Blockchains originated as open, public systems, but their future is leaning towards being private, with this shift happening faster than anticipated. This month, Tempo, a payment blockchain backed by Stripe and valued at $5 billion, released a detailed proposal for private enterprise stablecoin transactions.
Given Tempo's strong institutional backing, its prioritization of privacy from the outset sends a strong signal about the direction of the industry. The question of whether institutional blockchains will be private is now settled; the harder question is what kind of privacy they will implement. Public blockchains, starting with Bitcoin, solved the problem of transferring value without a trusted intermediary, followed by Ethereum's introduction of programmable value through smart contracts, and then stablecoins offering the stability of the dollar. However, as institutional interest and capital grow, a significant flaw becomes apparent: everything on public blockchains is visible.
This visibility is not a feature but a problem for financial markets, as it would allow others to front-run trades, map strategies, and identify targets. The announcement by Tempo indicates that institutions are no longer willing to accept this level of transparency. Tempo's solution involves 'Zones,' private parallel blockchains connected to the main network, where participants can transact privately, with only cryptographic proofs of validity being publicly visible. However, this model relies on trusting the Zone operator, who can see all transactions within their Zone.
An alternative approach is using zero-knowledge cryptography, which allows proving the validity of a transaction without revealing the underlying data. This method builds privacy into the blockchain's execution layer, ensuring that no operator has a complete view of transactions. The regulatory objection to privacy, based on the need for compliance, is becoming outdated.
Compliance can be achieved without full transparency by using selective disclosure, where only the necessary information is revealed to regulators. The choice between privacy through trusted operators or through cryptographic guarantees will determine the risk, compliance, and trust dynamics of the blockchain ecosystem.
The industry's future depends on this choice, with both approaches being legitimate but not equivalent in terms of trust and risk.