Author: Huobi Growth Academy|
Summary
As institutional capital continues to increase its share in the cryptocurrency market, privacy is transitioning from a marginalized demand for anonymity to a key infrastructural capability for integrating blockchain into the real-world financial system. The transparency of blockchain was once considered its core value proposition, but with institutional participation becoming the dominant force, this characteristic is revealing structural limitations. For enterprises and financial institutions, full exposure of trading relationships, position structures, and strategy timing poses significant commercial risks. Privacy has thus shifted from being an ideological choice to a necessary condition for blockchain to achieve scaled and institutionalized applications. The competition in the privacy sector is also moving from 'levels of anonymity' to 'institutional adaptability.'
I. Institutional Ceiling of Full Anonymity Privacy: Advantages and Challenges of the Monero Model
The fully anonymous privacy model represented by Monero constitutes the earliest and most 'pure' technical approach in the privacy sector. Its core objective is not to strike a balance between transparency and privacy but to minimize observable information on the chain, thereby cutting off third parties’ ability to extract transaction semantics from public ledgers as much as possible. To achieve this goal, Monero employs mechanisms such as ring signatures, stealth addresses, and confidential transactions (RingCT), which simultaneously obscure the sender, receiver, and amount. External observers can confirm that 'a transaction has occurred,' but they find it difficult to reconstruct the transaction path, counterparties, or value with certainty. For individual users, this 'default privacy, unconditional privacy' experience is highly attractive—it transforms privacy from an optional feature into a systemic norm, significantly reducing the risk of financial behaviors being tracked long-term by data analysis tools. It also provides users with anonymity and unlinkability akin to cash in payment, transfer, and asset holding contexts.
At the technical level, the value of full anonymity privacy lies not only in 'hiding' but also in its systematic design to counteract on-chain analysis. The greatest externality of transparent chains is 'composable surveillance': the public information of a single transaction can be continuously pieced together through methods like address clustering, behavioral pattern recognition, and off-chain data cross-validation, gradually linking to real-world identities and ultimately forming a 'financial profile' that can be priced and potentially abused. The significance of Monero is that it raises the cost of this process to a level sufficient to alter behavior—when large-scale, low-cost attribution analysis becomes unreliable, both the deterrent effect of surveillance and the feasibility of fraud decrease simultaneously. In other words, Monero does not merely serve those 'intending to do harm'; it also responds to a more fundamental reality: in a digital environment, privacy itself is part of security. However, the fundamental issue with full anonymity privacy is that its anonymity is irrevocable and cannot be made conditional. For financial institutions, transaction information is not only essential for internal risk control and auditing but also a legal obligation under regulatory requirements. Institutions need to retain evidence chains that are traceable, explainable, and submittable within frameworks such as KYC/AML, sanctions compliance, counterparty risk management, anti-fraud measures, taxation, and accounting audits. A fully anonymous system 'permanently locks' this information at the protocol level, making it structurally impossible for institutions to comply even if they subjectively wish to do so. When regulators require explanations of fund sources, proof of counterparty identity, or details about transaction amounts and purposes, institutions cannot restore critical information from the chain nor provide verifiable disclosures to third parties. This is not a case of 'regulators failing to understand technology,' but rather a direct conflict between institutional objectives and technical design—the bottom line of the modern financial system is 'auditable when necessary,' whereas the bottom line of full anonymity privacy is 'non-auditable under any circumstances.'
The external manifestation of this conflict is the systematic exclusion of strongly anonymous assets by mainstream financial infrastructure: delisting by exchanges, lack of support from payment and custody institutions, and the inability of compliant funds to enter the market. Notably, this does not mean that real demand disappears. On the contrary, demand often migrates to more concealed and high-friction channels, fostering the prosperity of 'compliance vacuums' and 'gray intermediaries.' In the case of Monero, instant exchange services have handled significant purchase and conversion demands during certain periods. Users pay higher spreads and fees for accessibility while bearing the costs of frozen funds, counterparty risks, and information opacity. More critically, the business models of these intermediaries may introduce sustained structural selling pressure: when service providers quickly convert Monero transaction fees into stablecoins and cash out, the market experiences passive selling unrelated to genuine buying interest but occurring continuously, thereby suppressing price discovery over the long term. Thus, a paradox emerges: the more strongly anonymous assets are excluded by compliant channels, the more demand concentrates in high-friction intermediaries; the stronger these intermediaries become, the more distorted prices become; the more distorted prices become, the harder it is for mainstream capital to evaluate and enter via 'normal market' methods, creating a vicious cycle. This process is not a case of 'markets rejecting privacy' but a result shaped collectively by institutional and channel structures.
