In-depth research report on the privacy coin sector: a paradigm shift from anonymous assets to compliant privacy infrastructure.

Author: Huobi Growth Academy |

summary

As institutional funding continues to rise in the crypto market, privacy is shifting from a marginalized demand for anonymity to a critical infrastructure capability for integrating blockchain into the real-world financial system. While blockchain's transparency was once considered its core value proposition, this characteristic is revealing structural limitations as institutional participation becomes dominant. For businesses and financial institutions, the complete exposure of transaction relationships, position structures, and strategic timings constitutes significant business risk. Privacy is thus no longer an ideological choice but a necessary condition for blockchain to achieve large-scale, institutionalized applications. Competition in the privacy arena is shifting from "anonymity strength" to "institutional adaptability."

I. The Institutional Ceiling of Complete Anonymity and Privacy: The Advantages and Dilemmas of the Monero Model

Monero, representing a fully anonymous privacy model, constitutes the earliest and most "pure" technical route in the privacy field. Its core goal is not to trade off transparency from privacy, but to minimize on-chain observable information and cut off third parties' ability to extract transaction semantics from the public ledger. To achieve this, Monero uses mechanisms such as ring signatures, stealth addresses, and RingCT to simultaneously conceal the sender, receiver, and amount: external observers can confirm that "a transaction has occurred," but cannot definitively reconstruct the transaction path, counterparty, and value. For individual users, this experience of "default privacy, unconditional privacy" is extremely attractive—it transforms privacy from an optional feature into a system norm, significantly reducing the risk of "financial behavior being tracked by data analytics tools for a long time," and providing users with near-cash anonymity and untraceability in payments, transfers, and asset holding.

On a technical level, the value of complete anonymity lies not only in "hiding" but also in its systematic design to resist on-chain analysis. The greatest externality of a transparent blockchain is "composable surveillance": the public information of a single transaction is continuously pieced together, gradually linked to real-world identities through address clustering, behavioral pattern recognition, and off-chain data cross-validation, ultimately forming a "financial profile" that can be priced and abused. Monero's significance lies in raising the cost of this path to a level sufficient to change behavior—when large-scale, low-cost attribution analysis becomes unreliable, the deterrent effect of surveillance and the feasibility of fraud decrease simultaneously. In other words, Monero is not merely for "bad actors"; it also responds to a more fundamental reality: in a digital environment, privacy itself is part of security. However, the fundamental problem with complete anonymity is that its anonymity is irrevocable and unconditional. For financial institutions, transaction information is not only essential for internal risk control and auditing but also a carrier of legal obligations under regulatory requirements. Institutions need to maintain a traceable, explainable, and submitable chain of evidence within frameworks such as KYC/AML, sanctions compliance, counterparty risk management, anti-fraud, and tax and accounting auditing. A fully anonymous system "permanently locks" this information at the protocol layer, making it structurally impossible for institutions to comply even if they subjectively wish to. When regulators require explanations of the source of funds, proof of counterparty identities, and details of transaction amounts and purposes, institutions cannot reconstruct key information from the blockchain, nor can they provide verifiable disclosures to third parties. This is not a case of "regulators not understanding the technology," but rather a direct conflict between institutional goals and technological design—the bottom line of the modern financial system is "auditability when necessary," while the bottom line of fully anonymous privacy is "non-auditability under any circumstances."

The outward manifestation of this conflict is the systemic rejection of highly anonymous assets by mainstream financial infrastructure: exchanges delist them, payment and custody institutions do not support them, and compliant funds cannot enter the market. It's important to note that this does not mean genuine demand has disappeared. On the contrary, demand often migrates to more covert and higher-friction channels, creating a "compliance vacuum" and a boom in "gray intermediaries." In the case of Monero, instant exchange services handled a large volume of buying and exchanging demand at certain times. Users paid higher spreads and fees for availability, and bore the costs of frozen funds, counterparty risk, and information opacity. More importantly, the business model of such intermediaries can introduce continuous structural selling pressure: when service providers quickly convert the Monero fees they collect into stablecoins and cash out, the market experiences continuous passive selling unrelated to genuine buying, thus suppressing price discovery in the long term. Thus, a paradox arises: the more rejected by compliant channels, the more likely demand is to concentrate on high-friction intermediaries; the more powerful the intermediaries, the more distorted the price; the more distorted the price, the more difficult it is for mainstream funds to evaluate and enter using "normal market" methods, creating a vicious cycle. This process is not due to "the market's lack of recognition of privacy," but rather the result of the combined influence of institutional and channel structures.

