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The Evolutionary History of Privacy in Crypto
Beginner
2025-12-15 | 10m
The history of privacy in crypto is not merely a chronicle of technological invention; it is a narrative of an ideological struggle gradually finding its technical form. It mirrors the classical trajectory of transformative technologies: beginning in narrow, single-user applications before evolving into a general-purpose, multi-user paradigm. Early computers performed solitary tasks—code-breaking, census calculation. The Internet started as ARPANET, a small research network. Artificial intelligence commenced with narrow expert systems. These technologies were later expanded into shared, programmable platforms that enabled global collaboration.
Privacy technology in crypto has long been trapped in its own "narrow" or "single-user" phase. For over a decade, tools were designed primarily for individual obfuscation, hiding one's transaction in a crowd or proving a statement without revealing the underlying data. They operated in isolation, unable to support a
shared private state where multiple parties could compute and collaborate on encrypted data. This limitation confined privacy to the fringes, often associated with controversy and regulatory scrutiny.
Today, this is changing. A new wave of cryptographic breakthroughs, particularly in
Multi-Party Computation (MPC) and
Fully Homomorphic Encryption (FHE), is dismantling the final barrier. They are enabling what can be termed
Encrypted Shared State. This evolution represents the completion of a grand architectural quadrangle for decentralized systems: Bitcoin introduced
public, isolated state; Ethereum brought
public, shared state; Zcash pioneered
encrypted, isolated state. Now, Privacy 2.0 delivers the final piece:
encrypted, shared state. This essay traces the journey from the cypherpunk ethos to this pivotal moment, examining how each phase built upon the last and why an encrypted shared state is the key to unlocking a future of private, collaborative, and compliant decentralized applications.
What's Privacy in Crypto?
Privacy in cryptocurrency refers to the suite of technologies and methodologies designed to protect the confidentiality of transaction details—such as the sender, receiver, and amount—on a public blockchain. It moves beyond the pseudonymity of basic wallet addresses, which can be traced through chain analysis, to achieve stronger financial confidentiality. This is achieved through various cryptographic techniques like zero-knowledge proofs (e.g., in Zcash), ring signatures (e.g., in Monero), and modern innovations including Multi-Party Computation (MPC) and Fully Homomorphic Encryption (FHE). The goal is not necessarily absolute, untraceable anonymity for illicit activity, but rather the essential financial privacy enjoyed in traditional finance, protecting users from surveillance, front-running, and censorship while enabling new use cases like private smart contracts and confidential decentralized finance (DeFi).
Privacy 1.0: Single-User Obfuscation
The cryptocurrency movement was born from the cypherpunk ethos of the late 20th century, a philosophy that viewed privacy as essential for an open society and cryptographic tools as the means to defend it. Satoshi Nakamoto's
Bitcoin realized a crucial part of this vision—decentralized, censorship-resistant money, but sacrificed privacy for transparency. The public ledger, while revolutionary, created a permanent record of all transactions, exposing financial relationships to anyone. This transparency birthed the "blockchain surveillance" industry, turning pseudonymity into a fragile veil easily pierced by chain analysis.
The pursuit of true on-chain privacy therefore became a parallel track to mainstream adoption. This era, now termed
Privacy 1.0, was defined by a core characteristic: it focused on
single-user privacy with no capacity for shared state. Its tools were designed for individuals to hide their own trail, creating islands of obscurity in a sea of transparent data.
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The Early Mixers and Altcoins (2013-2014): The first practical step was Bitcoin's CoinJoin(2013), a cooperative transaction-mixing scheme. It was followed by Monero, which baked privacy directly into its protocol using ring signatures and stealth addresses to obscure senders, recipients, and amounts. Monero represented a major leap but faced significant scalability limits and, due to its mandatory privacy, persistent regulatory pressure as a "privacy coin."
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The Zero-Knowledge Revolution (2016): A paradigm shift arrived with Zcash in 2016, which implemented zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge). This allowed users to cryptographically prove the validity of a transaction (e.g., "I have sufficient funds and the output sums equal the input") without revealing the amount, sender, or receiver. Zcash's optional privacy model, offering both transparent and shielded transactions, was a strategic compromise.
