No Privacy, No Product Market Fit, Eric Hill | ETHSofia 2025

Transcript

[Music] There we go. So, hi everybody. My name is Eric. Uh, I'm a lawyer, but I'm not your lawyer or yours or yours. Um, and right now, uh, I'm the legal adviser to something called the private proof of innocence protocol, as well as the rail gun privacy system. And before I talk about to our previous guest point about exponential or hyperbolic growth and why you don't have it in crypto, I'm just going to tell you explain how uh these two systems work. So rail gun is a uh private smart contract system. When you use the

rail gun smart contracts, it's a zk snark, so it's encrypted. So you basically take a public balance and you make a private balance by encrypting it. Once you're inside the rail gun system, you can do anything you can usually do. Sorry. You can do everything that you can normally do. You can do, you know, swaps, DeFi, lending, all that kind of stuff. You can do everything. And it's all behind in in private balances, which means that the sender and the receiver uh and the amount is not recorded on the blockchain.

Inside the rail gun protocol, there is an indexer that records every one of your transactions with a private viewing key. So you can always prove it's fully audible. You can show what you did. It's just the whole world isn't spying on you basically. Private proof of innocence is a separate project. And the private proof of innocence um is a list provider. It's an aggregator of list providers. So what it does is it goes down uh two lists. The first list is a public list which is all the familiar names you're familiar with. chain analysis, buy bit API, you know, elliptic, tr it goes down all through that doing a token trace. It then goes down through a second list of providers that's not public that is a secret uh which has a whole bunch of other sources

that are not in that public source. It aggregates that. When a transaction goes into rail gun, it trips 60 minutes and you are unable to do anything and it just begins to call private proof of innocence. And this allows uh the PPP PPI to outrun the hacker. So you can frontr run the hacker, right? So if somebody drains something, they try to go into rail gun, it closes for 60 minutes. And now this search goes on. If you're successful, you have non-contaminated funds, you get a mathematical proof that carries with you into rail gun that says that at the time that this went in, there is no known fault. It's a compliance tool.

that compliance tool which again has selective disclosure as well as the uh indexing inside rail gun allow fully auditable fully traceable but you decide when that's basically what these projects do. Okay. So for since 2018 everybody's been saying that uh you know the the mass adoption is coming institutional coming everybody's coming and it never comes and there's a lot of excuses that have been given but not a lot of reasons and I'm here to tell you today that the reason is uh privacy right that is the reason so if you've built a project that doesn't have traction you're like it has brilliant technology a great UX it has

low fees and you don't have users ask yourself. Is it because it's not private? Privacy is a non-negotiable component of true product market fit. It's not a niche feature or a luxury. It's a foundational pillar to achieve that product market fit in the crypto space. Without a credible path to user privacy, ma mass adoption is just a pipe dream. And this has been borne out by the evidence behind before you, right? There's like maybe five projects in the history of crypto besides Bitcoin that have product market fit. Lido being one of them, right?

There's a core conflict between transparency and user privacy, right? So the real uh so the transparency helps for onchain governance and and and and and making sure that you don't get rugged, but then user privacy and the real world consequences include financial surveillance, right? So everybody knows what you specifically have, your spending habits, investment strategies, right? Which keeps institutional trading and there's a whole bunch of uh businesses that do not come on board because of this, right? Security risks, they're self-explanatory, right? That's the wrench attack. And they've been going nothing but up up up. I was just in the US two weeks ago at an FBI meeting and they gave us a briefing of horrific

organized crime wrench attacks across the United States, right? Um security risk and then behavioral targeting. So the same way you have surveillance capitalism on Google targeting you with products, uh the same thing's happening on blockchain because it's uh not private. So the unusable product. So this is what I was getting at. You've built something. It is uh technically sound. It has uh no users, great interface, and low fees, right? So, I tell people, take out the banking app in your phone right now and ask yourself, would you use that if everybody knew you were doing? And the answer is no. You've just built an unusable product is what you've built,

which is why there's nobody using it except for like random DJs or very small group of people who just like to try technology. Product market fit is not about daily active users or total value locked. It's about building a product that users trust and feel empowered to use for the most sensitive activities. Right? So if you don't have a privacy, you have a fundamentally unfit product. So in traditional privacy uh finance of course privacy is a given expectation in crypto it must be an explicable provable guarantee. So there's there's a bunch of uh uh pivot moments that we have and one of them is that you can have provable guarantees in crypto, right? So

you can have a sound marketplace, right? So privacy among other things prevents crime, but it's also a precondition that prevents frontunning. It prevents price fixing and other frauds and conflicts. Okay, so let's talk about Constitution Dow for a second. Everybody remember Constitution Dow? So Dowo spun up. It raised money online, right? And within one week it had get mass menos $42 million and was going to bid to buy a copy of the United States Constitution. So the treasury was public. So the only other bidder, one bidder, right? CEO of a big corporation. He knew what the maximum bid was and he only made one bid. What was the bid? The exact amount of the treasury plus $1.

That is an unfit product. There was no price discovery. you know, we don't know if the highest or lowest price was paid. And because there was complete transparency and the um treasury was there, you had to break down total breakdown of auction mechanics, the destruction of market efficiency and productivity ultimately. Okay, it's my uh slide from K. I was at the stable coin summit. You know, nobody wants your stable coin. You can't scale from here. Stable coin adoption is limited. It's gone like this and then it just isn't going anywhere. Why is that?