Therefore, evaluating the Monero model cannot remain at the level of moral debate; it should return to the practical constraints of institutional compatibility: complete anonymity is "secure by default" in the personal world, but "unusable by default" in the institutional world. The more extreme its advantages, the more rigid its predicament. Even if the privacy narrative heats up in the future, the main battlefield for fully anonymous assets will still be primarily in the non-institutionalized demand and specific communities; while in the institutional era, mainstream finance is more likely to choose "controlled anonymity" and "selective disclosure"—protecting both trade secrets and user privacy, while providing the evidence needed for auditing and regulation under authorized conditions. In other words, Monero is not a technological failure, but rather locked into a use case that is difficult for the system to accommodate: it proved that strong anonymity is feasible in engineering, but it also proved in an equally clear way that—when finance enters the era of compliance, the focus of privacy competition will shift from "whether everything can be hidden" to "whether everything can be proven when needed."

II. The Rise of Selective Privacy

As complete anonymity and privacy gradually reach institutional limits, the privacy landscape is undergoing a directional shift. "Selective privacy" has emerged as a new technological and institutional compromise. Its core is not to oppose transparency, but rather to introduce a controllable, authorizable, and disclosable privacy layer on top of a default verifiable ledger. The fundamental logic of this shift is that privacy is no longer seen as an escape from regulation, but rather redefined as an infrastructure capability that can be absorbed by the system. Zcash is the most representative early practice of selective privacy. Through its design of coexisting transparent addresses (t-addresses) and shielded addresses (z-addresses), it provides users with the freedom to choose between public and private information. When using a shielded address, the sender, receiver, and amount of a transaction are encrypted and stored on-chain; when compliance or auditing requirements arise, users can disclose complete transaction information to specific third parties through "viewing the key." This architecture is a milestone in terms of its concept: it is the first mainstream privacy project to explicitly state that privacy does not necessarily come at the expense of verifiability, and compliance does not necessarily mean complete transparency.

From an institutional evolution perspective, Zcash's value lies not in its adoption rate, but in its "proof of concept" significance. It demonstrates that privacy can be an option rather than a system default, and that cryptographic tools can provide technical interfaces for regulatory disclosure. This is particularly important in the current regulatory context: major global jurisdictions do not deny privacy itself, but rather reject "unauditable anonymity." Zcash's design precisely addresses this core concern. However, as selective privacy moves from "personal transfer tools" to "institutional transaction infrastructure," Zcash's structural limitations begin to emerge. Its privacy model is essentially still a binary choice at the transaction level: a transaction is either completely public or entirely hidden. For real-world financial scenarios, this binary structure is too crude. Institutional transactions involve more than just the "two parties" information dimension; they involve multiple layers of participants and multiple responsible parties—counterparties need to confirm performance conditions, clearing and settlement institutions need to know the amount and timing, auditors need to verify complete records, and regulatory agencies may only be concerned with the source of funds and compliance attributes. These entities' information needs are neither asymmetrical nor completely overlapping.

In this context, Zcash cannot modularize and differentiate transaction information. Institutions cannot simply disclose "necessary information" but must choose between "full disclosure" and "full concealment." This means that once involved in complex financial processes, Zcash either exposes too much commercially sensitive information or fails to meet the most basic compliance requirements. Its privacy capabilities are therefore difficult to embed into real institutional workflows, remaining only at the marginal or experimental level. In stark contrast is a different selective privacy paradigm represented by Canton Network. Canton does not start with "anonymous assets" but directly takes the business processes and institutional constraints of financial institutions as its design starting point. Its core concept is not "hiding transactions," but "managing information access rights." Through the smart contract language Daml, Canton breaks down a transaction into multiple logical components. Different participants can only see data fragments related to their own permissions; other information is isolated at the protocol layer. This design brings about a fundamental change. Privacy is no longer an additional attribute after the transaction is completed but is embedded in the contract structure and permission system, becoming a component of the compliance process.

From a broader perspective, the differences between Zcash and Canton reveal the diverging directions of the privacy race. The former remains rooted in the crypto world, attempting to find a balance between personal privacy and compliance; the latter actively embraces the real-world financial system, engineering, proceduralizing, and institutionalizing privacy. As institutional funds continue to rise in the crypto market, the main battleground for privacy will shift accordingly. The future focus of competition will no longer be on who can hide the most completely, but on who can be regulated, audited, and used on a large scale without exposing unnecessary information. Under this standard, selective privacy is no longer just a technological path, but an essential route to mainstream finance.