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Application-Layer Tools on Ethereum (2019 onward): As smart contract platforms flourished, privacy tools migrated to the application layer. Tornado Cash emerged as a non-custodial mixer using zero-knowledge proofs to break the on-chain link between deposit and withdrawal addresses. Railgun and similar projects aimed to provide privacy for DeFi interactions via zero-knowledge smart contract systems.
Despite their sophistication, Privacy 1.0 systems shared critical limitations. They were often complex for developers, requiring the creation of custom cryptographic circuits. More fundamentally, they were
isolated and non-composable. A private Zcash transaction or a Tornado Cash withdrawal existed as an island. These assets could not then enter a shared, private lending pool or a confidential auction without losing their privacy guarantees. The state was encrypted, but it remained stubbornly isolated. Furthermore, this era conflated "zero-knowledge proofs for privacy" with the broader, more powerful concept of "zero-knowledge proofs for scalable verification," a distinction that would later become crucial.
MPC and FHE from Theory to Practice
The technologies powering the next leap,MPC and FHE have long histories in academia, their paths marked by decades of theoretical work awaiting sufficient computational power.
Multi-Party Computation (MPC) was born from a seemingly whimsical "Millionaires' Problem" posed by Andrew Yao in 1982. The question: how can multiple parties compute a joint function without any participant revealing their private input? Yao's solution, and subsequent protocols like GMW (Goldreich-Micali-Wigderson), proved that any function computable on plaintext data could, in theory, be computed on encrypted or secret-shared data. For years, MPC was impractical, with overheads millions of times greater than plaintext computation. Key breakthroughs in the 2010s, such as the ABY framework and optimizations based on fixed-key AES, finally bridged the performance gap, reducing overhead to manageable levels and making MPC viable for practical, real-time applications.
Fully Homomorphic Encryption (FHE) followed a similar arc. The concept was first proposed by Rivest, Adleman, and Dertouzos in 1978. For thirty years, only "somewhat" or "partially" homomorphic schemes existed, supporting either addition
or multiplication on ciphertexts, but not both. The field's "holy grail" was achieved in 2009 by Craig Gentry, who constructed the first feasible FHE scheme using lattice-based cryptography and a "bootstrapping" technique. FHE allows unlimited arbitrary computations on encrypted data without ever decrypting it, producing an encrypted result that can only be read by the data owner. Subsequent optimizations, like the CKKS scheme for approximate arithmetic, dramatically improved performance, pushing FHE toward practical application.
These technologies form the twin pillars of the new paradigm. MPC enables multiple parties to compute on their collective secrets jointly. FHE allows a single party (or a server) to compute on encrypted data alone. Together, they provide the toolkit for constructing a
shared computational environment where the state itself is persistently encrypted.
Privacy 2.0 and the Dawn of Encrypted Shared State
By the mid-2020s, market, regulatory, and technical forces converged to catalyze the shift to Privacy 2.0. The explosive growth of DeFi and on-chain activity made the lack of financial privacy—leading to maximal extractable value (MEV), front-running, and strategy copying—an acute pain point for both institutions and retail users. Simultaneously, regulatory frameworks like the EU's MiCA began to delineate a path for "auditable privacy," moving away from outright bans on privacy-enhancing technologies (PETs) and toward regulated transparency. Technically, the maturation of ZK proofs for scaling (zkRollups) created a high-performance, verifiable compute layer that privacy applications could build upon.
The result is
Privacy 2.0: Multi-User Privacy via Encrypted Shared State. This is not merely a better mixer; it is a new architectural primitive. It allows users to collaborate in a private smart contract, a confidential liquidity pool, or a sealed-bid auction with the same programmability as Ethereum's public state, but with the confidentiality of a private ledger. As noted by blockchain researcher Paul Timofeev, this creates a "universal encrypted computer," a shared state machine where all data is processed under encryption. This directly addresses the core limitation of Privacy 1.0, enabling composable, multi-user private applications.
Projects are now building this "encrypted computer":
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FHE-based Blockchains: Fhenix and Inco are developing Layer 1 and Layer 2 networks with native FHE runtime environments. Their "fhEVM" enables developers to write Solidity smart contracts where inputs, state, and outputs remain encrypted, allowing for private voting, blind auctions, and confidential DeFi pools to be executed directly on-chain.
