Shade Protocol — A Community Series: Privacy In DeFi

Article #2

Author: VJ

Privacy Enabled DeFi with Shade Protocol

You know when you’re catching up with a friend and you stumble into the fact that you are both deep into crypto? Such a fun moment. But what happens when you bring up the need for on-chain privacy? For me, it often goes like this…

Me: I think a lot of people don’t know that on Ethereum, for example, all your transactions are public. People can just see how much you are holding.

Friend: (radio silence — absorbing this new revelation and kinda pretending they knew it already)

What I take away from these strange little moments is this: for all of the enthusiasm about the decentralized web many users have not quite grasped the slightly embarrassing reality: Web3 operates with less privacy than Web2.

The current Web3 infrastructure is not sustainable without a privacy layer. Alongside countless other valuable applications, privacy transforms DeFi (Decentralized Finance) into PriFi (Private Finance).

The fact that PriFi has not yet exploded, doesn’t mean that it won’t. It just means that wonder of wonders, thank your lucky stars you are here early because a massive tidal wave of adoption is incoming. Shade is here for that wave. In some ways, Shade is that wave.

“Yeah, yeah”… you might be saying, “Get off your hype train. How can you claim to know PriFi is going to boom?”

The narrative is epistemology. Stories are how we make sense of the world and come to understand reality.

And if you go and talk to the people who are actually building on the bleeding edge of Web3, one of the dominant narratives right now is the need for privacy on the blockchain. This story is going viral because it makes immediate sense to people who know the blockchain space. The narrative of the need for privacy is a coherent representation of reality.

Let’s put it this way: Privacy is not a “nice to have” bonus feature. It offers an essential utility that DeFi is currently living without. And right now it is too easy to be naive to the problems and exploitation that result. But a blind eye isn’t really an amazing investment strategy.

So I understand why my crypto friends don’t really have much to say when I bring up privacy. Honestly, it is embarrassing to learn that your transactions are just hanging out for the whole world to see. And they have been ever since your first day in crypto.

But the secret contract functionality (thank you Secret Network) leveraged by Shade Protocol brings new possibilities to finance. Because the truth is, a lot of us have been unwittingly exploited on our adventures in DeFi. Consider these prevalent DeFi problems and how Shade addresses them…

Shade’s tech stack eliminates the possibility of front-running

It is not right that retail investor Jane just had $100 stolen from her (without even knowing it) while making a swap on a DEX. She’s never even heard of front-running but is, nevertheless, now included in the billions of dollars lost each year on AMM’s built on public-by-default chains. (If this problem is novel to the reader, you can learn more about front-running and how privately programmable smart contracts resolve it here)

Shade democratizes access to private stability

What would you do if crypto was banned by your government but the hyperinflationary environment meant your impoverished family was getting poorer each day? Traditional decentralized finance offers precious little help to victims of oppressive regimes. The very act of holding traditional, public-by-default stablecoins could be life-endangering for many who desperately need access to stability.

Privacy enabled finance is a totally different story though…

Imagine political refugees or other oppressed groups having access to Silk (a private-by-default, algorithmic stablecoin pegged to a global basket of assets and currencies). Because Silk is private-by-default, someone in a broken economic system could gain exposure to the asset and use it as an alternative currency.

These are the sorts of use cases we hope for globally. The tech makes a big dream like this possible.

You would probably agree that any technology in its raw, unapplied essence is morally neutral. That is true of Shade also. So we aren’t here to say that Shade Protocol is the salvation of the world, the ultimate political band-aid, or any other unrealistic claim…. With that said, we do believe that many of the applications within our financial ecosystem have the real possibility of making life better for people groups around the globe. We look forward to seeing those stories unfold as people gain access to these apps and assets like Silk.

Shade evens the playing field in decentralized finance

The privacy of Shade evens the playing field between whales, retail, and institutional investors. The reality is, there are a variety of tricks of the trade in DeFi that are perfectly legal but smell foul to our human sensibilities.

For example, in traditional markets, big players can mine public data on-chain and then make transactional decisions that cause cascading liquidation. Basically, they dump their big bag, the price plummets, leveraged traders get liquidated, and now that same big money can buy up the liquidated assets at a fat discount.

Is it legal? 100%. A better question though… “Is this how we want our markets to function?” It feels a bit exploitative. And those big traders will say, “Well those leveraged traders knew the risk. It’s their fault…”

But what if this whole conversation was a non-issue? What if users could access a synthetics marketplace that didn’t require leveraged trading? What if there was a whole financial ecosystem marked by transactional privacy so that no one was exploiting others? Sign me up. Let’s do that. And that’s exactly what Shade Protocol is.

Shade protects your transactional data from data mining

Part of the exploitation aforementioned is unnoticed by users. But analytics from firms like Chainalysis already cover more than 90% of transactions on Web3. These surveillance groups are dedicated to creating data sets for anyone who wants to buy it. Most frequently, it’s going to be big corporations and possibly even governments. Let’s say this really gently… power doesn’t gather your data to help you fulfill your human potential and realize your dreams. Power gathers your data to… well… you probably can fill in this blank without help…

Shade is fully compliant and auditable

With all of the rich benefits afforded from Shade’s tech stack, it is also fully auditable and, thus, ready to help users comply with regulatory bodies.

Programmable privacy means that users can provide viewing keys or permits to anyone (e.g. your accountant or tax preparer). This essential feature provides an auditability trail so that users adhere to local regulations and taxation.

Exponential PriFi Adoption is Incoming

If you look out over the horizon you can just make it out… the equivalent of a massive tidal wave. This narrative of privacy is contagious because it is intuitive to anyone with a basic knowledge of crypto and blockchain. That is — you don’t have to “sell” someone on their right to privacy. The narrative and the need make immediate sense.

Builders who have been around the block(chain) are contagiously sharing this same story: on-chain privacy is the next, essential step in decentralized finance.

That means exponential adoption is just a matter of time. The tech underneath Shade brings unmatched utility to the DeFi space. It’s good news for institutional investors (who certainly don’t want their transactions hanging out) and good news for everyday retail investors.

We are thrilled to have you along for this exciting ride.

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