III. Privacy 2.0: Infrastructure Upgrades from Transaction Hiding to Privacy Computing

As privacy is redefined as a necessary condition for institutions to go on-chain, the technological boundaries and value extension of the privacy field are also expanding. Privacy is no longer simply understood as "whether transactions can be seen," but is beginning to evolve towards a more fundamental question: can the system complete computation, collaboration, and decision-making without exposing the data itself? This shift marks the transition of the privacy field from the 1.0 stage of "privacy assets/privacy transfers" to the 2.0 stage centered on privacy computing, with privacy upgrading from an optional function to a general infrastructure. In the privacy 1.0 era, the technological focus was mainly on "what to hide" and "how to hide," that is, how to conceal transaction paths, amounts, and identity associations; while in the privacy 2.0 era, the focus shifts to "what can still be done in a hidden state." This difference is crucial. Institutions do not only need privacy transfers, but also need to complete complex operations such as transaction matching, risk calculation, clearing and settlement, strategy execution, and data analysis under the premise of privacy. If privacy can only cover the payment layer and not the business logic layer, then its value to institutions remains limited.

Aztec Network represents the earliest form of this shift within the blockchain ecosystem. Aztec doesn't view privacy as a tool against transparency, but rather embeds it as a programmable attribute of smart contracts within the execution environment. Through a rollup architecture based on zero-knowledge proofs, Aztec allows developers to finely define which states are private and which are public at the contract layer, achieving a hybrid logic of "partial privacy, partial transparency." This capability extends privacy beyond simple transfers to cover complex financial structures such as lending, transactions, vault management, and DAO governance. However, Privacy 2.0 doesn't stop at the native world of blockchain. With the emergence of AI, data-intensive finance, and the need for cross-institutional collaboration, simply relying on on-chain zero-knowledge proofs is insufficient to cover all scenarios. Therefore, the privacy field has begun to evolve towards a broader concept of "privacy computing networks." Projects like Nillion and Arcium emerged in this context. A common characteristic of these projects is that they do not attempt to replace blockchain, but rather exist as a privacy collaboration layer between blockchain and real-world applications. By combining multi-party secure computation (MPC), fully homomorphic encryption (FHE), and zero-knowledge proofs (ZKP), data can be stored, accessed, and computed under end-to-end encryption. Participants can collaboratively complete model inference, risk assessment, or strategy execution without needing to access the original data. This capability upgrades privacy from a "transaction-layer attribute" to a "computation-layer capability," expanding its potential market to areas such as AI inference, institutional dark pool trading, RWA data disclosure, and inter-enterprise data collaboration.

Compared to traditional privacy coins, the value logic of privacy computing projects has undergone a significant change. They do not rely on a "privacy premium" as their core narrative, but rather on the irreplaceability of their functionality. When certain computations are simply impossible to perform in a public environment, or would lead to serious business risks and security issues in plaintext, privacy computing is no longer a question of "whether it's needed," but rather "it cannot function without it." This also gives the privacy sector the potential to become a kind of "underlying moat" for the first time: once data, models, and processes are embedded in a privacy computing network, the migration cost will be significantly higher than that of ordinary DeFi protocols. Another significant feature of the Privacy 2.0 stage is the engineering, modularization, and invisibility of privacy. Privacy no longer exists in the explicit form of "privacy coins" or "privacy protocols," but is broken down into reusable modules embedded in wallets, account abstractions, Layer 2, cross-chain bridges, and enterprise systems. End users may not be aware that they are "using privacy," but their asset balances, transaction strategies, identity associations, and behavioral patterns are protected by default. This "invisible privacy" is more in line with the realistic path of large-scale adoption.

Meanwhile, regulatory focus has shifted. In the Privacy 1.0 phase, the core regulatory issue was "whether anonymity exists"; while in the Privacy 2.0 phase, the issue has become "whether compliance can be verified without exposing the original data." Zero-knowledge proofs, verifiable computation, and rule-level compliance have thus become key interfaces for dialogue between privacy computing projects and the institutional environment. Privacy is no longer seen as a source of risk, but has been redefined as a technical means to achieve compliance. In summary, Privacy 2.0 is not a simple upgrade to privacy coins, but a systemic response to "how blockchain can be integrated into the real economy." It means that the competitive dimension of the privacy field has shifted from the asset layer to the execution layer, from the payment layer to the computation layer, and from ideology to engineering capabilities. In the institutional era, privacy projects with true long-term value may not be the most "mysterious," but they are certainly the most "usable." Privacy computation is precisely the concentrated embodiment of this logic at the technical level.

IV. Conclusion

In summary, the core dividing line in the privacy field is no longer "whether it is private," but rather "how to use privacy within the framework of compliance." While fully anonymous models possess irreplaceable security value at the individual level, their unauditable nature makes them unsuitable for institutional-level financial activities. Selective privacy, through its disclosable and authorizable design, provides a viable technical interface between privacy and regulation. The rise of Privacy 2.0 further elevates privacy from an asset attribute to a fundamental infrastructure capability for computing and collaboration. In the future, privacy will no longer exist as an explicit function but will be embedded as a default system assumption in various financial and data processes. Truly valuable privacy projects are not necessarily the most "secret," but they are certainly the most "usable, verifiable, and compliant." This is the key indicator of the privacy field's transition from the experimental stage to maturity.