The main privacy challenges facing Web3 and how to overcome them

Despite Web3's groundbreaking potential and achievements to date, security and privacy are two key challenges that must be overcome for its overall success. While some promising work has been done for this purpose, the basic principles of Web3 – decentralization, trustlessness, and user autonomy – do not align with the current privacy/security environment. New approaches are needed to address Web3's privacy challenges. Thankfully, the web3 ecosystem itself unlocks the tools needed to make a robust and user-centric privacy system a reality.

This article guide:

What makes web3 privacy unique?

The main challenges to web3 privacy

How to overcome the privacy challenges of web3?

Towards a general privacy orientation

What makes web3 privacy unique? **

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A closer look at the core nature of Web3 can help you gain a deeper and more nuanced understanding of the key challenges discussed below. In general, one might think that privacy-related risks are a direct result of over-centralization.

Platforms like Meta (formerly Facebook) and other web2 giants have almost complete control over users' data. Most of the data is stored in a central server, often becoming a single point of failure. In addition, the Cambridge Analytica scandal of 2019 exposed how Zuckerberg's "vision of privacy" was a scam. But this is not a one-time situation – unfortunately, it is almost the norm.

Instead, Web3 promises community-driven control. This requires distributed data storage as well as decentralized governance. However, this also means that no one is particularly responsible for ensuring security or privacy. In a trustless ecosystem world, autonomous users are in control of almost everything. This includes keeping sensitive information secure.

When "your keys, your assets/data" became the motto, the ball of privacy mostly fell on the user's court. For example, given the immutability of Web3 transactions, losing a private key often means an irreversible loss. Web3 wallet addresses are ideally anonymous, which means that malicious actors are often not traceable.

"While decentralization is a goal worth working towards, the reality is that privacy concerns in decentralized systems are more important. In web2, Google and Facebook can see all your data and metadata (bad), but in web3 it can probably be seen by anyone (worse!). ）。 Sebastian Bürgel, founder of HOPR: BeInCrypto

These are some of the fundamental conflicts that innovators must resolve.

Key challenges to web3 privacy

In 2022, more than 167 major attacks cost nearly $3.6 billion from the web3 space, a 47.4% increase from 2021. According to security firm Certik, at least 74 of these incidents pose a long-term risk of data breaches that pose a serious threat to the privacy of web3.

Web3's internal conflicts over privacy can be resolved through innovation. It's just a matter of time. But there is a growing need to comply with global privacy regulations, such as the European Union's General Data Protection Regulation (GDPR) and the recommendations of the Financial Action Task Force (FATF).

They mostly assume that a particular entity collects, owns, and stores data generated through user interaction. This puts web3 businesses in a difficult position and introduces a new set of challenges:

1. Data Monitoring Obligations

Existing Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations require companies or platforms to collect and monitor user data. This is designed to help identify and report suspicious activity, protecting users and national interests. Similarly, companies must also issue "notices" informing users of how their data is collected, used, and stored.

Ideally, the web3 protocol doesn't collect user data at all, let alone monitor. But even if they do collect any data, it's mostly transparently stored on public blockchains. No specific entity other than the users themselves owns this data, making it difficult or even impossible for businesses or service providers to comply with regulations.

But at the same time, storing data on a transparent blockchain is a problem in itself. Anyone with an internet connection and other tools can access sensitive information stored on a public blockchain. From a privacy perspective, this level of exposure is undesirable, especially since malicious actors in the field are constantly developing new ways to exploit the system.

2. Maintain the user's choice to "opt-out"

Clicking "Don't Accept," "Disagree," or similar options provides a way for legacy users to "opt out" of data collection and sharing mechanisms. The jury is still out on whether this requires meaningful consent from the user's side. But regardless of its effectiveness, this gives users an option. However, this also requires some entities to control the data collection process.

When a user interacts with the unmanaged web3 protocol, the underlying blockchain automatically verifies and records the transaction. This is a code-driven process based on the principles of game theory. Under normal circumstances, no one, even the counterparties involved, can tamper with this data. That's what makes these systems so powerful.

No choice is given in web3. Instead, it is embedded in the system in a bottom-up manner. As a result, when regulators ask web3 companies to offer something they don't have, many companies fail to comply.

3. "Destroy" User Data

In addition to opting out, users can "destroy" or delete their data in accordance with existing regulatory requirements. For these reasons, this is again a challenge in Web3. Blockchain is irreversible for a reason, and even better if it wasn't.

Even when working with centralized or semi-centralized entities in a web3 space, users cannot expect their data to be compromised. At least not the part that is verified and recorded on the blockchain. Still, they can control who has access to this data, which is groundbreaking.

Since blockchains store all data in an encrypted format, a unique private key is required to access them. As a result, users can effectively revoke access to information from third parties, but deletion is not possible as required by regulatory authorities.

How to overcome the privacy challenges of web3? **

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Establishing a decentralized threat monitoring and risk assessment system is one possible solution. Thanks to the rapid development of artificial intelligence, innovators now have a very wide range of space to explore such critical infrastructure. More than 73% of web3 marketers, as well as other stakeholders, are already using AI in various ways. Prioritizing ethical and privacy-related considerations will drive this area forward in unforeseen ways.

In addition to adopting AI for intelligent threat identification, etc., inventing and improving web3 primitives is also crucial. For example, zero-knowledge proofs are a great way to ensure that data is shared or verified without revealing the actual content. This can work wonders while balancing Web3 basics with privacy needs.

Furthermore, since traditional social media platforms have been highly notary to privacy leakage PoVs, building a privacy-focused decentralized alternative could be a solution. As a result, platforms like Verida are building autonomous data infrastructure for web3 to help users own their data through encrypted document databases.

What must happen when privacy-first innovations are implemented? **

When privacy-first innovations emerge, web3 users must also ensure that they learn and use general security-enhancing practices: use strong passwords, avoid public Wi-Fi and centralized platforms, verify suspicious links (if any) before clicking on them, etc. These are very, very important because losing the private key in web3 cannot be recovered.

Finally, in the face of external challenges, regulators (and users) must deepen their understanding of EEB3. Their expectations must be realistic for the industry to comply. It is necessary for all parties to grow and develop over time, moving away from traditional mindsets.

Web3 brings a new world with completely different rules. On the one hand, regulators need to act accordingly, rather than taking the typical one-size-fits-all approach.

“...... Cooperation between developers, innovators and policymakers is essential. A regulatory framework that supports user privacy, data protection, and innovation must be established to facilitate the growth and adoption of the platform. --Chris Were, founder and CEO of Verida

Towards General Privacy Orientation

Web3 privacy challenges must be addressed urgently. Unlike web2, over time, web3's privacy cannot be reduced to mere lip service. Industry stakeholders must instill a general orientation to privacy from the start. Importantly, users must demand privacy at all costs, even if that initially means navigating a more complex user experience and a steeper learning curve.

New-age tools, coupled with secure data storage and authentication methods, will play a key role in this process. Web3 is still in its early stages, so the core components as well as the user experience will certainly improve in the coming years. Innovation in this area is already underway. It's not a question of if, it's a question of when privacy comes first.