Institutions are hesitant to adopt Web3 technologies due to the highly transparent nature of public, permissionless, blockchains. Avidan Abitbol, the project director for the Data Ownership Protocol (DOP) privacy solution, told Cointelegraph that selective disclosure through zero-knowledge technology solves this problem.
Abitol said that transparency creates the risk of theft for institutions, heightens targeting from scammers, and puts these institutions at a disadvantage during business negotiations. The project director told Cointelegraph:
“Institutions want to hide payments, workflow, daily work, who they pay, and when. If you have Bitcoin or Ethereum balances, those things are very relevant to other people.”
Additionally, transparency can create market risks due to traders using the holdings or transactions of large institutions as an indicator to pump or dump a particular asset, Abitol said.
Related: Big victory in Tornado Cash case as judge says OFAC exceeded authority
Privacy as a form of security
Blockchain transparency hindering institutional adoption is a well-documented problem. In Sept 2024, Paul Brody — the global blockchain leader for IT consulting and services firm EY — told Cointelegraph that privacy is required to safeguard institutional operations.
The executive said that the lack of blockchain privacy has implications that go beyond corporate finance and impact sectors like health care — where patient-client confidentiality is paramount and medical records must be kept private.
In October 2024, oracle provider Chainlink launched private transactions for institutions. The suite of privacy-enhancing features included the Blockchain Privacy Manager and the CCIP Private Transactions encryption tool.
Australia and New Zealand Banking Group (ANZ Bank) was among the first institutions to experiment with the Chainlink privacy features to settle real-world tokenized asset transactions.
Blockchain transparency also exacerbates problems with maximal extractable value (MEV). MEV refers to miners or validators organizing transactions within a block to reap maximum economic benefits.
This block reorganization involves including, excluding, and re-ordering transactions to collect the maximum fees and front-run other market participants through complex arbitrage strategies.
The block producers use the highly visible data on public, permissionless blockchain networks to extract economic value from investors and traders — a problem that data obfuscation and other privacy-enhancing solutions may mitigate.