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MPC Networks: Arcium is constructing a decentralized network that uses MPC as its core execution engine. Instead of writing zero-knowledge circuits, developers can write programs in Rust, which are compiled into secure MPC protocols, enabling complex multi-user computations like private credit scoring or collaborative data analysis.
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Confidential Virtual Machines: Ora is pioneering the "Optimistic Machine" (opML) for off-chain confidential computing, while Sunscreen offers developer tools to easily integrate FHE into blockchain applications.
This shift is fundamentally changing the narrative. Privacy is no longer a niche, antagonistic force, but a
functional requirement for mainstream institutional and consumer adoption. As Ethereum co-founder Vitalik Buterin has argued, the future of privacy on-chain likely involves a hybrid model, moving beyond pure "privacy coins" to a "privacy-preserving" ecosystem where transparency, selective disclosure, and complete confidentiality coexist based on application needs. Protocols can now be designed with "programmable privacy," where auditability for regulators is a built-in feature, not an afterthought.
The New Design Space and Future Trajectory
Encrypted shared state unlocks a vast, previously impossible design space for decentralized applications, moving far beyond simple transaction hiding:
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Private DeFi: Truly confidential lending/borrowing pools (e.g., Umbra), dark pools for institutional-sized trades without price impact, and private automated market makers that protect liquidity provider strategies from predatory arbitrage.
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Confidential Digital Assets & RWAs: Tokenized real-world assets (RWA) where ownership records, compliance checks (KYC/AML), and transaction histories are managed confidentially on-chain, unlocking institutional capital. Private, programmable stablecoins could also emerge.
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Private Governance & Voting: DAO voting where proposal details and individual votes are sealed until tallying, preventing early influence and voter coercion. Treasury management can occur without exposing the full strategy.
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Creative Markets & Gaming: Platforms for private bidding on intellectual property or digital art, and fully on-chain games with hidden information (like poker hands or real-time strategy fog of war), creating new economic models.
The future trajectory of crypto privacy will be defined by several key developments. First,
hybrid cryptographic approaches will become standard, combining ZK for succinct verification, MPC for interactive multi-party workflows, and FHE for non-interactive server-side computation for optimal performance and security. Second, the rise of
dedicated hardware acceleration, pioneered by programs like DARPA's DPRIVE and through FHE-specific chips—will be critical to bringing FHE and MPC latency down to levels suitable for real-time, consumer-grade applications.Finally, the establishment of
robust standardization and audit frameworks for these complex systems will be essential for gaining institutional trust and ensuring the promised privacy properties are correctly implemented, avoiding catastrophic bugs in systems designed to be opaque.
Conclusion
The journey of privacy in cryptocurrency is a profound case study in technological evolution. It began with an ideological imperative from cypherpunks, which manifested in the
single-user, isolated tools of Privacy 1.0 from CoinJoin to Zcash and Tornado Cash. These tools were groundbreaking but inherently limited, offering obscuration without the capacity for private collaboration on a shared platform.
The breakthrough to
Privacy 2.0 has been enabled by the decades-long maturation of foundational cryptographic primitives, primarily MPC and FHE, now powerful enough for practical use. These technologies facilitate
an encrypted shared state, the final piece in the architectural puzzle of decentralized systems. This transforms privacy from a peripheral feature into a foundational layer for a new generation of applications.
Just as the Internet evolved from a point-to-point research network into a global platform for shared creation, crypto privacy is transitioning from a tool for individual secrecy to a substrate for confidential collective action. It marks the moment the cypherpunk dream graduates from hiding in the shadows to building in the light on its own, uncompromising, and finally shareable terms. The encrypted world is no longer just a collection of private islands; it is becoming a private continent, ready for settlement. The history of crypto privacy is thus entering its most consequential chapter: one defined not by hiding, but by building openly in secret.
CoinCatch Team
Disclaimer:
Digital asset prices carry high market risk and price volatility. You should carefully consider your investment experience, financial situation, investment objectives, and risk tolerance. CoinCatch is not responsible for any losses that may occur. This article should not be considered financial advice.
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