Mike McCabe - The Future of Onchain Privacy

[music] [applause] Welcome everyone back to talk here at EFlooj. I'm very happy to be here. Um I'm going to talk a little bit about the future of onchain privacy. Um, and with that I want to start off with showing what privacy uh actually means in an entire like full scale end to end context on chain. And I have these listed out as layers here as you can see.

Uh, but I want to just stress that these are not necessarily layers. It is more of a loop where every time you interact with anything on chain uh this loop basically every layer activates or doesn't and um helps you helps you uh gain privacy or not. Uh so we can we can go over these layers a little bit so I can give you a bit more information about what is really going on here. Um I'm going to go bottom to top instead of top to bottom. So we start off with the with the network transport layer.

And this is really like the closest thing to web 2 that you have in let's say the web 3 ecosystem. And that is really just like your internet connection. How are you connecting to websites to your wallet? Um these basic primitives that still actually matter quite a lot if you're if you're interacting with anything on chain. Um, so there are a bunch of companies that are working on making this private.

However, we are still in a situation where most of this is still very public unless your own web 2 obssec is very good in which case you really do not have to worry about this too much. Um, some things that we can name here is like to nim hopper. Uh, these are all primitives working on making this private. Then we have the RPC and data access layer and that is really how you connect from like your wallet to the Ethereum network. And so that is mainly done through RPCs.

Um we have a bunch of initiatives working on making RPCs private but currently still we are in a stage where these are very exposed. Um want to give a quick shout out to Kohaku working on this specifically. Uh, Kohaku is an SDK developed by the Ethereum Foundation and they are currently working very hard on um creating this stack that allows wallets to implement and really uh give the best privacy experience to their users. Then we come into the transaction ordering and meu layer and that is really like before an event actually happens on chain who can see it. So once you broadcast your transaction to the Ethereum network before it is completed, it is submitted to the mempool uh which is like an ordering book almost of all transactions that are waiting to be executed.

This is currently public. Anyone can see this and because that is public that that brings risks with it, right? Um I don't know if anyone saw the uh lowering stock from shutter network but basically what this is where malicious mev is enabled. So people kind of like frontr run you, sandwich you, do all these things and so shutter in particular, flashbots as well are working on making this private and um cow swap already does this for you as well. There are custom solutions for this.

However, generally the mempool is still very public and um that that uh is a problem for people that just want to use Ethereum basically. And then finally we come into the application and compliance and identity layer. Uh this is the layer in which I work and which I operate. So this is my bread and butter and that is also what I'm going to talk about for the rest of the talk. Uh this is basically who can see what on chain.

So like a transfer happened what amount from who when all these different things that allow people to identify what is happening on chain basically. Okay. Um, so starting off with the application layer, um, Ethereum, the Ethereum Foundation recently released their straw map, which is their long-term road map in which privacy is treated as a first class citizen. Privacy is going to be embedded into the L1 U natively eventually. Uh however the road map specified that this is like 2030 plus and it didn't go further than that.

So whether it's going to be 2031 to we don't know. Uh so and then there is another thing of how this is going to be done which is what we also don't know. Um so there are two uh main I guess theories on on how this could be done. Two EIPs have recently been submitted. One is uh zero knowledge wormholes which was discussed yesterday actually.

Uh this is allows users to burn their ETH and then mint a new ETH token on another fresh address which is a way to get plausible deniability and a really clean solution to uh getting privacy on chain. Uh the other one is just simply private Ethernet 20 transfers through a privacy pool um which is what we're building and what I'll be uh telling more about um and then just embedded in the in the L1 natively. Um so maybe before uh we start off here and diving into real privacy um there are different degrees of privacy on chain as well and this is like we talk about privacy but privacy is actually a really complicated subject. Uh privacy is not a binary it is a spectrum something that you really need to keep in mind. Uh there are here four categories of what kind of privacy you can have.