Because all the non-private use cases have soaked it up and the private use cases um are not going to use stable coins. Here's a couple of examples of locked out use cases. Right? Institutional investors can't touch stable coins without transaction privacy. Businesses will not run their back-end finance in public. Human rights organizations like the UN. I'm working with the UN right now to deliver crypto in faraway dangerous places, right? They cannot have exposure to where they deliver those funds. Medical and legal professionals cannot risk confidentiality breaches. There's licensing requirements. And then anybody

who has a fiduciary duty, that right there comprises of like the majority of the financial markets in the world. And then there's your competitor. Did you build a better product? So there is an issuer of 100% anonymous, 100% untraceable currency and it's called the central bank. It's 100% untraceable, 100% anonymous by design. And the question is, is your product is your offer better? Is it 10 times better? You need to get people to stop using that and to use this.

And it hasn't happened yet. Hasn't happened since 2018. And for crypto to compete, it has to to achieve mass adoption, it must offer a credible path to a superior or at least equivalent level of privacy and security. So, I'll say it again. If you've built something and there's no traction, ask yourself if you added the privacy option, go private now, uh whether that would change anything. And I'm going to suggest to you that it will. It's not a loophole. It's missing infrastructure. So what's the solution?

It's to build in privacy, right? So we have zero. The technology is here today. You don't have to wait for next year. And it's not just the the projects that I work with that have this. There's other people that have the technology. It's out there. It already exists. It's vastly superior. So I'm going to give you an example. Um, token tracing as of this year, the best most credible reports say it's 98% effective. Okay, 98. In the 35 years of KYC, in the best years ever, the average is 0.5% effectiveness.

So if you only increased your effectiveness by one to 1% you would be 100% more effective than the existing system on for example on the AML side. If you increased your effectiveness to 2% you would be 200% more effective than the existing system. Token tracing today is already 98% effective. It's like 14,000% more effective than the existing KYC regime. Right? So you can have the ZK proof systems paired with token tracing that can vastly by magnitudes of order that are almost in unimaginable create very clean pools of funds to move around privately

which reduces the compliance cost the burden cost. By the way, the annual cost of KYC is 300 billion, right? PPOI costs about five bucks, you know. So, um, transaction details like sender receiver while still proving trans transaction validity on onchain. So, so you get all the security of Ethereum or the EVM. You get the mathematical provability in ZK proofs, whether it's ZK Snark or another technology, right? You can use that. You can obtain absolute confidential transactions. You have onchain auditability.

Uh optional user controlled viewing keys. They can reveal private transaction history to anybody whether it's an authority or maybe it's just your internal auditor. You know in the UN they ship about 300 million of crypto. Uh they need to know that they didn't send it to their brother, you know, so they need these viewing keys. Um and then modular compliance or selective disclosure, right? enables you to selectively and provably share only the necessary information. So you don't have to tell everybody your birthday or your kids' birthday if they don't need to know the birthday. They just need to know the information you need to know. And so you can selectively do it in a modular way. That technology exists today.

You don't have to wait. So in summary, uh privacy isn't a problem to be solved later. It's a fundamental requirement for achieving product market fit. By building privacy in from the start, you can unlock the use cases and attract users who are currently locked out of the system, which is the majority of users. And that is my message to you today. It's the unlock. Great. So, does anybody have any questions?

That was nice pitch. But uh so so what do you recommend actually practically uh like when when it comes to technology? You have some particular project that you would recommend right away to adults for chains? >> Yes. Rail gun. >> Yeah. Absolutely. Yeah. So they work different. I mean I'm not here to uh promote one or the other. I'll just say some privacy solutions require you to migrate to another chain to bridge. Some privacy solutions like rail gun just let you do it on EVM. You don't have to get off. Each has their merits. You know >> what I what I really now consider exciting that we have a nice overstabilized stable coins. Uh

>> yes. Yes. Sure. Sure. So that we are building now this system of of like synthetic stable coins inside of our ecosystem which will be basically backed by both liberal merits and liberal dollars. uh and it's very like proof against uh downfall because it's really like over collateralized and and makes a lot of sense to me. Uh and if we add the privacy element to it, that will be a lot of fun. So >> yeah, when I was listening to you talk, I was thinking about that. I was when you're talking about the building kind of like an economic uh system inside. I was like, "Oh, it's free country. They should have privacy."

>> This is the I think I'm not aware if there are any actually privacy stable coins right now. Are they? >> Not that I'm aware of. >> That's That's I think a huge market to be explored. >> Yep. >> Let's do it. >> Nice. All right. Anybody else? >> Don't be shy. Take me on. >> I have a probably slightly uninformed question, but how how scalable and expensive is ZK proof? >> Ah, >> tech because that's Yeah.

>> Yeah. Yeah. So it's very complex. I can't speak about the other um systems. I can tell you that the secret in the knowhow in ZK is how to keep the cost down like how to make the circuits so that they're not expensive and uh but it can be very expensive. There's a lot of compute. Rail guns 500,000 lines and it's not easy but uh it is the cheapest but yeah so this is the fundamental problem with ZK proofs is very expensive and is when people first get into it they begin to design it they they design it in a very inefficient way that ends up costing double or triple or quadruple. So this is like a lot of the

projects in the ecosystem and as you see them pivot and pivot and pivot and pivot uh it's it's about getting the cost down. So but yeah it's a good question knowledgeable one. Yeah because it has to pay a gas fee right somewhere. Anybody else? Great. Well I thank you for inviting me. It was great to be here and I hope to see you next year. [Applause]

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