Web3 represents the next generation of the internet with decentralization, transparency, and user control, unlike the traditional Web2 model that is controlled by central entities like tech giants. In order to thrive, Web3 needs privacy while developing a secure and user-centric digital ecosystem.

Unlike traditional finance, where privacy is intrinsic, blockchain networks in Web3 like Bitcoin and Ethereum are built on the principle of transparency. While beneficial for validating transactions, transparency poses a significant privacy risk for users and developers alike. Despite these challenges, Web3 must address privacy concerns in an effort to maintain trustlessness.

Levels of Privacy

Web3 Privacy can be categorized into three levels: network, protocol and user privacy. Network-level ensures privacy through the underlying consensus mechanisms and design choices of the blockchain network. Bitcoin is a great example of this, whose principles of decentralization and pseudonymity have transactions that are pseudonymized using cryptographic hashes.

Protocol-level privacy involves privacy protocols built on top of existing blockchain networks. This means that private transactions are processed in a protocol that runs alongside the blockchain. While difficult to execute on the Bitcoin network due to its limited programmability, Ethereum brought in smart contracts that can be further programmed to ensure extra protection.

Another type of privacy is user-level privacy, which focuses on the individual user’s data, separating their personal information from their on-chain identities. This is usually targeted through stealth wallets or decentralized identity (DID), which cryptographically secure personal information and provide a way to verify identity without revealing data.

Web3 Privacy and Data Protection

Web3 aims to enhance data privacy through decentralization, but it also faces significant challenges.

Web3 and Decentralized Data

Web3’s decentralized architecture promises enhanced data privacy by eliminating the need for trusted third parties. However, decentralization also complicates compliance with privacy regulations. Traditional elements of privacy, such as notice, choice and data destruction, become challenging to implement in a decentralized environment.

Providing notices of data collection consistently is difficult due to the distributed nature of the data. Users should also have the option to opt-in or out of data collection, but implementing opt-in mechanisms in a decentralized system is complex because data is not controlled by a single entity. It is also important that data can be deleted upon request. In a blockchain, where data is immutable, achieving data destruction is inherently impossible.

Privacy by Design

Privacy is considered integral to the development of Web3 ecosystems and technologies from the very beginning. Adding privacy by design ensures that privacy features are embedded in the architecture of the system. This means incorporating robust encryption methods, anonymization techniques, and secure data handling protocols at the foundational level.

Consent and Transparency

Ensuring that users are fully informed about how their data is used and obtaining their explicit consent helps provide a level of trustlessness. In order for users to understand the data collection, processing, and sharing practices, transparent smart contracts and clear privacy policies can be embedded directly into dApps. Users should have the ability to grant or revoke consent for data usage at any time, and these preferences should be enforced through the underlying technology.

Smart Contracts and Privacy

Smart contracts are self-executing contracts with the terms directly written into code. While they automate processes and reduce the need for intermediaries, they must be designed to handle private data securely. Privacy-enhancing techniques such as zero-knowledge proofs (ZKPs) can be used to ensure that the data processed by smart contracts remains confidential. ZKPs allow one party to prove to another that a statement is true without revealing any information beyond the validity of the statement itself..

Regulatory Compliance

Compliance with privacy regulations like the General Data Protection Regulation (GDPR) often requires clear data management practices, including data minimization, the right to be forgotten, and explicit consent for data processing. Ensuring that all nodes comply with these regulations can be difficult. Privacy-enhancing technologies and frameworks need to include creating systems for managing user consent, securely deleting data upon request, and providing transparent data processing practices that comply with global privacy standards.

Zero Knowledge Proofs

Zero-knowledge proofs enable one party to prove to another that a statement is true without revealing any additional information. This cryptographic technique can be used in various applications, such as identity verification, transaction validation, and data sharing. In financial transactions, for example, ZKPs can prove that a transaction is valid without disclosing the transaction amount or the parties involved. This ensures that sensitive information remains confidential while maintaining the integrity and security of the transaction.

Smart Privacy on Oasis

Oasis offers a different solution to privacy solutions called smart privacy, working as a comprehensive approach to data privacy in Web3 by integrating customizable privacy features directly into its blockchain platform. Through Oasis’ confidential EVM, Sapphire, it allows for the execution of the Oasis Privacy Layer (OPL) to enable confidential smart contracts, ensuring sensitive data remains private even from node operators.

As Sapphire is the first confidential EVM in production, Oasis’s privacy framework leverages advanced cryptographic features like trusted execution environments (TEEs) and ZKPs that supports interoperability with other EVM-compatible blockchains. This provides a secure, user-centric solution for dApps that allows their users to have privacy as a default, or any combination of privacy necessary to run the dApp without compromising data safety.

Web3 Data Privacy and Transparency

While decentralization aims to protect user data, it also needs a certain level of transparency to ensure trust and security. Technologies like ZKPs and DID systems help strike this balance by allowing users to prove their identity or the validity of their transactions without revealing unnecessary information. Users should also have the right to privacy-focused tools, understanding data sharing practices, and maintaining control over their personal information.

Web3 privacy is a crucial aspect of the next generation of the internet, but through prioritizing privacy protocols and technology, Web3 can be a safe yet transparent transition from Web2.