Messari explains how Secret Network provides application layer privacy for the crypto industry

Author: Rasheed Saleuddin

Original Title: 《Shhhhh It's a Secret (Network)》

Translation by: Hu Tao, Chain Catcher

"The inevitable end of the crypto industry is the greatest decentralization and the greatest privacy." ------ Naval Ravikant

Cryptocurrency is redefining the dynamics of the next wave of financial and application development. It introduces a bottom-up approach to building new financial infrastructure, allowing users to oversee network activities and help determine the direction of each project. Unlike today's management of our financial and capital formation systems, users hold the power themselves.

Public blockchains like Bitcoin and Ethereum operate according to these standards. Bitcoin was created in part to check the central bank governors who are prone to mismanaging the money supply and abusing their immense power. Ethereum unlocked the ability to create globally accessible programmable applications that can be governed by token holders and open-source contributor communities. These models set the stage for the first part of Naval's thesis on crypto: maximum decentralization.

However, while Bitcoin and Ethereum excel at distributing power to the majority, their current default public designs may not provide a complete solution for Naval's second outcome—maximum privacy—now or anytime soon.

In the modern era of surveillance capitalism and state-level monitoring, this lack of user privacy is particularly pronounced. The transparency of Bitcoin and Ethereum may only exacerbate these existing concerns. They allow for end-to-end monitoring of every financial transaction for each wallet, while complementary solutions like mixers face liquidity and availability challenges that may limit the level of privacy they can offer.

Privacy coins like Monero and Zcash have emerged to address these issues. They use complex cryptography to obscure transaction details, thereby protecting user privacy and enhancing security. However, as they currently do not support smart contracts, they fail to meet the needs of DeFi users, creating a market gap.

Secret Network aims to fill this gap. It is one of the first blockchains to natively support programmable smart contracts with privacy, launching on the Secret mainnet in September 2020. Secret will face challenges in trying to build a user base, such as overcoming users' general concerns about sacrificing convenience for privacy. However, private smart contracts also bring significant usability advantages and unlock important new use cases. As privacy transitions from a nice-to-have feature to a necessity for sophisticated Web3 application users, Secret Network may become one of the leaders in the field of private computing.

Privacy in Crypto

Privacy on the blockchain is far from guaranteed. Transactions are at best pseudonymous, and hackers and ransomware attackers often realize this at their expense. In short, cryptocurrency is a terrifying shadow banking system that seems to remain unaffected by the American political elite. This is often a positive from the perspective of law enforcement or taxation.

But legitimate personal privacy and security concerns exist in everyday activities that the most popular public chains cannot easily address.

Investment flows on the blockchain are relatively easy to track. Blockchain analytics providers like Chainalysis specialize in analyzing trends or crypto transactions for exchanges and regulators. Websites like Nansen allow retail users to track the wallets of crypto's most prominent investors, monitoring their every deposit, token trade, and NFT purchase.

Source: Twitter

Investors, borrowers, and savers should receive confidentiality from regulated TradFi institutions. For example, consider the information required to share credit scores. However, privacy solutions in the crypto space have not kept pace with application development and user growth.

Beyond its importance to DeFi, privacy is also crucial for functional Web3, which focuses on decentralizing and privatizing user data. Do we really want Facebook, TikTok, or Spotify to know everything about us?

Source: The Wall Street Journal

Do we want all our personal data to be easily accessible to centralized databases that can be hacked, and for our identities or funds to be stolen?

Should every cup of coffee we buy or every Uber ride we take be public? Once two people transact on the blockchain, they know each other's public keys and can track accounts associated with that person from then on. The thorough transparency provided by public distributed ledgers may be a significant barrier to the mass adoption of crypto payments—along with enormous security risks.

Enter Secret Network

Privacy coins like ZCash and Monero or Ethereum DApps like Tornado Cash can obscure the flow of crypto assets to some extent. However, as mentioned earlier, privacy coins cannot meet the demands for anonymity or security in this new financial environment. They are well-suited for private transactions or storing wealth, but that's about it.

For privacy networks to attract users in the DeFi era, their privacy features must also extend to the application layer.

Secret Network is one of the first privacy-centric smart contract platforms launched. It is a Layer 1 blockchain built using the Cosmos SDK and Tendermint BFT, a delegated proof-of-stake consensus protocol.

Like other Tendermint-based chains, Secret Network has a block time of about 6 seconds and can process thousands of transactions per second. The chain currently supports 50 active validators, with an average of 167 delegators per node.

Secret originated from a project called Enigma at MIT, which raised $45 million in its 2017 ICO to build privacy technology for public blockchains. Secret Network is an independent Layer 1 blockchain launched by the Enigma community based on Enigma's research and technology. The community also facilitated the exchange between Enigma's old ENG ERC-20 token and Secret's native SCRT mainnet. Since the network hard forked to secret-2 on September 15, 2020, private smart contracts with encrypted inputs, outputs, and states have been running on the mainnet. This enabled early DeFi applications like "secret tokens," which are private versions of Secret's native token or assets bridged from other chains.

