The Problem with Centralized Systems and Data Breaches
Data breaches highlight the risks of centralized systems, reinforcing why privacy must shift from an optional feature to a standard practice across digital infrastructure. Earlier this week, sensitive customer information belonging to several major U.S. banks—including JPMorgan, Citigroup, and Morgan Stanley—was reported to be at risk after a cyberattack targeted SitusAMC, a mortgage technology vendor. The leaked content was reported to include accounting documents, legal files, and in some cases, client-related financial information. While the full scope is still being investigated, the incident exposed a deeper reality: modern financial infrastructures are only as secure as the weakest service provider linked to them. And yet, what makes this more concerning is not the breach itself, but how familiar the pattern has become. Systems built for convenience, integration, and automation continue to expand, while privacy protections remain inconsistent and often optional. The result is a world where data flows faster than ever, but without guardrails strong enough to protect it.
Shifting the Paradigm: Privacy as Hygiene
Shortly after the news surfaced, Ethereum co-founder Vitalik Buterin commented publicly: "Privacy is not a feature, but a hygiene practice." This wasn’t just a reaction—it captured a cultural shift underway across Web3. For years, privacy has been treated as a toggle or product setting. Users could opt in, install a tool, or manually modify wallet behavior. But this model assumes privacy should be an enhancement rather than a baseline. Buterin’s framing flips the expectation: privacy should work invisibly, automatically, and by default. His comment resonated because it reflects an emerging truth: we are moving toward a world where digital ownership has real economic weight. And in that world, privacy cannot remain an optional configuration—it must be structural.
Web3's Privacy Movement: Addressing Transparency and Selectivity
Blockchains were designed to be transparent. Every transaction, balance, and movement is visible and verifiable. This is what makes decentralized systems predictable and trustable. Yet, the same transparency exposes behaviors, address relationships, and financial identity over time. The Privacy Track in Web3 exists to solve exactly this tension. Rather than removing transparency entirely, it aims to enable selective visibility—where users, protocols, or institutions can disclose only what is necessary, when it is necessary. In simple terms, privacy infrastructure seeks to answer questions such as:
- •How can transactions be validated without exposing counterparties?
- •How can smart contracts operate on encrypted data?
- •How can users verify compliance without forfeiting confidentiality?
- •How can institutions use blockchain without revealing their operational patterns?
As regulatory expectations evolve and adoption accelerates, privacy is transitioning from a niche capability to a required component of scalable digital infrastructure.
Key Sub-Sectors Within the Privacy Ecosystem
Although the privacy space is often grouped together, it’s more diverse than it appears. Today, it can broadly be divided into four developing layers:
Private Transactions
These protocols enable users to send assets without exposing transaction history or wallet linkages. Unlike early mixers, newer approaches introduce compliance-friendly proof systems instead of full anonymity. A notable example here is Privacy Pools. Rather than hiding funds in a single undifferentiated pool, it allows users to prove cryptographically that their assets are not linked to prohibited sources, preserving privacy while remaining auditable.
Confidential Computation
This is where the technology becomes more foundational. Instead of simply masking transaction destinations, protocols in this category enable encrypted computation—where smart contracts operate on private data without revealing it to validators. A leading project in this category is Zama, which focuses on Fully Homomorphic Encryption (FHE). The goal is simple but transformative: make private smart contracts feel as seamless as public ones while preserving compatibility with existing blockchain infrastructure.
Privacy-Preserving Identity
As more users move from anonymous wallets toward on-chain identity and credentials, privacy becomes essential. Selective disclosure frameworks allow users to prove eligibility—for example age, nationality, or asset ownership—without exposing unnecessary personal information. This category intersects with decentralized identity (DID) frameworks and is likely to become increasingly relevant for compliance-driven applications such as tokenized assets, institutional DeFi, and on-chain credit systems.
Regulated Privacy Infrastructure
Finally, a new category is emerging—systems designed from the beginning to align with legal frameworks. Instead of assuming privacy and compliance exist in conflict, this part of the ecosystem attempts to unify them. It is here where Vitalik’s idea becomes most visible: privacy as a baseline, transparency only when necessary.
Leading Projects Shaping the Future of On-Chain Privacy
As the privacy stack matures, a few projects have moved from experimentation to becoming reference points for how privacy on-chain should evolve. One of the most discussed examples today is Privacy Pools. Built on Ethereum and developed as a successor to earlier privacy models, it introduces a new mechanism that allows users to shield transactions while still demonstrating compliance when necessary. Instead of relying on a single undifferentiated anonymity set, it uses cryptographic proofs to categorize transaction sources, allowing users to prove they are not part of prohibited groups. The design sits somewhere between complete anonymity and full transparency, and its purpose is not to evade visibility, but to align privacy with regulatory expectations. Because of this balance, Privacy Pools is often referenced in discussions around “regulated privacy”—a concept increasingly relevant as institutions enter Web3.
Another important project in this space is Zama, which focuses on Fully Homomorphic Encryption (FHE). While Privacy Pools addresses privacy at the transaction layer, Zama pushes the concept deeper—into computation itself. With FHE, smart contracts can execute logic directly on encrypted data without ever decrypting it, meaning validators can verify execution correctness without accessing the underlying information. This represents a major shift from traditional blockchain models, where visibility and validation are inseparable. Zama’s work has attracted significant attention because it offers a path toward private lending, private voting, encrypted financial instruments, and enterprise applications where confidentiality is not negotiable. The project remains in active development, and its technology is gradually being tested by developers exploring privacy-preserving applications on existing chains.
Alongside these two, there are also emerging identity-focused protocols building zero-knowledge-based verification frameworks that allow users to selectively disclose information. Instead of publishing identity attributes, users can prove compliance conditions such as eligibility, residency, or asset thresholds without exposing unnecessary metadata. These tools are still at an early stage, but they signal an important evolution: privacy in Web3 is no longer just about transaction shielding—it is expanding to include how users exist on-chain.
Although the privacy ecosystem does not yet have a single dominant winner, these projects demonstrate the trajectory of the sector. Privacy is moving from isolated tools into embedded architecture. It is shifting from niche usage toward infrastructure alignment. And perhaps most importantly, it is transitioning from a defensive posture—protecting users from being exposed—to a constructive one, enabling new types of applications that would not be possible without encrypted computation and selective disclosure. As more builders, institutions, and regulators engage with this category, the conversation is slowly changing. Privacy is no longer framed as a barrier to compliance or adoption. Instead, it is becoming part of the foundation required to scale digital ownership responsibly.
The Future: Privacy as the Foundation for Digital Finance
What we now see is not a privacy “toolset,” but the early formation of a privacy-native architecture. Step by step, the narrative is shifting. Privacy is no longer about hiding—it is about enabling secure participation. It is not a workaround. It is not a niche feature. It is part of the foundation required for a functioning digital economy. And perhaps the biggest takeaway from both the banking breach and Vitalik’s commentary is this: privacy failures rarely come from the technology users fear—they come from the systems users trust. If Web3 is going to deliver on the promise of ownership, autonomy, and open systems, then privacy must evolve from a preference into a standard. Because the future of digital finance will not be defined by transparency alone—but by the balance between what must be seen and what deserves to remain private.