Therefore, evaluating the Monero model should not remain confined to moralistic debates but must return to the practical constraints of institutional compatibility: full anonymity privacy is 'default secure' in the personal realm but 'default unusable' in the institutional realm. The more extreme its advantages, the more rigid its challenges. Even if the narrative around privacy heats up in the future, the main battleground for fully anonymous assets will still primarily lie in non-institutionalized demand and specific communities. In the institutional era, mainstream finance is more likely to opt for 'controlled anonymity' and 'selective disclosure'—protecting trade secrets and user privacy while providing evidence required for audits and regulation under authorized conditions. In other words, Monero is not a technological failure but is locked into a use case that institutions struggle to accommodate. It demonstrates the engineering feasibility of strong anonymity but also clearly shows that as finance enters the compliance era, the focus of competition in privacy will shift from 'whether everything can be hidden' to 'whether everything can be proven when needed.'
II. The Rise of Selective Privacy
Against the backdrop of full anonymity privacy gradually approaching its institutional ceiling, the privacy sector is undergoing a directional shift. 'Selective privacy' has emerged as a new technological and institutional compromise path. Its core is not to oppose transparency but to introduce a controllable, authorizable, and disclosable privacy layer atop a default-verifiable ledger. The fundamental logic of this transformation lies in redefining privacy—not as a tool for evading regulation but as an infrastructural capability that can be absorbed by institutions. Zcash represents the most iconic early practice in the selective privacy pathway. Through a design that allows transparent addresses (t-addresses) and shielded addresses (z-addresses) to coexist, it gives users the freedom to choose between public and private modes. When users utilize shielded addresses, the sender, recipient, and amount of the transaction are encrypted and stored on-chain; when compliance or audit needs arise, users can disclose complete transaction information to specific third parties using a 'view key.' This architecture holds milestone significance at the conceptual level: it is the first time a mainstream privacy project explicitly proposed that privacy need not come at the cost of verifiability, and compliance does not necessarily mean total transparency.
From the perspective of institutional evolution, the value of Zcash does not lie in its adoption rate but in its 'proof-of-concept' significance. It demonstrates that privacy can be an option rather than a system default state and proves that cryptographic tools can reserve technical interfaces for regulatory disclosures. This is particularly important in the current regulatory context: major global jurisdictions have not rejected privacy itself but rather 'non-auditable anonymity.' Zcash’s design precisely addresses this core concern. However, as selective privacy moves from being a 'personal transfer tool' to 'institutional trading infrastructure,' Zcash’s structural limitations begin to surface. Its privacy model essentially remains a binary choice at the transaction level: a transaction is either fully public or entirely hidden. For real-world financial scenarios, this binary structure is too coarse. Institutional transactions involve not just the 'two parties' dimension but multiple layers of participants and multiple responsible entities—counterparties need to confirm fulfillment conditions, clearing and settlement institutions need to know amounts and timing, auditors need to verify complete records, and regulators may only care about fund sources and compliance attributes. These entities’ information needs are neither symmetric nor completely overlapping.
In this scenario, Zcash is unable to modularize transaction information or implement differentiated authorization. Institutions cannot merely disclose "necessary information" but must choose between "full disclosure" and "complete concealment." This implies that, once engaged in complex financial processes, Zcash either exposes excessive commercially sensitive information or fails to meet the most basic compliance requirements. Consequently, its privacy capabilities struggle to integrate into real institutional workflows and remain relegated to marginal or experimental use. In stark contrast stands the alternative privacy paradigm represented by Canton Network. Unlike originating from "anonymous assets," Canton is directly designed based on the operational processes and institutional constraints of financial institutions. Its core concept is not about "hiding transactions" but "managing information access rights." Using the smart contract language Daml, Canton breaks down a transaction into multiple logical components, allowing different participants to view only data fragments relevant to their permissions while isolating the remaining information at the protocol level. This design brings fundamental changes: privacy is no longer an add-on attribute after a transaction is completed but is embedded within the contract structure and permission system, becoming an integral part of the compliance process.
From a broader perspective, the differences between Zcash and Canton reveal the diverging directions of the privacy sector. The former remains rooted in the crypto-native world, attempting to strike a balance between personal privacy and compliance; the latter actively embraces the traditional financial system, transforming privacy into an engineered, procedural, and institutionalized solution. As the proportion of institutional funds in the cryptocurrency market continues to rise, the main battleground for the privacy sector will shift accordingly. The focus of future competition will no longer be on who can hide the most thoroughly but on who can meet regulatory scrutiny, auditing, and large-scale adoption without exposing unnecessary information. Under this criterion, selective privacy is no longer just a technical approach but a necessary pathway to mainstream finance.
