Why do we lock our front doors? Bringing Financial Privacy to Blockchain

Why do we lock our front doors? The same reason we need privacy in blockchain — to protect what’s precious to us. But how can we achieve this in the digital age?

9 min readFeb 19, 2025

Introduction

While traditional banks already know our transaction history, there’s a crucial difference with blockchain transactions. When your bank sees your transactions, this information stays private between you and the bank. However, on a public blockchain, once your address is linked to your identity, anyone can see your entire financial history — past, present, and future.

Here’s a practical example: John, a freelancer, receives payment through cryptocurrency. Currently, when he pays his rent, his landlord can trace all his other transactions through that same address. A simple solution might seem to be using different addresses for each transaction, like having multiple bank accounts. However, when you need to combine funds from these different addresses or show proof of your total assets, the connections between these addresses become visible, revealing your entire financial network. This is why Penumbra offers a more comprehensive solution — it keeps your transactions private while still allowing you to prove your financial status when needed, similar to how you can show bank statements to specific parties while keeping them private from everyone else.

Overview

With expansion in DeFi, the initial question generally is whether and how well it can be audited and how transparent it can be, and sometimes at the cost of privacy. Most use cases and users involving finance have extremely high requirements for privacy. This leads us to an issue of highest priority: how do we ensure privacy along with transparency which DeFi offers? To solve such privacy issues, Penumbra brings a novel solution that tries to keep financial activity private yet at the same time preserve the benefits of DeFi.

It is possible to keep track of one’s investment, trades, or value in blockchain and crypto in a variety of ways. As an example, Bitcoin and altcoins contain openly available ledgers (read more about leadrers) with every single transaction. You can inquire about those transactions which are related to digital addresses, and you can trace them from account to account. If the internet address of someone is connected to their real name because they provided their name on a site or blogged on social networking sites, then all people can view their account balances and past transactions. There are certain companies whose work is to sort through this data to try to determine who certain users are.

Penumbra is a decentralized system with no single authority. It tries to resolve privacy concerns without compromising on the openness and versatility of DeFi platforms. Now let us learn how Penumbra presents a new solution that is uniquely suited for the DeFi landscape. Read more

What is Penumbra all about?

Penumbra is a decentralized platform that is all focused on financial privacy and still maintaining the open and transparent atmosphere of DeFi networks. It uses something known as zero-knowledge proofs, specifically zk-SNARKs , to allow you to conduct private transactions and engage on its network. That means tha t all your transactions are validated and secure, but the finer details like what assets you hold, how much, and with whom are hidden.

Penumbra is a private trading blockchain in the Cosmos ecosystem, which is meant for those who really value their privacy. You can carry out all types of DeFi actions like bridging, swapping, and staking without worrying about security issues or disclosure of your information. Penumbra interoperates with Cosmos through Inter-Blockchain Communication (IBC), which allows you to exchange any assets that are IBC-compatible safely and privately. Unlike other privacy protocols where you decide what transactions you want to keep private, all transactions on Penumbra are private by default. It creates a unique safe haven within the Cosmos universe. In addition, it allows you to disclose details to authorized third parties if you wish to do so.

While the technology of Penumbra is extremely advanced, it is not so complex to understand.

Explaining Penumbra in Simple Terms

Penumbra is basically an online personal banking facility where you can manage your funds without anyone else seeing the information. It utilizes technology in the form of **** zero-knowledge proofs (zk-SNARKs) that conceals what types of assets are being utilized, how much of them exist, and who is involved. So, everybody can see that the transactions are valid and secured, but no one is aware of the specifics except those immediately concerned. This way, Penumbra has the advantages of both worlds: it makes your financial transactions secret while being open like all other digital finance platforms.

Now that we’ve described what Penumbra is, let’s discuss why privacy is so important in the digital finance world.

Why Do We Need Trading Privacy in the Digital Currency World?

Now that we’ve explained what Penumbra is, let’s talk about why privacy is so crucial in digital finance.

Financial Privacy: Just as in the case of conventional banking, people want their financial transactions to remain private. This helps to protect against scams and unwarranted attention. For example, in 2014, the Mt. Gox exchange hack exposed the Bitcoin holdings of many users, leading to targeted attacks. Read more
Personal Security: Keeping transaction history private reduces the chances of theft or harassment. When in 2016 a hacker stole $65 million worth of Bitcoin from Bitfinex customers, they also became targets of further exploitation. Read more
Market Manipulation Protection: When others are aware of your trading activities, they can influence the market. For instance, in 2017, a “Whale” phenomenon was witnessed when large Bitcoin holders were manipulating prices by making huge trades. Read more
Independence and Autonomy: Privacy allows people to engage in trade without government notice or interference. Activists used cryptocurrencies in 2020, during the Hong Kong protests, so they wouldn’t be tracked by the government. Read more
Competitive Advantage: Businesses keep their trades private in order to remain competitive. Goldman Sachs was going to open a cryptocurrency trading desk in 2018 , leaked document news had revealed. It would have benefited their competitors if it were out in the open.
Avoiding Price Slippage: Large transactions can move prices if others know about them. In 2021, Tesla’s announcement of buying $1.5 billion worth of Bitcoin caused a price surge , which could have been avoided with more anonymity.
Regulatory Compliance: Privacy helps in adhering to laws that protect sensitive data. An example is the GDPR in Europe, which requires rigorous data privacy, including financial transactions. Penumbra’s privacy features allow selective disclosure, which helps users attain compliance without exposing superfluous information. Having established the need for privacy in digital finance, let us proceed to understand how Penumbra achieves this with its fundamental features.

