0xRank DAO: An In-Depth Analysis of the Technical Advantages and Investment Logic of the Privacy Public Chain Secret Network

Author: Yan Wuji @YonRick, 0xRank Project Overview:

Secret Network is the first privacy public chain within the Cosmos ecosystem and currently the most developed privacy public chain in the ecosystem. This chain focuses on privacy functionality, building a dedicated infrastructure for privacy in the Web 3.0 era. The project has established a complete cross-chain bridge infrastructure, and the ecosystem is gradually becoming richer.

Investment Logic:

1. Privacy protection of public chain information is a rigid demand for blockchain users and is one of the important functional applications. This report predicts that the privacy market can grow 3-4 times in scale within 5 years, with a CAGR of 41.4%. After the privacy public chain ecosystem is sound, this sub-industry has the potential to become a market hotspot for investment opportunities.

2. The convenience of asset cross-chain significantly affects users' experience with privacy tools. The complete cross-chain bridge ecosystem of Secret promotes the value overflow of chains like ETH and BSC, leading to a continuous increase in Secret Network's TVL, achieving a growth rate above the industry average.

3. The continuous construction of ecological applications such as DeFi, GameFi, and stablecoins increases the scenarios that can retain value beyond just privacy tokens. The synergy between scenarios, ecosystems, user experience, and capital injection creates a very good flywheel effect, establishing a long-term moat based on ecological value.

4. Moat Logic: Leading companies in the privacy industry can establish a self-reinforcing strong moat through ecosystem scaling. Under the premium of leading companies, Secret Network's circulating market value should have a growth opportunity of 5-10 times.

Investment Duration:

It is recommended to choose a long-term investment cycle, gradually reducing holdings after the privacy sector explodes.

Valuation Judgment:

Top-down: As the leader in the privacy public chain market, SCRT's ratio to the leading public chain should be predicted based on the privacy industry's share of the overall industry. Its current circulating value should be around 1 billion USD, while its current valuation is 870 million USD, indicating that the current price is still within a reasonable range.

Long-term Valuation Logic:

According to Tractica data, the blockchain is expected to have three times the growth potential by 2024E, with the public chain market growing the fastest. Coupled with the maturity and penetration of the privacy industry, it is estimated that the privacy sector market will at least expand 4-5 times over the long term. After the project's ecosystem explodes, with on-chain transactions achieving tenfold growth, SCRT's circulating valuation could reach 6-12 billion USD. Considering an annual inflation rate of 15%, its long-term increase could be at least 5-10 times, making it highly valuable to buy at the bear market low.

Differentiated Views from the Market:

1. The macro logic of investing in Secret Network is the overall increase in the penetration rate of the privacy industry, which is the part of industry growth we need to bet on the most in our investments. Currently, the privacy industry's share within the entire blockchain system is severely underestimated, and there should be 3-4 times market space for expansion.

2. Why haven't existing privacy coins like Monero grown? XMR, ZEC, etc., have not met user needs: 1) Privacy reserve coins are not Turing-complete public chains and cannot import value through cross-chain bridges. The sales of privacy tokens and other currencies sold through privacy tokens face obstacles and still rely on CEX; 2) The functionality of privacy coins is limited to value storage and trading, and their ecosystems do not capture value through Dapps. Privacy public chains can effectively solve these issues: 1) Secret captures value beyond the transactional level, capturing excess value in the form of public chain applications; 2) The DEX and diverse cross-chain solutions within the Secret ecosystem significantly enhance the effectiveness of anonymous tools. Therefore, the reason the existing privacy industry has not grown is that the products do not meet user needs, and the profit model is not viable.

3. Why is the moat of privacy public chains high? From both software and hardware perspectives, if the underlying architecture of the blockchain is adjusted to become a privacy public chain, then all product logic above must be redesigned. Currently, no mature public chain has sufficient resources to fundamentally adjust its ecosystem; on the other hand, in terms of hardware, current privacy public chains are based on more complex cryptographic algorithms or external hardware facilities, which require public chain nodes to upgrade hardware configurations (TEE, ZK, etc.), distinguishing them from existing BTC and ETH miners. Therefore, privacy public chains have a very high moat.

4. From an investment perspective, what is the core logic of competition among privacy public chains? The difficulty of asset cross-chain and the prosperity of the ecosystem. The generation of native value on functional public chains does not have an advantage compared to public chains like Bitcoin and Ethereum, which also have reserve currency characteristics. Therefore, their value source needs external value injection, meaning that the value from chains like Bitcoin and Ethereum and within the Cosmos ecosystem overflows to the Secret chain due to privacy demands. Secret is built on the Cosmos ecosystem and has established cross-chain facilities for ETH and BSC, with cross-chain bridge facilities for BTC and Polkadot also under construction. Thus, from this perspective, the success of Secret Network's ecosystem is a small bet in the investment logic.