III. Privacy 2.0: From Transaction Concealment to Upgrading Privacy Computing Infrastructure
When privacy is redefined as a necessary condition for institutions to adopt blockchain technology, the technical boundaries and value extensions of the privacy sector also expand. Privacy is no longer understood solely in terms of whether a transaction is visible but begins to evolve toward more fundamental questions: Can the system perform computation, collaboration, and decision-making without exposing the underlying data? This shift marks the transition of the privacy sector from the 1.0 phase centered on "privacy assets/privacy transfers" to the 2.0 phase focused on privacy computing, upgrading privacy from an optional feature to universal infrastructure. In the Privacy 1.0 era, the technical focus was primarily on "what to hide" and "how to hide," such as obscuring transaction paths, amounts, and identity associations. In contrast, the Privacy 2.0 era shifts the focus to "what can be achieved while maintaining concealment." This distinction is critical. Institutions do not merely need private transfers but require the ability to perform complex operations like trade matching, risk calculation, clearing and settlement, strategy execution, and data analysis under privacy-preserving conditions. If privacy only covers the payment layer and not the business logic layer, its value to institutions remains limited.
Aztec Network represents one of the earliest manifestations of this shift within the blockchain ecosystem. Aztec does not treat privacy as a tool to counter transparency but embeds it as a programmable attribute of smart contracts within the execution environment. Through a zero-knowledge proof-based Rollup architecture, Aztec allows developers to precisely define which states are private and which are public at the contract level, enabling a hybrid logic of "partial privacy, partial transparency." This capability extends privacy beyond simple transfers to cover complex financial structures such as lending, trading, treasury management, and DAO governance. However, Privacy 2.0 does not stop at the blockchain-native world. With the emergence of AI, data-intensive finance, and cross-institutional collaboration needs, reliance solely on on-chain zero-knowledge proofs is insufficient to cover all scenarios. Consequently, the privacy sector has begun evolving toward a broader "privacy computing network." Projects like Nillion and Arcium have emerged in this context. These projects share a common characteristic: they do not aim to replace blockchains but exist as a privacy collaboration layer between blockchains and real-world applications. By combining multi-party secure computation (MPC), fully homomorphic encryption (FHE), and zero-knowledge proofs (ZKP), data can be stored, accessed, and computed in a fully encrypted state, allowing participants to collaboratively perform model inference, risk assessment, or strategy execution without accessing raw data. This capability elevates privacy from a "transaction-layer attribute" to a "computational-layer capacity," expanding its potential market to areas such as AI inference, institutional dark pool trading, RWA data disclosure, and inter-enterprise data collaboration.
Compared with traditional privacy coins, the value proposition of privacy computing projects has undergone significant changes. They no longer rely on "privacy premiums" as their core narrative but instead depend on functional irreplaceability. When certain computations are impossible in open environments or when plaintext exposure would lead to severe commercial risks and security issues, privacy computing becomes not a question of "whether it is needed" but "whether the system can function without it." This also gives the privacy sector its first semblance of a "foundational moat" potential: once data, models, and processes settle within a specific privacy computing network, migration costs significantly exceed those of ordinary DeFi protocols. Another notable feature of the Privacy 2.0 phase is the engineering, modularization, and invisibilization of privacy. Privacy no longer exists in explicit forms like "privacy coins" or "privacy protocols" but is broken down into reusable modules embedded in wallets, account abstractions, Layer 2 solutions, cross-chain bridges, and enterprise systems. End users may not realize they are "using privacy," yet their asset balances, trading strategies, identity associations, and behavioral patterns are protected by default. This "invisible privacy" aligns more closely with the practical path toward mass adoption.
At the same time, regulatory focus has also shifted. In the Privacy 1.0 phase, the core regulatory concern was "whether anonymity exists." In the Privacy 2.0 phase, the question becomes "whether compliance can be verified without exposing raw data." Zero-knowledge proofs, verifiable computation, and rule-level compliance thus become key interfaces for privacy computing projects to engage with regulatory frameworks. Privacy is no longer viewed as a source of risk but is redefined as a technological means to achieve compliance. Overall, Privacy 2.0 is not a simple upgrade of privacy coins but a systemic response to how blockchains can integrate into the real economy. It signifies a shift in the competitive dimensions of the privacy sector: from the asset layer to the execution layer, from the payment layer to the computational layer, and from ideology to engineering capability. In the institutional era, the privacy projects with long-term value may not be the most "mysterious" but will certainly be the most "usable." Privacy computing is the concentrated embodiment of this logic at the technical level.
IV. Conclusion
In summary, the core watershed of the privacy sector is no longer "whether privacy exists" but "how privacy can be used under compliance conditions." Fully anonymous models possess irreplaceable security value at the individual level, but their non-auditability determines their inability to support institutional-grade financial activities. Selective privacy, through designs that allow disclosure and authorization, provides a feasible technical interface between privacy and regulation. Meanwhile, the rise of Privacy 2.0 further upgrades privacy from an asset attribute to an infrastructure capability for computation and collaboration. In the future, privacy will no longer exist as an explicit feature but will be embedded as a default assumption in various financial and data processes. The privacy projects with long-term value will not necessarily be the most "hidden" but will certainly be the most "usable, verifiable, and compliant." This marks the critical transition of the privacy sector from its experimental stage to maturity.
