Despite the latest technology, the world has yet to crack the code of online privacy and security. But that’s not the only big issue we need to worry about.

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Hackers and thieves trick innocent users into giving up their personal information as society becomes more digital and virtual currencies play a role in all of this.

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Cryptocurrencies broke records in 2022 when the market topping $2 trillion for the first time in history.

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And while current investors greeted it with enthusiasm, it made others wary.

Why? Because as an asset class grows, it becomes more attractive to attackers. And to see this, just look at growing the number of users who have become victims of cryptocurrency robberies.

The big question is this: if these crimes against individuals are so dangerous and can only increase as the market expands, why is the world at large still ignoring the value of privacy? The answer lies in the lack of clarity about why security and privacy are important and how they are interrelated.

Let’s imagine that an investor has a significant supply of cryptocurrency – 50 BTC, which at a price of $30,000 per coin is $1.5 million.

Their wallet will inevitably become a target for hackers and robbers, which is why privacy is so important. No one should know that millions are stored in this investor’s wallet.

Security is a critical principle if we want adoption rates to continue to rise, but it’s often overlooked. Precautions and robust measures are needed to give investors a sense of privacy as security – and to prove to newcomers that digital assets do indeed have value compared to fiat currencies.

Identity is the antidote to the DEX regulation problem

History of crypto privacy

A few years ago, the world experienced a currency privacy boom. It was 2016 and 2017 – a time when it was new and unlike anything most of us have ever seen before.

This popularity was quickly overshadowed by decentralized finance (DeFi) and smart contracts. The attention was so significant that the world began to recognize smart contracts as a requirement, leaving “anonymous transactions behind”.

By default, smart contract transactions are not private, which means that anyone can access and view all information sent and stored using this method. And although they are secure, their data is forever embedded in the blockchain.

Around the same time, the development of the Lightning Network, a Layer 2 payment protocol implemented to improve transaction speed, and Taproot, an upgrade that bundles multiple signatures and transactions together to make transactions easier to verify, have been credited with significantly improving bitcoin privacy.

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Another contributing factor is the world’s misunderstanding of “privacy technology” as an impediment to fee stability through smart contract scaling and functionality, which can only be described as a compromise.

Few understand how important privacy is to crypto assets, and even fewer realize how much the stakes have risen.

Self-storage, control and identification – how regulators made a mistake

Why privacy equals security

As crypto has proliferated, the regulation of exchanges has become much stricter, especially regarding the storage of identities, including multiple addresses.

Unfortunately, this creates a single point of failure, resulting in a significant increase in reports of breaches and data breaches. These negative consequences boil down to the fact that the regulation is aimed at finding opponents in a given list of users, and the list of users should not exist in the list of clients of an external adversary.

Companies that can’t afford to do business are too busy enforcing rules that verify user identities and not paying the cost of actually storing user identities securely.

A related problem boils down to the vulnerability of the design of exchanges to internal leaks. In the context of cryptography, even one attacker out of “N” innocent people can effectively affect security and therefore privacy.

As a second important consideration, blockchain analytics and other tracking technologies have proven to be powerful game-changers in catching previous perpetrators of old hacks. Unfortunately, despite their good intentions, these same tracking tools can help facilitate targeted attacks if they fall into the wrong hands.

In this example, privacy, a key differentiator of decentralized assets, is quickly removed, highlighting the purpose of the underlying infrastructure.

Need – a large-scale educational project to combat hacking and fraud

Rationale for cryptographic privacy

Privacy concerns are not new, so several technologies have gained attention as they prevent privacy from impacting payment stability through scaling, namely the Lightning Network.

In practice, the Lightning Network assumes that users are online and can communicate with protocol participants based on the online assumption. This process effectively ensures scaling and privacy compatibility.

Together, online guessing combined with zero-knowledge proof allows for successful online communication, a capability that can be extended to an Ethereum-like smart contract. It is believed that if privacy can be effectively tied to a smart contract, cryptocurrency users will soon realize the importance of privacy.

This article does not contain investment advice or recommendations. Every investment and trading step involves risk, and readers should do their own research when making a decision.

The views, thoughts and opinions expressed here are those of the author only and do not necessarily reflect or represent the views and opinions of Cryptooshala.

Leona Hioki is the CEO of Ryodan Systems AG. In 2013, he worked with security technologies and cryptography in the Japanese government’s white hacker training program for youth. Hioki has been researching Ethereum scalability for five years and is currently developing the zkRollup solution.