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Why encryption make sense on Bitcoin ?

September 14, 2024 · 9 min read

Co-Founder RizeLabs

In this article we are going to talk about why encryption make sense on top of Bitcoin.

Intro

Imagine Bitcoin as a treasure buried deep beneath layers of ice—its full potential trapped and waiting to be unlocked. While it’s been a store of value for many, the vast reserves of Bitcoin on Layer 1 remain largely frozen, unable to participate in the dynamic world of decentralized finance or generate yields. Efforts like Babylon are chipping away at this ice, but the challenge remains: Bitcoin’s true power is yet to be fully realized.

Some of the original Bitcoin purists—OGs—may argue that Bitcoin should remain unchanged, preserving its foundational simplicity. Yet, history has shown us that any currency, to thrive, must evolve and be widely adopted. This has been the case for the U.S. dollar, which became a global reserve currency through widespread use and trust. Bitcoin now finds itself at a similar crossroads.

As governments and financial giants recognize Bitcoin's potential, ETFs are being created to give them exposure to this asset class. Yet, despite this increasing institutional interest, there’s one crucial roadblock: they can’t hold or trade it directly.

Privacy: A Barrier for Institutional Adoption

As Bitcoin reaches this critical inflection point, the interest from institutional players—governments, financial institutions, and corporations—is unmistakable. They see the potential for Bitcoin to become a global asset, but there’s a significant hurdle in their path: privacy.

In a world where data has become the new oil, institutions must tread carefully. The very feature that gives Bitcoin its strength—transparency—also becomes its Achilles' heel. While blockchain transparency promotes trust and enables verification, it exposes every transaction to the public eye. For large corporations, this means that sensitive financial movements, supply chain data, or strategic business decisions could be laid bare for competitors to analyze.

A 2022 PwC survey highlighted that 55% of businesses are hesitant to adopt Bitcoin because of these concerns. The fear isn't unfounded—imagine a global supply chain where every payment could be traced, revealing strategic partnerships or pricing models. In the hands of competitors or malicious actors, this could become a significant risk. As powerful as Bitcoin’s decentralized transparency is, it inadvertently invites surveillance and competitive exposure.

In today’s digital economy, the value of privacy has never been greater. Institutions, particularly those with vast amounts of capital and sensitive operations, can’t afford to take risks with their data. This dilemma creates a tension—Bitcoin’s path forward requires a balance between its decentralized transparency and the privacy protections that institutional players demand.

The challenge is clear: if Bitcoin is to move beyond its current use case and unlock the trillions in institutional capital waiting on the sidelines, privacy is no longer optional—it’s essential.

Privacy: Essential for Retail Users' Security and Confidence

While institutional players face the privacy dilemma from a corporate and competitive standpoint, retail users are confronted with a different yet equally pressing challenge: personal safety and financial security. These everyday Bitcoin users may not be bound by the same heavy regulations as institutions, but the risks they face are no less daunting.

For the average retail user, the transparent nature of Bitcoin’s blockchain can feel like a double-edged sword. While Bitcoin offers freedom from traditional banking systems, that freedom comes at a cost—visibility. When a user’s identity becomes linked to their Bitcoin address, they become vulnerable to targeted phishing attacks, scams, and even worse, social engineering attacks designed to exploit their financial data.

The numbers paint a stark picture. Over the last two years, reports show a 200% increase in these types of attacks. According to Chainalysis, cryptocurrency-related crime hit an all-time high of $14 billion in 2021, with a significant portion involving thefts targeting users with visible Bitcoin holdings. These attacks don’t just harm individuals; they create an atmosphere of fear that undermines trust in the broader ecosystem.

This fear has a profound economic impact. When users feel they are being watched, they’re less likely to participate fully in the Bitcoin economy. A study from the Journal of Cybersecurity highlights how perceived risks of surveillance discourage people from engaging in cryptocurrency transactions. This reluctance stifles innovation, reduces liquidity, and limits Bitcoin’s potential as a widely adopted currency.

As Bitcoin’s market capitalization surpasses $1 trillion, trust in its privacy and security systems becomes paramount. Retail users need to feel secure not only in their transactions but also in their anonymity. Privacy breaches could shake user confidence and lead to market instability. Yet, the common concern that enhanced privacy would enable illicit activities doesn’t hold water—data suggests that less than 1% of total cryptocurrency transactions involve illicit activity. This indicates that strict regulations targeting privacy tools might harm legitimate users far more than they deter criminals.

In this way, both institutional players and retail users face the same underlying issue—Bitcoin’s transparency, while one of its core strengths, can also be a liability. For Bitcoin to truly grow and reach mass adoption, privacy needs to be part of the equation. Just as institutions are demanding it for protection from competitive risks, retail users need it to safeguard their personal financial well-being.