5. Why is the business model of privacy public chains significantly better than that of mixing tools? The logic lies in long-term value extraction and retention. The Value-Add of privacy public chains meets users' functional needs, aiming to protect their on-chain data. Therefore, privacy public chains can derive value from the benefits brought by privacy protection functions, which is the essence of profitability. On the other hand, the value acquisition methods of privacy public chains go beyond just transactional demands; their DeFi ecosystem, NFTs, GameFi, etc., can all create demand for Secret Token (SCRT). Therefore, in the long run, the more complete and user-friendly the privacy public chain ecosystem is, the more it will attract user funds for long-term residence, bringing long-term demand for tokens and solid support for token prices.

6. Secret Network has received a $225 million ecological fund investment from 25 current ecosystem investors. The ecological construction by important market investors will provide Secret with advantages in project contact, ecosystem building, and credit enhancement.

Business Insights: 1. The Essence and Core of Product Services

The essence of privacy public chain services is the privacy protection of public chain transactions and interaction content. Based on privacy public chains, it prevents others from tracking historical information, and users pay costs for its functions. Logically, it is similar to SaaS; according to the Unit Economy model, the value of a single customer is the long-term discounted LTV minus customer acquisition costs. From this logic, increasing user LTV and reducing customer acquisition costs are growth points for the business model. Therefore, I continuously focus on the ecosystem (LTV value) and cross-chain bridges (reducing acquisition costs). Moreover, from the SaaS perspective, users' privacy needs are fundamentally similar, so the product's reusability is strong, solving the defects of project-based SaaS.

On the technical level, Secret Network is not a complete technical crush; its overall framework is built on Cosmos-SDK, using the Tendermint consensus protocol, and adds TEEs (Trusted Execution Environments) to the chain's architecture. The combination of these elements can indeed meet user needs. Verified through actual use, the cost of a single transaction on the Secret chain is very low, generally below $0.1, making it highly user-friendly.

2. The Rigid Demand Logic of Users Driving Industry Growth

From the current perspective of blockchain's privacy practicality, privacy is lacking in mainstream blockchain systems. For example, transactions and interactions on the ETH chain are based on personal or institutional addresses, making past transaction records fully transparent.

This issue will bring two types of potential risks: one type for Smart Money in the industry, where transaction information of institutions or individuals will be tracked, thus affecting the yield and security of funds. For instance, if users in an exchange see that a whale is withdrawing funds, they may start front-running, or a whale may be discovered to have pre-positioned in a certain DEX token. According to Bayes' theorem, the transparency of information actually provides excess information to the market, leading to losses for monitored users; the other type for general users is that although current blockchain applications are basically closed-loop within the crypto circle, once a public chain account address is bound to a real individual or institution, or a company's address is monitored by various address detection applications, then its ledger and transactions are effectively public to everyone (including competitors or scammers). Therefore, if blockchain development continues to integrate into real life, privacy will inevitably face a significant test.

3. Can Secret Network Meet the Privacy Needs of Typical Users?

Typical User Privacy Needs:

1. Safe and convenient cross-chain solutions (primary, prerequisite)

2. Developed DEX market providing liquidity

3. Stablecoin exchange channels

Currently, several very advantageous points: The existence of IBC ensures the security of cross-chain funds. As the core consensus that Cosmos officially promotes and is currently the most recognized in the market, its recognition is evident. However, does the self-incubated Secret Bridge meet the security standards?

According to the Secret white paper, its self-incubated Secret Bridge only has 5 key nodes participating in the cross-chain verification process, raising doubts about its centralization and security, and whether there is a possibility of collusion among cross-chain bridge participating nodes. Data Source: Secretanalytics How is the liquidity in the DEX market? Currently, it covers mainstream trading pairs, but the actual TVL and depth are insufficient. Data Source: Secretanalytics Stablecoin exchange channels: For value to be retained long-term within the ecosystem, it must rely on stablecoins as a buffer between crypto assets and real value. Stablecoins play an irreplaceable role in value retention within privacy public chains. Currently, Secret Network has provided stablecoins like USDC and USDT through cross-chain methods in its ecosystem and has launched the native token Shade Protocol and Silk, which have received widespread attention. However, the security of stablecoins and ecosystem construction still need long-term observation.