Um the m most straightforward one is pseudonymity and that is like when your grandma calls bitcoin anonymous money because you have like a weird wallet address. It cannot be linked directly to your own identity. You have like an address. Uh but everyone can still see what happens. It's still public.

Uh then you have confidentiality and that is where assets and amounts are hidden or one of those two. Um this is like a weird token standard that uh there is some there are some primitives for. So Salena has some of this, circle has some of this. However uh due to yeah the the token standard it is not really widely adopted because it is not so composable with the rest of DeFi. And then we have anonymity in which parties are hidden, amounts are hidden, senders and recipients are hidden.

So basically all you can see is something happened but you have no idea what happened which is the section that I'm going to be talking about mainly which is privacy pools rail gun and tornado cache the most common privacy protocols on Ethereum currently and then you have fully private uh so that is you cannot really see anything uh in some case you don't even know something happened um this is not native on the L1 and I don't think this is going to be native on the L1 uh this mainly happens on uh different blockchains, layer 2, Aztec for instance. Um and here you can have like fully private state, fully private smart contracts. Uh and then about the compliance layer, the compliance and identity layer. Uh this is also again a spectrum. Um there are various ways of doing compliance.

uh especially when priv privacy pools um what we have chosen for is to have like you can have no compliance whatsoever which is uh the let's say OG privacy protocols Ccash, Monero, Tornado Cashache uh you can have compliance on deposits which is what we have within privacy pools where we essentially if someone deposits into privacy pools we check what their source of funds is. If that source of funds is associated with any illicit activity, let's say a hack or a scam or an exploit or anything like this, then we have the possibility to deny entry within the privacy pool. And um that way we can prevent the the pool of being tainted with bad funds and yeah we do that through membership proofs. There are various different ways in which this can be enforced. So we have a zero knowledge proof system to do this.

Uh but you can also do this through like KYC or you can have like a global viewing key that like it's privacy for most people but there is like still some authority that can still see what happened everywhere and you can also have programmatic privacy for instance where if you meet certain conditions you are granted in automatically. Um so then uh a quick look at what the application layer looks like today. um the state of privacy. I mean, I'm here spreading hats saying privacy is normal. And whenever I give out a hat, I get the reaction, yeah, privacy is normal.

Privacy should be normal. But if we actually like look at the data on chain, the numbers are really quite depressing. Um less than 0.01%. I put that in there as like the lowest number that I wanted to go, but in reality, it's like 0.

0000 0000 something% of activity on Ethereum is private which is just like well we have a lot of potential to grow let's put it that way uh which is also our goal with with privacy pools uh we want to to grow this amount um to let's say 0.1% first uh zero half a percent 1% and so if we actually manage to do this there is there is as I said a lot of room for growth and then there are also um four different categories within the um uh application layer of privacy. And so you have shielded pools which is essentially you deposit into a smart contract. uh everyone deposits into the same smart contract and then the interactions the events within that smart contract are governed by zero knowledge proofs and usually submitted on chain by a relay layer which is a third party that executes uh events on behalf of you. And so that means that everyone has the same relay layer or a bunch of relayers and that means that no one can see uh who actually executed that transaction.

It is just the same address that you always see. And then within a shielded pool, you can deposit money, you can transfer money, you can do various things. Um, we have private DeFi and private intents. And so this is like you can swap ETH for USDC privately. Uh, we have confidential contracts and so that is as I said um not really on mainet.

This is like fully private state. So this is like very specialized technology and that is mainly um Aztec that is pushing that forward and we have the private stable coins where you cannot see the amount or the asset being transferred. Um so about these numbers right like why is privacy adoption so low? Uh I think and this is my personal opinion there are three main blockers for widespread privacy adoption and I have listed them out here. one is the compliance risk.

Uh secondly, the integration f friction and then thirdly the UX gap. Uh I'm going to dive into all of this. Uh so first of all starting with the compliance risk and so we are currently working we have just launched privacy pools version two on testn net. Um however version one of privacy pools was a very basic privacy protocol. the innovation there really lay within the compliance part of privacy pools.