Previous Attempts at Bitcoin Privacy: Lessons Learned and the Path Forward

As the need for privacy in both institutional and retail spaces becomes increasingly clear, it’s no surprise that many attempts have been made to bring privacy solutions to Bitcoin. Over the years, we’ve seen the rise of privacy-focused cryptocurrencies like Monero and Zcash, which were built specifically to address the demand for anonymous transactions. Monero alone has reached a market cap of over $3 billion, a testament to how many users prioritize privacy in their financial dealings. This demand has also been reflected within the Bitcoin ecosystem, where tools like CoinJoin have seen growing adoption. Wasabi Wallet, a leader in CoinJoin techniques, reported over 1 million transactions processed through their platform by 2022, signaling that users are increasingly aware of, and demanding, enhanced privacy measures.

However, while these solutions point to the right direction, they’ve struggled to gain mainstream adoption. Why? Because most of them either operate in a non-compliant manner or offer a terrible user experience. Take CoinJoin, for instance. Despite its privacy advantages, it often requires users to navigate technical complexities, creating friction that deters everyday Bitcoin users. On top of that, many privacy-enhancing solutions have faced significant legal hurdles. Regulatory bodies around the world are cracking down on tools they view as potential enablers of illicit activity, citing AML and KYC violations as major concerns.

But there’s a pattern to innovation—technology evolves in cycles. First comes the rush of excitement, then the inevitable correction, and finally, a period of real, thoughtful building. Privacy solutions for Bitcoin are no different. The initial rush brought attention to privacy issues, but also exposed the need for compliant, user-friendly tools that can navigate both the regulatory landscape and user expectations.

At Encifher, we believe privacy isn’t just a niche concern; it’s foundational to Bitcoin’s future in the global economy. Just as decentralized finance (DeFi) has disrupted traditional banking systems, privacy on the world’s most secure blockchain could be the key to unlocking a new era of financial autonomy. We envision a future where Bitcoin’s liquidity grows as its privacy features improve—attracting more participants, deepening markets, and creating opportunities for everything from lending to staking.

The question isn’t whether privacy is needed—it’s how to make it accessible and compliant. Previous solutions have laid the groundwork, showing us the potential but also highlighting the gaps. For Bitcoin to become the trusted, private asset the world needs, privacy tools must strike a delicate balance between regulatory compliance and ease of use—something the ecosystem has struggled with so far.

Resistance from the government

As the demand for privacy grows, so does the scrutiny from governments and regulators. Over the past few years, we’ve witnessed several high-profile crackdowns on privacy-enhancing services. The shutdown of Bestmixer.io in 2019, the indictment of Helix operator Larry Harmon in 2020, and the 2022 sanctions against Tornado Cash by the U.S. Treasury all point to one clear trend: regulators are tightening their grip on privacy tools that they believe facilitate illicit activity.

These actions highlight a deep tension between privacy and compliance. Users of these services risk unintentional legal violations, while developers face prosecution for creating privacy solutions. This creates a chilling effect on innovation, stifling the development of much-needed privacy mechanisms in the Bitcoin ecosystem. Moreover, the complexity of existing tools like CoinJoin, coupled with regulatory pressures, has left retail users struggling with steep learning curves and clunky interfaces.

For Bitcoin to evolve, privacy must not only be compliant but accessible. Simplifying the user experience while ensuring adherence to regulations is critical. That’s where Encifher comes in.

Encifher: The Future of Compliant and Secure Bitcoin DeFi

At Encifher, we’re building the solution Bitcoin needs—a platform that offers compliant, programmable privacy explicitly designed for Bitcoin DeFi. Unlike previous approaches that have struggled with compliance and usability, Encifher takes an app-specific approach, focusing solely on enhancing the Bitcoin ecosystem.

Our approach is different from Tornado Cash, where users became anonymous and ran into regulatory roadblocks. Instead, Encifher hides the amount of assets being swapped, blended, or staked, preserving user privacy without compromising compliance. By ensuring that users' financial details remain confidential while still adhering to regulations, we create a more secure, flexible, and trustworthy DeFi environment for Bitcoin.

What sets Encifher apart is that our solution is powered by FHE, which is GDPR-compliant, offering a privacy framework that meets stringent global standards. This means that our users—whether institutional players or retail investors—can trust that their activities are protected while remaining within legal bounds.

For large-ticket holders or institutional participants, we are considering integrating KYC options in the future. This would add an extra layer of legitimacy, helping institutions comply with regulatory requirements while still enjoying the benefits of privacy. This hybrid approach—privacy for retail users and KYC for large players—strikes the perfect balance between trust and usability, ensuring Encifher remains a trusted, compliant solution in the Bitcoin ecosystem.

Encifher’s mission is clear: to provide compliant, programmable privacy that doesn’t sacrifice ease of use. We’re creating a DeFi environment that empowers users, protects their privacy, and ensures Bitcoin can grow into a truly global financial asset.