4. Core Technical Solutions of the Product Secret Network is a Layer 1 solution built on Cosmos SDK, using Tendermint to achieve consensus. It employs TEE (Trusted Execution Environment), commonly used in computer science, to provide privacy transaction functionality. TEE is like a black box for the computer's owner. The owner has no right to view the data inside, ensuring that encrypted data will not be leaked, while computation can proceed securely. Currently, TEE's hardware support comes from Intel SGX.

Data Source: Secret Network Data Source: Secret Network The execution of contracts is illustrated above. The left side shows the normal execution flow of CosmWasm, while the right side shows the computation flow of Secret Network contracts. The first process on the right includes SGX, and the second process has Enclave. It can be seen that Secret Network relies on the concept of Trusted Execution Environment at every step.

The Secret Network Enclave is where these contracts are specifically executed. The Enclave is a black box with its own keys. Users outside the Enclave cannot view these keys. All execution results must be signed by these keys. The Enclave can also connect with Secret Network using these keys.

TEE is protected by CPU hardware:

1. It has high security isolation and provable characteristics.

2. It supports general CPU instructions and various contract virtual machine instruction operations.

3. It efficiently utilizes CPU-specific instruction sets to accelerate operations including encryption and decryption algorithms. 5. Secret Network's User Base and New Application Numbers Continue to Expand, Indicating Potential for Fundamental Growth (1) The number of on-chain transactions has been rising long-term, with a short-term increase due to the Shade airdrop. Data Source: Secretanalytics, Data as of March 5, 2022, time value is UTC 6:00, hence the low transaction volume shown on March 5. In the long term, with each market boom, Secret Network's daily transaction volume data has qualitatively improved. On February 22, the Shade Protocol project on Secret distributed airdrops, and on the 3rd, the transaction volume reached nearly 70,000.

(2) The continuous growth of on-chain addresses supports Secret Network's attraction to new users and institutions. Data Source: Secretanalytics, Data as of March 5, 2022 The number of on-chain addresses on Secret Network has been continuously growing. Since mid-December 2021, in less than three months, the number of new addresses on Secret Network has doubled, reaching a total of 120,000 unique addresses.

(3) The construction of cross-chain bridges is beginning to show results, with total TVL reaching $46 million and having 4 types of cross-chain solutions. Currently, there are 4 cross-chain channels on Secret: IBC, XMR (Monero), BSC, and ETH, with the Ethereum cross-chain bridge and cross-chain transaction volume being the largest proportion. With the short-term decline in transaction volume and insufficient incentives for cross-chain bridges, TVL is in a downward trend during this phase. Data Source: Secret Network (4) Projects and developer tools within the ecosystem continue to emerge. Data Source: Secret Network The layout of projects within the ecosystem is also thriving, with the recent official release of the GameFi project Legen DAO and the listing of Alter on DEX; developer tools are also gradually improving, with the Blackbox tool, continuous updates of Secret.js (a developer toolkit based on JavaScript), the good experience of the payment tool Secret Invoice Payments, and many new projects in development and verification stages, all supporting Secret Network's emphasis on its ecosystem and support for developers.

6. Based on Privacy Protection Technology, Secret Network Has the Following Highlights Compared to Other Public Chains (1) Privacy Solutions

The blockchain explorer provided by Secret Network allows viewing of on-chain transactions, but compared to the disclosed information in Etherscan, it can be found that important information about transaction behavior and interactions with protocols on the Secret chain (transaction addresses, transaction amounts, contract interaction methods) is hidden by default, achieving the necessary privacy functionality.

(2) The Ingenious Design of Viewing Keys

Secret Network cleverly provides the design of viewing keys as a solution for information tiering. Users with viewing keys can check all transaction information of a certain address, providing a new way for regulators, fund admins, and audits to participate. This method is more regulatory-friendly, offering an intermediary way to meet regulatory needs compared to Monero (Monero) being directly banned by the US.

(3) Prevention of MEV and Front-run Attacks

Unlike identifying methods to solve this issue, Secret Network's information encryption scheme inherently resolves MEV issues and front-running, as when users declare encrypted information to the system through the client, their information is already encrypted. On this basis, miners will not be able to learn user interaction details through transaction information in the mempool, thus having excellent MEV resistance.

(4) NFT Solutions with New Features

Secret has set up NFT solutions that are more attractive in terms of privacy, where its NFTs process information in tiers, dividing it into public information and private information. Before purchase, private information will be invisible. A reasonable use case would be a technical property or a video, where the complete segment cannot be accessed before purchase, and only after purchase can the real usage rights be obtained.

7. Token Economics

System security plays an extremely important role in Secret Network. If an attacker conducts a Byzantine attack on the network consensus layer, the security of on-chain transactions and cross-chain assets will be greatly challenged. To reduce the possibility of system attacks, Secret Network uses inflation, block rewards, and staking to lower the risk of attacks under the PoS consensus mechanism.

