Hi everyone, I am Fatty!
Blockchain technology has been designed from the ground up to be transparent by default. This architecture stands in stark contrast to today's Web 2.0, which is defined by closed ecosystems owned by companies that profit from information asymmetry. This asymmetry exists because these companies act as gatekeepers, collecting more data from you than you realize and monetizing that data at your expense.
Public blockchains create an open alternative to this system. Networks such as Bitcoin and Ethereum are transparent by default, and all users have equal access to data within the network. Public blockchains appear to eliminate the unique information asymmetry that underpins the current Web 2.0 monopoly. But in fact, networks that build transparency by default create their own information asymmetries that impose costs on network participants and require a sustainable solution.
Asymmetry on the public network
Transactions on a public blockchain are visible to everyone, whether they are active participants on the network or not. The fact that these networks are open prevents any single entity from monopolizing user data the way Web 2.0 monopolies do today. However, a fully transparent system opens the door to potentially being exploited by many more actors.
Anyone who submits an on-chain transaction shows their hand to everyone else in the system. This enables strangers to learn more details about our personal and business activities that we may be willing to share. Worse, it creates opportunities for other network participants to profit from the information we disclose through transactions. It's not theoretical; it's costing users money today.
Consider a common use case of DeFi: transactions. Critics of centralized stock brokerages such as Robinhood claim that these entities sell order flow to hedge funds, who can then "front-run" user-submitted trades. But on Ethereum, anyone can see the order flow (either by running a node themselves or using a service). Therefore, even if the system is not deliberately "manipulated", opportunistic individuals (or bots) can easily exploit public data on an open blockchain. This is the basic idea behind the "dark forest" problem described here.
A specific example is front-end operations. Front-running describes a scenario where a bot scans pending transactions on Ethereum for arbitrage opportunities. For example, a bot might identify profit opportunities by buying and selling ahead of a large trade on a decentralized exchange. By offering a slightly higher gas price, these bots incentivize miners to execute their transactions ahead of already pending DEX transactions. This results in the transfer of profits to the previously running bots at the expense of the initial trader. (Interested friends are welcome to leave a message or si/wo)
Miners can also get a head start in a scenario known as miner-extractable value (MEV). MEV refers to the amount of profit that ecosystem miners can extract from the network by reordering the mempool to perform self-interested transactions. For example, a miner might recognize that the pending transactions in the mempool include a large number of transactions between token pairs on the DEX. Armed with this knowledge, miners can conduct transactions optimally. Because miners are responsible for ordering transactions, they can ensure their transactions happen at the most profitable time.
In short, anyone using a public blockchain network is vulnerable to speculators in the system. Decentralized networks are far fairer than those obtained through centralized alternatives. However, the examples of front-running and MEV cited above illustrate how information asymmetry can still impose costs on users in a decentralized system. With a public network, we may have removed centralized gatekeepers. But now we find ourselves in a "dark forest" facing not one, but potentially many potential adversaries who can exploit and use our data at our expense.
Seeking a Solution: Absolute Privacy by Default
A naive way to solve this asymmetry on the public network is to hide everything and make the system completely private. But absolute privacy eliminates one of the most significant benefits of the open web: composability. In an open network defined by data transparency, smart contracts can autonomously interact with and access any on-chain information. The DeFi ecosystem, DAOs, and other composable contracts all rely on transparent access to data. Building networks with absolute privacy by default ensures that no data can be exploited, but also prevents the creation of the very powerful decentralized applications that define why encryption is revolutionary.
Also, privacy is not binary. It exists on a spectrum and is more or less important to different individuals and/or institutions depending on the context. Take Venmo, for example. You might want to show how much you've donated to a particular charity over the past year. And you probably don't mind that the details of what you pay your friend are visible to that friend. But you most likely don't want to disclose your salary amount to everyone.
People transacting on a blockchain network should be able to make similar decisions. Everyone should be able to toggle each transaction to adjust what they want to share and what they want to hide. This option is not possible in today's blockchain ecosystem. Transparency is the default, and users cannot opt out, let alone choose the level of privacy. But absolute privacy by default limits the capabilities of a decentralized web. The solution lies in the middle; building opt-out privacy-by-default networks where transactions are automatically fully private, but allowing users to selectively decide what to make public ensures that we can still build a robust and performant go-to protocol on top of the protocol. Centralized system.
Aleo: Opt out of privacy by default
When there is information asymmetry, it imposes costs on users. While public blockchains like Bitcoin or Ethereum eliminate centralized rent-seekers, they do not fundamentally address the problem of information asymmetry. However, complete privacy undercuts the killer feature of these emerging networks by preventing the contractual composability that underpins DeFi, DAOs, and other smart contracts.
The winning solution is a decentralized network defined by opt-out privacy that achieves the best of both worlds. It gives users the freedom to share any information they want with whoever they want. If neither party can exploit information or access asymmetries, then neither party can make selfish and unfair decisions. And it puts the control back in the hands of the user, who can decide for themselves how much or how much they want to share about themselves or interact with others.
That’s why we founded Aleo — to solve the paradox of public network asymmetry by accelerating the application of zero-knowledge to blockchain ecosystems. Aleo's specific zero-knowledge solution, Zexe, supports full programmability and privacy. Just as importantly, Aleo offers opt-out privacy, ensuring that ultimate control rests with the user, who can choose what information they wish to make public. Aleo enables network participants to interact on a public network in complete privacy without sacrificing any degree of performance or power supported by decentralized networks.