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How Blockchain Privacy Will Shape The Next Financial System

From Transparency to Privacy

Crypto is the only industry where we are comfortable with neighbors seeing our salaries, savings, and spending. Early cryptocurrency developers sacrificed privacy in pursuit of a fair, open, and transparent financial system. The next generation of users will expect privacy-preserving technology embedded in applications that store data in transparent public ledgers and that adhere to modern crypto privacy standards.

Institutions are exploring the blockchain sector more than ever, but they could never expose customer data on-chain, nor can they operate in regulatory gray zones. There is a growing demand for on-chain solutions that balance privacy with compliance.

That’s where zero knowledge comes in.

How Blockchain Privacy Works

Privacy in modern financial applications is built around zero-knowledge technology and ZK-based privacy solutions.

Zero-knowledge proofs enable users to prove properties of data without revealing the data. For example, a user could prove they are a member of a group, without revealing their user identity, known as a public key.

Perhaps that group could be a collection of users who have deposited funds into a privacy pool, and the signature allows the release of those funds. This is the basis for public yet private blockchain transactions.

My favourite visualization for this is to imagine a database of paying users segregated into subscription groups, gold, silver, and bronze, with different monthly plans.

In a web2 world, these users would pay via Stripe (or any other card processor), and the transaction would permit Stripe's servers to ping a centralized server to allow the user access to their subscription products. The user's information is stored confidentially on the company's servers (hopefully), and any form of transparency is sacrificed.

In a web3 world, the user might use a wallet to connect to a smart contract and sign a transaction issuing a payment. This is fully transparent, but there is no financial privacy. Anyone using a block explorer can see who sent money, how much was sent, and what it was for.

In a zero-knowledge world, the user might use a privacy pool to release funds without revealing their identity. The transaction would still live on a public ledger; the payment could be seen, but it would not be possible to see who sent it.

This provides the best of both worlds, allowing a user to maintain their privacy while still benefiting from transacting on a public ledger with digital assets.

The Future of Finance: Balancing Privacy & Compliance

Zero-knowledge introduces coexistence between transparency and privacy in financial systems.

Businesses could settle cross-border payments instantly without revealing their counterparties.
Consumers could send payments and explore decentralized finance without sacrificing the privacy they enjoy in traditional finance.
Regulated financial institutions and Regulators could verify compliance using cryptographic proofs rather than invasive data access.

Public blockchains gave us freedom, transparency, and auditability at the cost of discretion. Zero-knowledge technology is the next step in the maturity of blockchains to serve everyone, from individual users to global financial institutions.

Stellar is at the forefront of this transformation, paving the way for a financial system that combines all the benefits of transparency at the base layer with configurable privacy and compliance tools at the applicable layer.

Stellar already processes billions of dollars in payments quarterly. Organizations depend on its openness, but can’t afford to expose every cash flow or counterparty relationship to the world. That’s why Stellar is uniquely positioned to show that privacy on a public chain can work at scale and why we’ve built a strategy to get there

Tomer Weller

The result will be a world where transparency builds trust, privacy preserves dignity, and the blockchain becomes a foundation for the future of global finance.

Learn more about the roadmap for Privacy on Stellar: