Bridging Privacy and Blockchain: Protecting User Data in the Age of DeFi
With the decentralized finance system (DeFi), you skip the usual bank stuff, like filling out forms and waiting for days to transfer your money. You can send, borrow, or trade funds in a matter of seconds. And guess what? You don’t need permission from a bank or middleman.
It sounds like the financial freedom we’ve all longed for, doesn’t it?
Well, as long as by financial freedom you mean having everyone see your wallet activity on the blockchain. That’s right. With DeFi, your transaction history is out there for the world to see.
The number of DeFi users is expected to reach over 213 million by 2026. That said, finding a way to secure your data while still enjoying the benefits of DeFi is now more important than ever. So, let’s get into how privacy and blockchain can come together to protect your data.
Understanding transparency in DeFi
DeFi is built on public blockchains, such as Ethereum, Solana, and Polygon. This is exactly why it’s transparent. But its transparency is what makes DeFi different from traditional finance.
Every transaction that you make is going to be recorded on a public ledger. One needs no more than internet access to see it. Naturally, your personal identity is still hidden. No one is aware of the real person behind the wallet address. And we need to make sure to keep it that way.
Because if that changes, it could lead to serious privacy risks.
The risks behind DeFi transparency
Knowing that your real identity isn’t visible on the blockchain is a relief. However, because all your transactions are public, someone could still analyze and trace your financial activity back to you.
If this were to happen:
- People can see how much you own, where you send money, and what you buy and sell.
- Hackers could use this information to launch more convincing phishing attacks and trick you into giving away your passwords, private keys, or other sensitive data.
- Companies and governments could monitor your activity.
In other words, you become an easy target. In order to avoid this, we need to learn how privacy and blockchain can come together to protect the user data of DeFi users. Well, let’s find out.
Protecting user data in the age of DeFi
DeFi transactions are transparent. There’s no changing this. What you can do, though, is protect your privacy by making it harder for others to link your transactions back to you.
Here are some ways in which you can do this.
Learn how to control your data
When you use DeFi or crypto websites, there’s always the risk of trackers collecting data about your activity across different websites. This is known as cross website tracking and means that your actions on these websites can be linked together to create a detailed picture of what you do online. In other words, others can connect your blockchain transactions back to you.
This is why you should take your time to read the permission requests for tracking. Definitely don’t click “accept all” without having read what you’re agreeing to, and avoid using websites unless they use tools like Usercentrics to give you clear options about what types of trackers you want to allow or block. This is how you control what data is collected about you.
Take advantage of zero-knowledge proofs
As we’ve learned by now, DeFi wants to be open and transparent. Users, on the other hand, appreciate their privacy. This is what zero-knowledge proofs were created in the first place.
Think of zero-knowledge proofs as if they were a secret language. Because at their core, that’s exactly what they are. They allow you to prove to someone that what you’re saying is true without having to reveal too much information in the process. For example, you could prove that you have enough money to make a transaction without revealing how much money you actually have.
How does this work?
As the sender, you’ll need to provide the zero-knowledge proof, which is actually mathematical data created by your computer that shows you know certain information. When you send this proof to the blockchain, it checks it and only completes the transaction if your claim is true.
Understanding privacy-focused blockchains and layer 2 solutions
Some blockchains are built with privacy in mind. Some of these include Secret Network, Oasis, and Monero. These are not your typical blockchains, as they keep your transaction details hidden from the public eye. They make sure that only you and the authorized party can see what’s happening with your funds. This makes it harder for anyone to track your financial activity.
Now, layer 2 solutions are more about making existing blockchains faster and cheaper to use by processing many transactions off the main chain. However, some of these, such as Aztec, which works on top of Ethereum, also come with privacy features to hide transaction details.
The thing is, these privacy blockchains and layer 2 solutions are still not as widely used. And for obvious reasons. They’re quite new compared to blockchains like Ethereum, which have large communities and more apps are built on them. This means fewer users and less liquidity.
On the other hand, developers now have the possibility to build DeFi apps with native liquidity on HyperEVM, which is designed to be fast, scalable, and Ethereum-compatible. This way, new projects can gain liquidity quickly, so we could soon see privacy-focused blockchains that not only keep your data safe but also feel as easy and fast to use as the biggest DeFi platforms.
Tools like deBridge further enhance this by making it easy it safe to move assets between different blockchains so that privacy-focused DeFi apps can reach more users.
Get familiar with privacy wallets
If you’re ready to take control of your privacy when using DeFi, you need to get yourself familiar with privacy wallets. They’re different from regular crypto wallets in the sense that they focus on keeping your transaction details private. They don’t just throw your activity out in the public.
Instead, these privacy wallets use transaction mixing, stealth addresses, or built-in encryption to make it harder for anyone to link your wallet to your identity. Such privacy wallets are Wasabi Wallet and Samourai Wallet, which were specifically created to give users more anonymity.
But if they’re so great, why doesn’t everybody use them?
Well, privacy wallets are often more complicated to use. They also come with higher fees, and not all DeFi platforms support them. Still, they’re extremely useful in terms of DeFi privacy.
Use DeFi without linking it to your identity
Is this truly possible? Well, not 100%. But it is definitely possible to make it harder for anyone to connect your DeFi activity back to you. Here’s what you need to pay attention to:
- Don’t reuse the same wallet for everything: If you’re using one wallet for every activity, from trading to moving money around, you’re basically an open book. Make sure that you create different wallets for different purposes.
- Don’t withdraw straight from centralized exchanges: When you send crypto from an exchange like Binance directly to your wallet, what you’re doing is linking that wallet to your identity. To avoid this, you can try using an intermediate or a privacy wallet.
- Don’t connect your wallet to every dApp: If you’re connecting your main wallet to every dApp, then you’re basically exposing everything from your balance to your past transactions. What you can do instead is create separate wallets for such activities.
So yes, while you can’t completely avoid DeFi transparency, you can definitely protect your privacy to some extent with these workarounds. You can still stay in the shadows.
Taking control of your privacy in DeFi
What we’ve learned in this article is that DeFi operates on the blockchain, which is where it gets its transparency from. However, this transparency isn’t that great when it comes to your privacy.
Still, there are many ways in which blockchain technology can help you protect your privacy without having to give up the benefits of DeFi, including privacy wallets, privacy-focused blockchains, and zero-knowledge proofs. But there are also some actions you can take beyond blockchain, such as not reusing the same wallet, paying attention to what kind of cookies you accept, and what websites you visit. This is how you get more control over your privacy.
Author Bio
Makedonka Micajkova is a freelance content writer and translator, always bringing creativity and originality to the table. Being multilingual with professional proficiency in English, German, and Spanish, it’s needless to say that languages are her biggest passion in life. She’s also a skilled communicator as a result of her three years of experience as a sales representative. You can find her on LinkedIn.
- Cryptocurrency