Web3 brings a number of improvements based on blockchain innovation as the next step in the evolution of the internet. Still, privacy has not been one of them —at least so far, and the next wave of layer-2 (L2) solutions aims to change that.
The introduction of Ethereum (ETH-USD) and smart contracts turned blockchain technology from Bitcoin’s (BTC-USD) uninteresting infrastructure to the future of the internet. The Web3 era mainly focuses on blockchain innovation, including privacy and decentralization, that would put users back in control.
Decentralization and data integrity bring their own set of challenges, though, leaving issues like privacy as the Achilles’ heel of blockchain innovation. At its core, blockchain technology is built on the principles of transparency and immutability. These attributes, while fostering trust and security, inadvertently create privacy challenges.
As the “mothership” of the whole blockchain ecosystem, Ethereum exemplifies this dilemma. Despite the recent developments in zero-knowledge (ZK) solutions, which allow for making transactions without revealing the content, the transparent nature of the Ethereum blockchain makes building a privacy-friendly Web3 an uphill battle.
Ethereum records every transaction publicly, making it impossible to preserve privacy while taking a step on blockchain. While it’s useful for auditability, this level of transparency strips users of their anonymity, turning Web3 into a shared digital journal where everyone’s financial histories and balances are available for anyone.
For users, keeping finances on the blockchain means spending habits and wealth are no longer private. For businesses, the implications become more damaging. Having a financial ledger that’s visible to competitors, vendors, or anyone interested, turns into a competitive disadvantage. Once confirmed on the blockchain, each transactional data adds up to a digital book of account, revealing business strategies, partnerships, and financial health.
On the other hand, Ethereum’s public ledger doesn’t just reveal current transactions but also provides a permanent record. This immutability can help prevent fraud and tampering. However, it also means that once information is exposed, it remains exposed forever, causing concerns about personal data misuse and vulnerabilities.
Adding a Privacy Layer to the Blockchain
In addressing the limitations of the Ethereum network, the blockchain community is witnessing the rise of new layer-2 solutions that lead with innovations aiming to enhance various aspects of blockchain functionality from scalability and speed to privacy.
The race to innovate further on the blockchain has lured even established layer-1 ecosystems to join the convenience of layer-2 scalability. Known for its Web3 payment tools, the former L1 ecosystem COTI has revamped itself as COTI V2, with a focus on privacy protection on Ethereum.
Sensitive data transmitted as public information on a blockchain is a bug, not a feature, according to COTI CEO Shahaf Bar-Geffen. “This isn’t tolerated in legacy business systems, so why should it be tolerated on-chain?” he asked rhetorically.
COTI V2 will prevent sensitive data from being broadcast to competitors, partners, and clients to allow businesses to “capitalize on blockchain’s many strengths and to access Web3 in a purpose-built environment that’s optimized for speed, scalability, and performance,” Bar-Geffen said.
Going L2 to Provide Privacy for the Ethereum Ecosystem
Rather than continuing to develop an independent L1 blockchain, COTI is aligning with the Ethereum ecosystem to leverage Ethereum’s established liquidity and security while concentrating its innovative efforts on addressing Web3’s shortcomings. Slated for a devnet release in Q2 2024, COTI V2 aims to answer privacy concerns by building cryptography that doesn’t reveal the value, vote, or other sensitive data while processing blockchain transactions.
The team will utilize Garbled Circuits, a cryptography concept that was introduced in the 1980s for secure computation. It involves keeping inputs hidden during the computation of a function — a perfect workaround to solve privacy concerns on public blockchains.
As Web3 evolves, the role of layer-2 blockchain solutions is becoming increasingly significant, especially in fixing the limitations of the Ethereum blockchain. While Ethereum’s transparency is key for trust and security, it can also lead to privacy issues. Layer-2 solutions like COTI V2 are poised to bring reliable solutions to privacy, scalability, and efficiency, contributing to a balanced and user-centric Web3 experience.
With the introduction of sophisticated cryptographic methods, layer-2 solutions can help carve a pathway to secure, private, and efficient transactions, marking a significant leap towards a blockchain framework where user anonymity is preserved without compromising the inherent benefits of transparency and security. These advancements are set to revolutionize the ecosystem by resolving the critical issue of privacy in blockchain transactions.
This would position the Web3 evolution as not just a technical enhancement but a pivotal shift towards a more balanced, user-centric experience, potentially transforming how people interact with the internet.