Um, and so what we have essentially done there is implemented this this deposit checking tool which allows us to keep bad actors out. And our thesis for privacy pools v1 was can we see if there is enough interest uh in compliant privacy to actually continue building on it. And well, we've had something like 5,000 individual depositors. Um, we've done like $30 million in volume. So, uh, we feel like that thesis is validated and that's why we're building, uh, our version two now to essentially address all these other risks that we see.

Uh, quickly very quickly on how our compliance tool works. Um, there are five steps within the compliance uh, process. So first of all someone deposits into privacy pools. Uh then what happens is we check the source of funds. We essentially have three categories where we can group people in.

We have known bad actors which are like uh associated with scams or something like that. Uh we can immediately not grant them access. We have known good actors. So that would be someone that has like let's say just withdrawn from Coinbase which we know their KYC and AML standards are up to standard. um and they then they deposit into privacy pools.

Well, then we know it's a known good actor uh and so we can let them in and then we have unknown actors which um we need to manually review and find custom solutions for. Then uh secondly what happens is if we deem uh uh if you are allowed into the pool then we publish your address on IPFS we have a whole list of addresses there and based on that list you can create a membership proof. So you are part of that list and you can then show that proof to the relayer which is a third party that executes events within the pool. Um, and if you do not have that proof, the relayer will not execute. If you have that proof, the relayer will execute and thus you can gain privacy.

Um, cool. So, that's about the compliance risk. Then we're diving into the integration friction risk. So, maybe just a quick show of hands. How many of you have ever used a privacy protocol?

Okay, I see a few people here. Um, if you've used a privacy protocol, you know how clunky and annoying and hard it is to to actually understand what is going on, what you need to do, what the expectations are, all these kind of things. They are currently mainly standalone applications that you need a lot a lot of prior knowledge and understanding of to actually use. Um, this is a terrible user experience. like nobody wants to to first have to spend like half an hour or an hour trying to understand what they actually have to do before they can do something.

And so what is being developed now is basically embedded privacy and that is mainly um privacy that is integrated into other pieces of already existing infrastructure. And so you can think of things like wallets, DeFi applications, treasuries that can basically abstract away all the complexity for you and simply allow the user to press almost a toggle of like privacy mode on or off. And if you select privacy mode, the application will automatically route that for you without any UX friction. Um, so this is already like a huge improvement over standalone applications where the user needs to figure everything out. Um this is basically shipping now.

We have seen our first few deployments of this over the last few months but um yeah this space is going to grow very very rapidly over the coming years. You will see more and more privacy integrations within existing infrastructure and I think this will be a major unlock for actually giving users privacy seamlessly. Basically, if you can choose to have private or non-private money in your wallet, I think a lot of people will choose to have private. Uh and then the final stage as I talked about earlier is the private L1. Uh then the third third problem that we see which is um the uh UX gap.

So currently um privacy protocols are extremely limited. There is not a lot of stuff you can do with a private address except for like as I said previously uh withdraw, deposit, send. It costs money to use as well and it's like a 0.5% fee. So it's actually pretty expensive.

Um and the functionality is very limited. So I think this is also a major deterrent for wide adoption of privacy. Uh what our goal for privacy f pools v2 really was is to create a feature complete protocol that basically rivals the public on public public chain experience but from your private balance. So we're adding loads of different things like yield like swaps like DeFi compatibility which you can all do from your private balance. Um, we're adding hardware wallet support.

We're adding multisync support and we're assuming that with these added features, um, there is also going to be simply more product market fit for the demands that users have for privacy and we think this is going to be an again a major unlock for the entire privacy space. Um yeah with that uh as I just told uh privacy pools v2 just shipped and we are very much looking into integrations and um we are inviting everyone to to come build with us and check it out. Um, I wanted to not only show slides but also kind of like demo how how you can build on privacy pools and the things that you can do with it now, how you can really rival that existing um public infrastructure. And so for that I have essentially been uh vibe coding a bunch of applications built on privacy pools v2. Uh I would love to demo that in real time now but unfortunately I don't have my laptop here.

I can't. So, I had to record it. Um, so I've created a little video here. Um, and I can essentially play that and show you guys what happened what what happens. Um, yeah.

So, here one one of the cool features that we have is we have private payment requests. So, what you can do is this is essentially the same as uh Venmo or Tiki in the Netherlands. You can create a link that you can send to anyone and the other person can then open that link, connect their wallet and here's a payment request for 0.05 E. They can play uh press pay and then regardless if you have money in your private balance or your public balance, you can immediately pay this payment request and um yeah, there won't be a trace of that on chain.

And so we feel like this is going to be a major unlock. It's a very convenient way instead of like sending wallet addresses across or um yeah having to scan QR codes and all these things. You can just simply send a link to your friend, ask for the money for a coffee or dinner or whatever and you can do that completely anonymously. Um here you can see the the transaction being completed. And then the other thing I wanted to show you guys uh was a private payroll application.

Um so payroll in public from Dows is very common currently which is obviously not ideal. Here I have free recipients for EV clu that you could want to pay. Um here you can just see this is all built on privacy pools v1 uh or v2 excuse me. And um you can have these different people that you want to pay in there. You can simply press run cycle and the protocol will anonymously distribute these funds to anyone.

Um it takes a little while and that is mainly due to my coding skills not to the protocol. Um but here you can see the the transactions are being submitted. Uh three different recipients are now concurrently receiving funds. Um so yeah as I said we have to wait a little bit but again the goal here is to highlight uh the kind of different applications you can build on this. And this is still a relatively simple application.

Obviously, you're just transferring money. Um, which is relatively straightforward, but building different kind of UIs for that can really uh create a more UX friendly experience. What is also nice in privacy pools v2 is that we have builder codes. Uh, builder codes essentially allow you to build a front end like this and monetize that yourself. So you can build your application on top of privacy pools.

Uh set the amount of fees or whatever you would like to charge and then the contract will automatically uh redistribute that to you. Uh here a more complex example. So this is an OTC order book. As you can see here there are all these orders. I can create an order and I think I did it for 0.

01 E. Yes. Uh the price here is hardcoded. So I know this isn't accurate but here I have now created an order. I can go to another uh privacy pools account.

I can see the order is added right now. I can open it. I can press fill order which unfortunately is cut off but I've pressed it here. And now what the protocol can do is it can atomically swap these two commitments these two zero knowledge proofs with each other. And so you can build like entire decentralized applications on top of privacy pools that are relatively complex because order books are fairly complex.

Um and here you can see the transactions are being prepared. Uh so yeah, first the maker transaction is created and then the taker transaction is created. Um I did a little bit of a better job on this one and so it's luckily a bit faster. Um and you can see here that like within something like 30 seconds we have managed to create a fully private transaction that is P2P. Um you can also facilitate this and create like a more centralized experience uh through liquidity pools and these kind of things but this is pure P2P.

You can see both of the transactions executed on chain. They both come from the same address which is the relayer executing this for you. And so here you can have basically a fully private um trading experience directly within privacy pools. Uh one shout out that I would really like to give and that I really encourage you guys if you're interested in privacy to check out is Cloaked Wallet. Um Cloaked Wallet is founded by um uh Blaine and Olivia and they are building on privacy pools as well.

They have created an absolutely delightful privacy experience. Like your grandma could use this and have private onchain money which I think is really quite amazing. Um if you want to just test out how private onchain tools work, this is definitely the best way to do so. Um yeah and with that this is uh these are the test net links for privacy pools v2. if anyone is inclined in in testing.

So, uh we are giving everyone that wants to use this uh free Sapoleia E. Uh so you can simply create a payment request, send it in the E cluge chat or send it anywhere else and I will pay that payment request for you and uh you can you can get some [music]

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