For cryptocurrency to become sound money, it needs to integrate a degree of privacy on a transactional level, just as paper currency does. Bitcoin and Ethereum, both, lack strong privacy measures, but this is being addressed. As shown by Chain Link’s research paper, mixing services powered by decentralized oracles can overcome this barrier, September 4, 2019.
From lending and borrowing to insurance and investments, Ethereum’s desire to create the most comprehensive layer of open finance is turning heads across space.
Considering this entire premise is built on ETH being sound money, there are measures that need to be taken to allow this narrative to build.
Mixers built with a decentralized oracle like ChainLink can improve distribution and limit risks from a single point of failure.
A ‘mixicle’ is a hybrid between an oracle and a mixer. They are designed to be simple and light weight, which means they don’t use privacy enhancing tools such as zero knowledge proofs.
This mixicle would be layered inside the transactional layer of the DeFi application. Rather than payments moving through a centralized entity or in a direct peer to peer manner, it would be automatically routed through the decentralized mixer so nobody can observe inputs and outputs to establish a users identity, or link multiple addresses belonging to them together.
The Case for On Chain Privacy
An unhealthy trend has popped up in the crypto world, whereby people pay a premium for bitcoin, labeled ‘virgin Bitcoin’s, that has been freshly mined. This is so that they can confirm this bitcoin has no illicit history.
This is a direct attack on the moneyness of bitcoin of threatens practical fungibility. Without on-chain privacy to hide the history of each satoshi, the market will inevitably value virgin bitcoin more than rest, which effectively leads to two types of bitcoin.
Ethereum may witness the exact same scenario unravel, and it was only recently when Vitalik emphasized on the need for privacy that a community developer built Tornado Cash.
Any kind of financial mechanism on a blockchain requires transactional privacy. Current mixers require users to go out of their way to keep their coins private. Decentralized mixicles can automate on-chain privacy and create a better experience on protocols like Dharma and Compound.