In the context where the mainstream society has difficulty accepting decentralized products such as public chains, wallets, and decentralized exchanges with rational cognition, adding a layer of “privacy” to decentralized applications is likely to become a compliance and scrutiny hotspot. Privacy projects are often seen as accomplices to illegal activities such as terrorist financing and money laundering, and are subject to “special attention,” especially in countries with strong regulatory control, where they are easily seen as hostile entities. The probability of the team giving up under pressure is high.
Currently, privacy projects construct an independent “black box” environment, where users can transfer their assets into the black box and then utilize features such as Stealth addresses, Commitment Trees, and ZK proofs within the black box to obscure their tokens. Typically, the larger the black box pool and the more users it has, the more mature the privacy construction conditions become. However, the common approach to addressing compliance issues in such solutions is usually through blacklisting and proof of innocence methods, which easily handle deposit-related problems. But if there is any connection to the flow of illicit funds after withdrawal, it will bring about significant troubles.
To achieve a switch in the underlying asset trading environment, commonly used privacy solutions involve constructing a privacy transaction mechanism, where users first need to deposit into the privacy environment before being able to complete a series of subsequent operations. This places the platform in a challenging position of having to screen for all potential illegal transactions while also facing the operational pressure of slow user growth and difficulty in expanding the fund pool. The platform not only needs to ensure that it is not subject to any mistakes in regulatory investigation but also needs to explain to its vast user base the platform’s fairness and justice (resistance to censorship), which is currently even more challenging.