Core Features of Penumbra

To be able to cater to the need for privacy, Penumbra has several features that are designed to ensure information remains private.

Penumbra DEX: At the center of Penumbra’s platform is the decentralized exchange (DEX). This allows for secure, private, and efficient asset trading. Unlike regular DEXs, where the terms of the trades are revealed on the blockchain, Penumbra’s DEX uses zk-SNARKs to ensure all trades are totally private. This implies that what assets, how much, and who are involved are not disclosed. Furthermore, Penumbra’s DEX interfaces with the Cosmos network through Inter-Blockchain Communication (IBC), which allows users to trade any assets supported by IBC anonymously. This makes Penumbra useful for individuals who desire to perform DeFi actions without revealing their trading strategies or money conditions. Let’s discuss other key core values now:
Private Trading: Penumbra enables individuals to trade assets on a completely private basis, such that the terms of the transaction are not visible to third parties.
Staking with Privacy: Individuals can engage in staking mechanisms without divulging their holdings or identity, which provides an additional layer of safety to the participants.
Private Liquidity Pools: Penumbra allows people to form private liquidity pools. This means they can supply liquidity without their activity or what they supplied being made public.
Decentralized Governance: Penumbra uses a private voting system. This allows stakeholders to vote on proposals without what they voted for being made public. All of this is achievable due to advanced cryptographic technologies. Let us take a closer look at the technical innovations underpinning Penumbra.

Technical Innovations in Penumbra: How Penumbra Provides Financial Privacy

Discussing the features of Penumbra brings us to the technology underpinning them. There are advanced technologies behind these robust features to ensure privacy.

zk-SNARKs: zk-SNARKs **** are a special kind of zero-knowledge proof. They enable one person to prove something is true to another without conveying any other information. For instance, Alice can prove she has enough money for a transaction without divulging her full balance. Read more
Sapling Protocol: Sapling protocol borrows concepts from Zcash technology to improve Penumbra. It assists in making fast and private transactions. It facilitates easy transactions that conceal details and enhances the capability of maintaining privacy for numerous transactions. This implies users can make transactions faster without compromising on privacy, making the system robust enough for many individuals to utilize. Read more Penumbra technology is very interesting, but the most significant part is how it works in daily life. Let us see how it helps us in our day-to-day money problems.

Real-World Applications of Penumbra: Examples

With the technology out of the way, let’s go over how Penumbra’s privacy benefits apply to everyday life.

Private Asset Management: Individuals and financial institutions can both use Penumbra to privately manage their assets. For example, a hedge fund can trade and manage large portfolios without revealing their investment strategy or the size of their holdings, preventing market manipulation and competitive disadvantage. More details can be found here.
Compliance and Regulatory Adherence: While Penumbra is focused on user privacy, it is also constructed to be regulator-friendly. Through its selective disclosure capabilities, a firm might, for example, show financial soundness or adherence to anti-money laundering regulations to regulators without revealing confidential business data. For example, during an audit, a firm might show that it has adequate reserves without revealing the specifics of its holdings. More details can be found here.
Cross-Border Transactions: Penumbra can facilitate international financial transactions in a more efficient and private manner. Think of a business that needs to pay an overseas supplier — Penumbra could execute this payment anonymously and instantaneously, without the high fees and intense regulatory oversight typically accompanying cross-border transactions while maintaining strict privacy safeguards. More details can be found here. While Penumbra offers revolutionary solutions, there are also some challenges to overcome.

Challenges and Future Directions

Penumbra is bringing some new solutions, but it also has challenges of its own. It is doing great in DeFi privacy, but there are challenges like getting approval from regulators and having many users. It needs to figure out how to provide privacy and still fit into the rules, which is tricky for most privacy technology. Read more

As Penumbra grows bigger, it will need to be integrated with other DeFi platforms and blockchains in a way that it becomes more user-friendly. Future upgrades will probably be a more user-friendly interface, quicker transactions, and cheaper transaction fees for transactions that are private.

In spite of these challenges, Penumbra can help make DeFi privacy better.

Conclusion

Alright, let’s get this straight: Penumbra has some rough times ahead, but it is evident that it has the potential to transform DeFi privacy for the better. They are building a healthy niche in DeFi by embracing privacy without sacrificing decentralization and transparency. As DeFi continues to grow, platforms like Penumbra will be tasked with making financial privacy a staple of the whole blockchain ecosystem.

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Note: While we strive to provide the most accurate information, cryptocurrency investments come with inherent risks. Always conduct thorough research before making any investment decisions.