my problem with this outcome.

The level of privacy of Ethereum is already good, since there is a pseudonomity.

Ethereum has no privacy at all right now. You can trivially unmask all transactions, which is why it has almost zero real world adoption outside of speculative DeFi apps.

Ethereum is supposed to be a decentralized financial platform, most users agree.

Surveillance is already here, and will remain, whatever Ethereum does.

This doesn’t address my point about how centralized privacy devolves into a balkanized financial system controlled by a few centralized parties. I totally reject your defeatist attitude toward surveillance, and I hope every other Ethereum stakeholder does as well.

7

Ethereum has no privacy at all right now. You can trivially unmask all transactions, which is why it has almost zero real world adoption outside of speculative DeFi apps.

Ethereum has already a good level of privacy. There is little privacy on your bank account, because your bank knows everything about your transactions, and your state can know a lot and act on it.

This is not the case with cryptocurrencies in general, including Ethereum, thanks to pseudonymity, decentralization, immutability, permission-less access,…

The traceability of every transaction is an important security for every user, because is gives the opportunity to prove to regulators, inspectors and other officials, everything you have done on Ethereum, where your Ethers come from and where they go.

I personally do not want to resign to gaining privacy only after a total economic collapse brought about by dystopian levels of centralized control.

Yes, it would be better to avoid it, as it would have been better to avoid past wars and economic collapses. The fact is that things happen despite wishful thinking.

centralized privacy devolves into a balkanized financial system controlled by a few centralized parties.

There is no risk of a balkanized financial system with Ethereum, because, to be honest, Ethereum is currently a western project. Most devs, users, stakeholders, nodes and regulators are Westerners. Many of those who are from China or Russia have left their country when they had an opportunity to do so. Those from developing countries are more westernized than their compatriots.

Since Ethereum is currently a western project, it’s important to understand US and UE regulations, and to take them into account, to figure out what is possible and what is not, what is risky and what is not.

8

Ethereum has already a good level of privacy. There is little privacy on your bank account, because your bank knows everything about your transactions, and your state can know a lot and act on it.

No, anyone can use basic network analytics to deduce a huge number of people’s transactions. This capability was available as long ago as 2011, and in UTXO-based blockchains which provide even better privacy by default than account-based ones like Ethereum:

https://www.researchgate.net/publication/51918209_An_Analysis_of_Anonymity_in_the_Bitcoin_System

This means there is effectively zero privacy in Ethereum right now. You may as well be ready to have all of your transactions linked to your real identity, by any one, if you use it.

As for the rest of your points, we can agree to disagree. I think we have both sufficiently articulated our positions to enable others to assess them for themselves.