What does information asymmetry cost users?
Blockchain as a technology was originally designed to be transparent by default. This focus cannot be compared to today’s Web 2.0 companies, which have closed ecosystems and capitalize on the user’s extracted information.
Not so long ago, an open alternative for this system appeared — public blockchains. By default, Bitcoin and Ethereum are considered transparent, all users have equal access to data on the network. One could say that public blockchains destroy the information asymmetry that holds Web 2.0 monopolies. But, unfortunately, networks that talk about transparency by default create their own information asymmetries, which are costly to network participants.
Asymmetry and public networks.
Transactions taking place on public blockchains can be seen by all users, regardless of whether they are active participants or not. The openness of the networks does not give rise to a monopoly of user data by companies, as is the case everywhere today.
Everyone who sends a transaction on the chain reveals their ideas to the rest of us in the system, which allows strangers to get more information about our actions in domestic and economic terms than we want. What gives other members of the network to earn on it. This really happens and is very costly for users.
Considering trading, a common use case for DeFi, critics of centralized exchange brokers say that these organizations sell order flow to hedge funds, which can then manage user trades. On Ethereum, anyone can track order flows. As a result, it is easy for self-interested people or programs to benefit from the public data of an open blockchain.
A specific example of this problem is “running ahead”. It describes an algorithm in which bots monitor pending transactions on an Ethereum stream for arbitrage opportunities. For example, a program can recognize a profit opportunity before making large transactions on a decentralized exchange. An increased oil price is offered, after which the miners execute their transactions faster than the expected DEX transaction. As a result, the profit from here is transferred to the launched bot at the expense of the initial trader.
Miner Extractable Value (MEV) helps miners stay ahead of the curve. MEV refers to the amount of profit that ecosystem miners can extract from the network by reordering the mempool to perform transactions that benefit the miner. Miners can optimally place their trades if they recognize that pending transactions involve a significant number of transactions between a pair of tokens on the DEX.
Simply put, anyone who operates on the public blockchain network suffers from greedy participants in the system. Decentralized networks are much fairer than those available through centralized alternatives. However, the examples above show how information asymmetries make users pay in decentralized systems. Public networks are eliminating centralized gatekeepers, but now users are facing potentially more adversaries who use our data at our expense.
The solution is complete privacy by default.
The networks, which are transparent and private by default, guarantee that no data is used or misused, but they make it impossible to develop and run powerful decentralized applications. Absolute confidentiality excludes the possibility of layout. In an open network with data transparency, smart contracts autonomously interact with and access information on the network.
Privacy is non-binary. It covers the whole spectrum and in the social plan has a different significance. For example, when you donate to charity, you may not mind having your payment details disclosed, but you probably don’t want your salary to be made public.
Such a choice should be for people who use blockchain networks for transactions. To date, the ecosystem does not provide such an opportunity. There is no choice of the degree of privacy disclosure, there is no choice to refuse the transparency of the network. The solution fits into the elements of the question — a network that defaults to opt-out privacy, where transactions are automatically made completely private, but allows users to selectively decide what to make public to ensure that a powerful and performant decentralized system can still be built on top of the protocol.
Opting out of default privacy in Aleo.
Information asymmetry is costly for users. Complete privacy weakens the features of public blockchains such as Bitcoin or Ethereum, which prevents contracts from being drafted.
The best solution is a decentralized web that is defined by privacy opt-outs, giving users the choice of what information they want to share and with whom. If none of the parties can use the posted information for greedy purposes, no one will be able to carry out unfair actions, which will return control to the hands of users, who themselves will decide the direction of their interactions in the web space.
The Aleo platform exists specifically to address information asymmetries through the use of zero-proof knowledge. Aleo’s Zexe provides programmability and privacy.