(This is a duplicate blog post of https://medium.com/silent-protocol )
Silent Research Labs is thrilled to introduce Silent Protocol, a privacy wrapper for the Web3 ecosystem that — through an abstraction known as EZEE (Economical Zero-knowledge Execution Environment) — allows end users to have anonymous and pseudo-confidential interactions with existing, natively-deployed EVM smart contracts.
Interact with Uniswap, Yearn, OlympusDAO, Ribbon or any other protocol without revealing your transaction details and retain full anonymity.
This is the DeFi code of silence.
Web3 and Privacy
Up until now, Web3 lacked the necessary frameworks that would give users access to decentralized computation and private interactions while maintaining composability with existing protocols and preserving network effects.
Silent Protocol has developed a zkSNARK-based scheme that not only allows for anonymous and confidential transactions (via multidimensional non-opt-in construction on the L1) but also enables them on any existing DeFi applications without having to pool transactions. With Silent, users don’t need new wallets or additional tooling to take advantage of private DeFi on protocols they already use everyday.
By using the EZEE framework through 0dapps, Silent Protocol will allow users to perform complex DeFi operations at 1:1 synchronicity with the application contract, and grant them complete anonymity and pseudo-confidentiality while doing so.
Web3 needs Privacy more than ever
As of current, the crypto industry is going through its Uber/Airbnb moment as it experienced back in the 2010s when the new emerging industry had to adjust and cooperate with regulations and figure out what may be the most beneficial and socially sustainable path to trudge. Today they are giants and are an industry of their own. Innovation always meets regulations and for the most part, those regulations are there to do more good than harm, unlike popular opinion.
This article is mainly focused on answering the question, what’s the future of privacy-preserving software in the developing regulatory environment, what we can expect, apart from introducing the world to Silent Protocol? Read on.
Crypto Firms, which are defined to be Money Service Businesses (MSB), have to adhere to some AML/CFT standards and comply with the laws of their operating jurisdiction, including registering with the FINCEN, etc. But usually, DeFi protocols operate autonomously on a smart contract and are not treated as a MSB, and do not need to register under a governmental body or procure a licence to operate.
So what about projects/software that want to provide unhosted wallet services with privacy-enhancing technologies built in? Is the project a Money Service Business (MSB) or MSB equivalent?
If decentralised software (DeFi protocols) were to be defined as Money Service Businesses, then not only would it be difficult for developers to build but it wouldn’t be endogenous to build in DeFi, because it will change the meaning and the value proposition of the technology. However, FATF in their latest guidance states that:
- An entity or a person who merely facilitates/governs or provides ancillary infrastructure” including “verifying the accuracy of signatures” will not be determined to be a VASP.
- FATF also states that publishing software that creates new virtual assets or new virtual asset networks is not an activity that triggers surveillance obligations.
This determines that autonomous protocols where end users are in complete control of their assets and data are not to be classified as VASPs, additionally talking about privacy proving Software in general, according to the precept taken from the FINCEN’s guidance with the subject: “Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies”:
“An anonymising software provider is not a money transmitter. FinCEN regulations exempt from the definition of money transmitter those persons providing “the delivery, communication, or network access services used by a money transmitter to support money transmission services.”60 60. 31 CFR § 1010.100(ff)(5)(ii). This is because suppliers of tools (communications, hardware, or software) that may be utilised in money transmission, like anonymising software, are engaged in trade and not money transmission.”
Where it defines that software providing anonymising services is not a money transmitter or a VASP.
So, why did the OFAC ban an anonymising service like Tornado Cash? Will the government ban make it difficult for all privacy-preserving systems to exist?
Privacy in web3 and especially in public blockchains is of utmost importance. It shouldn’t be because we want to make it difficult for the government to track our data but it should be done to silo our private data from every other person on the blockchain. It is a threat to our existence if both bad and good actors can collect data and information about the activities that we are performing on the public ledger, and this in nutshell, is why we need privacy in web3. Even more so than web2 and we have to do whatever it takes to provide normal users privacy in their lives.
So, why did the government ban anonymizers like tornado cash?
MICA in their recent EU regulatory posts stated, exchanges(VASPs) shouldn’t support privacy tokens whose transaction is not verifiable. The government fears illicit finance and money laundering risks. In a recent post that shocked the crypto space, the treasury released an article stating,
“Today, Treasury is sanctioning Tornado Cash, a virtual currency mixer that launders the proceeds of cybercrimes, including those committed against victims in the United States….Tornado Cash has repeatedly failed to impose effective controls designed to stop it from laundering funds for malicious cyber actors regularly and without basic measures to address its risks. Treasury will continue to aggressively pursue actions against mixers that launder virtual currency for criminals and those who assist them”.
Tornado Cash is a decentralised tool that allows users to gain privacy, it is a fair and elegant solution that doesn’t allow data breaches like celsius [2022] where many normal user details were made public and utilised by bad actors, by providing normal users privacy. Doxxing a user’s details in public can at times have negative consequences and Web3 is a new dimension where data protection and user privacy becomes system critical for proper functioning of a user. Tools like Tornado are very useful for normal users, to safeguard themselves against malicious actors. But alongside good actors, bad and harmful actors end up taking advantage of this tool and due to the properties of this system, it helps bad actors hide their trail from authorities and acts as a stumbling block for the ecosystem at large. Even if so, Tornado ONLY processed ~20% of lifetime deposits that were malicious in nature. Which clearly defines and indicates the vast amount of honest users that want and needs privacy. However, Tornado wasn’t able to build system controls that would make the transactional history verifiable for a particular user and a solution that would deter bad actors from using its system. And this was the reason why the OFAC banned the use of Tornado.
But, how do we build system control without turning into an MSB and what can these system controls be? Introducing Silent Protocol.
As summarised, decentralisation and the property of trustlessness should be of the utmost importance while building public goods software, especially in DeFi. We have to build decentralised services that serve and are owned by the common public, with the following philosophies in mind, namely:
- Censorship resistant
- Permissionless
- Privacy-conscious
Along with effective control measures as directed by OFAC. So how to build those effective system controls that will allow the general public to access privacy-respecting software without controlling the protocol or owning all the data, without incurring the risks of becoming a Money Service Business?
Introducing Silent Compliance Extension
Silent Research Labs is introducing its patent-pending console for the Web3 ecosystem that helps bring privacy for existing and new applications on the blockchain, known as Silent Protocol. Silent Protocol is a compliant infrastructure that doesn’t only allow users to gain privacy while interacting with its peer users but also enables users to post arbitrary computations targeting their favourite on-chain application with complete composability.
Silent Protocol is introducing a novel feature known as Silent Compliance Extension, built through Shamir Secret Sharing that allows the system operator to assist authorities by enabling data access for highlighted participants only after reaching a consensus.
Silent Protocol in this manner bakes in effective control measures, serving good users to gain privacy and disincentivizing bad actors to use the tool.
Silent Protocol is built as a middleware service layer that allows application developers to help provide their users’ private access to their application state, protecting user privacy without changing or writing any code. We will soon be releasing the alpha version of our network. Look forward to hearing more from us in the upcoming days.
Interested in learning more or getting involved?
Reach out to us via email (info@silentdao.org) and follow us on Twitter.
(To the Developers) If you’re interested in integrating your application with Silent protocol to gain compliant and user friendly privacy, contact us.