Secret Network utilizes Intel Software Guard Extensions (Intel SGX), which divides protocol code into trusted and untrusted parts. The secure "enclave" component of the Trusted Execution Environment (TEE) executes trusted code. TEEs are used in many devices, including smartphones and video game consoles, and act as a "black box" for computing encrypted data.

Source: Secret Network

The Secret Network TEE maintains the integrity of any cryptographic layer, ensuring that transaction data remains secure and private during execution, even from validators. The only way to view encrypted information is through a set of "view keys." End users have complete control over these keys, allowing them to access private transaction details so they can share this information with other users or professionals like tax authorities.

Secret Ecosystem

Secret Cross-Chain Bridge

While privacy is a key feature of Secret Network, it is not enough to stand out in a competitive Layer 1 environment. The success of a Layer 1 will depend on the utility it can provide to new users. A rich application ecosystem across specific sectors or multiple sectors adds network utility and appeal for developers looking to make a living with cryptocurrency. But the challenge is finding a way to bootstrap a new ecosystem from scratch. This is a classic chicken-and-egg problem, as liquidity begets liquidity.

One of Secret Network's main development strategies is to connect to other networks with existing user bases and liquidity pools. With the right incentive structure, Secret Network can share the activity generated by other blockchains without spending excessive resources to build a new economy from scratch. The project launched its first bridge on December 15, 2020, establishing the necessary connection with Ethereum.

Since then, it has also deployed bridges with BSC and Monero, and is developing a communication gateway to Astar Network (a potential Polkadot parachain previously known as Plasm Network), as well as a bridge to the rapidly growing Terra ecosystem.

Interoperability is also a core reason Secret Network chose to build on the Cosmos SDK framework. The Cosmos SDK allows developers to add new features through plug-and-play modules. One of these modules implements the Inter-Blockchain Communication (IBC) protocol, allowing the network to communicate with other IBC-enabled chains. The SCRT token holder community has expressed support for Secret Network adopting IBC, and the project has already enabled these cross-chain communication capabilities in the Supernova upgrade.

Wrapping ERC-20 and BEP-20 tokens or Monero requires bridging to Secret through locking bi-directional smart contracts. For example, Monero (XMR) can be deposited into Secret in exchange for xXMR. Users can transfer funds in the opposite direction (back to Monero) by burning xXMR tokens to unlock the native XMR on Monero. However, for chains other than Monero, bridging is not entirely anonymous, as even maintaining privacy on Secret Network can allow tracking of bridge transfers on the native chain.

Secret DeFi

Bridging existing chains is a key step. Undeniably, cryptocurrency is a multi-chain universe at this point. Innovation does not happen in isolation. However, a Layer 1 also needs a reason to first attract attention and maintain engagement. This reason could be a shared goal or spirit among community members, such as the need for privacy protection, but it is often a DeFi ecosystem filled with incentives that can lock in activity. Secret now supports decentralized exchanges (SecretSwap), governance tokens for Secret's DeFi sector (SEFI), and peer-to-peer "auction" markets, which form the foundation of the chain's application ecosystem.

Secret Network applications leverage a unique smart contract that the project calls "Secret contracts." Unlike contracts used on Ethereum, these Secret contracts can accept encrypted inputs and produce encrypted outputs while avoiding the disclosure of each contract's state (its internal database). In marketing terms, Secret Network packages Ethereum's smart contract execution, Monero's transaction privacy, and the interoperability provided by the Cosmos SDK chain.

Source: Secret Network

While transaction privacy is a straightforward result of smart contracts with built-in confidentiality, Secret contracts have the benefit of minimizing Miner Extractable Value (MEV).

Due to its security and user experience implications, MEV is at the center of many concerns and conspiracies within Ethereum. Because Ethereum is fully transparent, miners can see incoming transactions and can change the order of transactions or submit competing transactions that benefit the miners. In contrast, the secret nature of Secret Network hides transaction data from validators, preventing them from reordering transactions or executing front-running attacks, aside from blockchain analysis tools like block explorers.

It is worth noting that Secret Network's native SCRT token is not a privacy coin. All SCRT transactions are public, similar to BTC or ETH. Like most new Layer 1s, SCRT serves as the core governance and staking token for the network. Its primary functions include voting on protocol changes, paying gas fees, and staking (as a validator or delegator) to help secure the chain. The secret part of Secret Network lies in its ability to hide the transaction history and state changes of tokens and contracts running on the network.

Secret NFT

The privacy attributes of Secret Network can extend to various token types, including NFTs. In April 2021, the first recipient of the network's community grant publicly announced the reference implementation of the Secret NFT standard (SNIP-721) on the mainnet. Like their fungible counterparts, Secret NFTs inherit the same privacy features when transferred or processed by Secret contracts.

