Why DeFi Isn't As Anonymous As You Think, But Definitely Becoming More Private As Web3 Evolves

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The words “decentralized finance” or “DeFi” are among the most talked-about topics these days, especially if you’re an active member of the blockchain and crypto communities. 

DeFi (short for decentralized finance) is an umbrella term that covers a diverse range of “decentralized” financial products and services. Powered by blockchain and distributed ledger technology (DLT), DeFi cuts out the intermediaries and service providers prevailing across traditional financial services models.

Despite the hype, a lack of privacy has emerged as one of the biggest challenges for the evolving DeFi sector. By design, blockchain records all transactions on distributed ledgers. These records are immutable and can be accessed by anyone. While most of the user’s details remain private, it is still possible to identify transactions and trace them back to users, implying that DeFi isn’t quite as anonymous as previously thought.

Currently, DeFi trading strategies are single-use. Once someone executes a profitable trade, it is recorded on the ledger for the world to see. As the DeFi market expands, so do wallet monitoring capabilities and the number of analytics platforms, leading to a perpetual cycle of investors and traders stalking on-chain transactions. This, in turn, has impacted deep-pocketed players, like the whales and institutional investors, who now have to go to extreme lengths (like splitting their assets across multiple accounts) to keep their strategies private.

For DeFi to reach mass adoption levels, privacy is critical. At the same time, it is also important to realize that privacy and