The system's set inflation rate is between 7%-15%, depending on the ratio of locked to unlocked SCRT tokens. If over 67% are locked, the more locked, the higher the inflation rate. Currently, it maintains an annual inflation rate of 15%.

The initial supply of the system is 70 million SCRT tokens, with a total supply of 190 million tokens. The current circulating supply is 163 million tokens, with new selling pressure mainly coming from the release of staking rewards, which are released at an annualized rate between 22%-27%. Therefore, there is expected to be no large-scale unlocking of tokens, and the overall token price should remain relatively stable.

8. Team Background, Execution Capability, and Other Supporters

One of the core development teams behind Secret is SCRT Labs (formerly Enigma, a Layer 2 scaling solution for Ethereum with privacy smart contracts), founded in 2014 by MIT graduates Can Kisagun and Guy Zyskind, making it one of the earliest projects and teams in the blockchain industry. Guy Zyskind (CEO of SCRT Labs) was previously a research assistant at the MIT Media Lab, researching and teaching blockchain technology. He authored the Enigma white paper (downloaded over 100,000 times) and the paper "Decentralized Privacy: Using Blockchain to Protect Personal Data" (cited over 200 times). Can Kisagun holds an MBA from MIT Sloan and a bachelor's degree in industrial engineering from Northwestern University, with rich experience in the business field, having worked at McKinsey for 3 years, mainly in finance and banking. Before Enigma, he also founded a fintech company in the blockchain field. Other members include Itzik Grossman (VP of Engineering), who has 5 years of experience in network and information security and software engineering. Other major contributors include Tor Bair (CEO of the Secret Foundation), who completed his MBA at MIT with Can Kisagun. Before pursuing graduate studies, Tor was a professional options trader, interned at Spotify, and worked as a data scientist at Snapchat, joining Enigma full-time in 2017. Carter Woetzel (Community Lead of the Secret Foundation) is the author of the Secret Network gray paper (assisted by Enigma), focusing on marketing and community management, with an emphasis on content creation. Additionally, Carter is the chief researcher and economist for Shade Protocol (a DeFi DApp connected to privacy protection), with its first product being Silk (a privacy-protecting algorithmic stablecoin built on Secret).

9. Horizontal Comparison of the Advantages of the Privacy Public Chain Industry Compared to Other Solutions Data Source: "On-Chain Privacy: By Default, For All, On Cosmos" From the above chart, we can see that privacy public chains have significant advantages in achieving decentralization, smart contract support, and cross-chain compatibility, which are the foundations of complete user privacy needs.

Trusted Execution Environments (TEEs) are already widely applied, such as fingerprint unlocking on mobile phones and biometric recognition. TEEs rely on trusted hardware facilities for security, depending on the trusted environment of the hardware and centralized hardware vendors, requiring trusted assumptions about the hardware, which may face side-channel attacks (SCA, a method of obtaining secret information from cryptographic devices). Its advantages include high flexibility, friendliness to general computing, and fast rates. The technology is relatively mature, and compared to other privacy computing solutions, TEE's overall strength is the closest to practical scenarios.

Zero-knowledge proofs have high credibility and can achieve complete anonymity, but some protocols also require trusted setups, relying on the generation of special random numbers. They can achieve flexible data computation interactions and cross-validation, but the implementation difficulty remains high. Currently, the efficiency of generating proofs is around 7 seconds, requiring substantial computing power to improve calculation rates.

Risk Analysis:

1. The security of BTC and ETH cross-chain bridges. The logic here is whether BTC whales are willing to put their coins into Secret Network. If the cross-chain bridge is attacked and causes losses, who will bear that loss? The trade-off between the benefits brought by privacy and the risks of the cross-chain bridge may lead whales to be hesitant to transfer large amounts of funds into privacy public chains.

2. The number of trading pairs and depth of mainstream coins on the DEX of Secret Network. Here, the Secret project team must go out sourcing and collaborate with some large DeFi whales to provide liquidity, and increase the annualized yield of mining to encourage retail investors to invest liquidity into the mining pools.

3. The regulatory acceptance of privacy. If the Viewing Key is not a viable accepted solution, then Secret Network's future scalability will face significant challenges.

Conclusion:

This article introduces the research framework and investment logic of the privacy public chain industry, as well as the leading advantages of the Secret Network project compared to its peers from an investment target perspective. With the continuous increase in the importance of the privacy industry, privacy public chains will undoubtedly become a favored segment of the Web 3.0 market for investors in the future, and early positioning is recommended!