After the booming NFT market, prioritizing NFTs is a logical move for Secret Network or any new platform. The creation and sale of NFTs have seen a parabolic trajectory over the past eight months, as indicated by the monthly trading volume of popular NFT marketplace OpenSea.

While Ethereum has been the center of NFT activity so far, its rising transaction costs may have priced out a significant portion of the cryptocurrency population. Ethereum's scalability limitations have created an excellent opportunity for new low-cost Layer 1s to absorb users and use cases that can no longer afford Ethereum fees. Secret Network stands to benefit from this situation, but competition in minimizing fees is a fiercely competitive market. Where Secret Network can stand out is in the advantages brought by Secret NFTs.

Secret NFTs have the same characteristics as Ethereum's ERC-721 tokens while offering three new features: (1) hiding ownership of rare items, (2) privatizing metadata fields (how NFT signatures connect to off-chain data like artwork), and (3) controlling access to connected content.

The first feature has obvious appeal. As unique and often scarce items, NFTs can be relatively easily tracked using on-chain analysis tools. The privacy settings of Secret Network allow users to hold NFTs outside of public view. The last two attributes may enable new NFT use cases (gaming projects with hidden features or art embedded with secret links) and allow artists or markets to customize access to their products (important for exclusive events or the adult entertainment industry).

The Secret Network NFT sector is currently small. Secret Heroes is the first game on the network, and according to the project's latest roadmap update, an NFT marketplace is in the works. Despite the current level of adoption and the late timing, Secret can carve out a niche in the NFT market by offering one of the only privacy-centric solutions for non-fungible products.

Competitive Landscape

The path to fully implementing privacy smart contracts is groundbreaking for Secret. It is one of the first networks to support the issuance of tokens with privacy attributes and smart contract functionality without compromising transaction privacy.

Each of these privacy-centric Layer 1s aims to provide differentiated features. Dero intends to support native assets (non-contract-enabled tokens) and smart contracts but is still in the testnet phase. Haven is a fork of Monero aimed at supporting a token ecosystem pegged to external assets, such as stablecoins pegged to the dollar. Phala focuses on providing privacy within the Polkadot ecosystem.

Other privacy solutions appear in the form of (1) privacy coins, (2) mixers, and (3) Ethereum-based protected transaction contracts.

For strictly private transactions and value storage, Monero and Zcash are well-known privacy coins that use well-researched privacy technologies, but they exist in a regulatory gray area. Zcash has made some progress on U.S. exchanges, achieving coveted listings on Coinbase and Gemini. However, considering that some exchanges have previously delisted XMR due to legal issues, Monero remains beyond the comfort level of most regulators. Both Monero and Zcash are one-trick ponies. They handle private value transfers well, but they currently do not support smart contracts. Privacy without DeFi or Web3 is only a partial answer.

On-chain mixers like Tornado Cash break the chain of asset transaction history. They make it difficult to match input and output transactions, providing users with the same assets in a new wallet without transaction baggage. However, mixing is an effective but incomplete solution, as it gives users a fresh start but does not prevent them from being exposed again. Additionally, mixers require significant liquidity to optimize privacy, as transaction inputs must be of the same size, making it challenging to match transactions when input volumes are low.

For those who want to retain access to the Ethereum ecosystem, Railgun, Aztec, and Offshift seem to be viable options. However, Aztec is not fully decentralized, and the other two involve significant technical challenges that keep them away from mainnet launch.

In its favor, Secret has a first-mover advantage, and if it can continue to gain momentum in the recent market upturn, it has the potential to become a trendsetter in the privacy space. Its early position in the interconnected Cosmos ecosystem may bode well for adoption. As the Ethereum community is well aware, DeFi has a high degree of reflexivity. A little momentum in liquidity driven by token incentives could snowball and lead to rapid adoption. The decisive factor will be whether Secret's Supernova upgrade and an increasing number of on-chain privacy cases can help the network gain more adoption.

Future

Secret has invested significant resources into developing its application ecosystem and products. The project and its community have established a grant program with 20 million SCRT to help fund applications built on the network. It has also completed integration with Band Protocol, a necessary DeFi building block that provides price information for on-chain exchanges and other financial applications like lending and derivatives protocols.

The main value pillar of Secret Network is its name: privacy computing. Privacy in cryptocurrency is challenging in terms of technological development, regulatory acceptance, and user adoption. Secret has addressed the first issue and developed solutions to help tackle the second when the time is right. However, user adoption of privacy solutions will be a significant barrier, as users often prioritize convenience and familiarity over privacy.

Our privacy is under attack—it's been the case in Web2 for some time, and now in crypto. Unless there is a dramatic (perhaps necessary) shift in consumer behavior, things may only get worse. Do we value our privacy enough to rebuild the DeFi ecosystem on a privacy-centric Layer 1? Do we only slightly value it, using privacy networks as a supplementary service as needed? Or do we yield to the looming threat of state surveillance?