TL;DR:
COTI brings privacy to Ethereum using innovative technology called garbled circuits
This breakthrough addresses key privacy issues holding back widespread DeFi adoption
Use cases include private transactions, secure trading, and regulatory compliance
COTI solves MEV exploitation and enables advanced DeFi products such as private AMMs, and integration of real-world assets
Privacy-preserving solutions like COTI’s are set to unlock DeFi’s full potential
Decentralized finance (DeFi) is rewriting the rules of global finance.
DeFi has unleashed a wave of financial innovation. By enabling direct peer-to-peer transactions DeFi removes financial intermediaries such as banks, promising to democratize access to financial services and slash costs.
The disruptive potential of DeFi is evident in its explosive growth, with Total Value Locked exploding from $700 million in January 2020 to a peak of $180 billion by November 2021. Since then, growth of the sector has stalled. One of the barriers between DeFi and mainstream adoption is a lack of user privacy. Essentially, all transactions and activity on the blockchain are transparent for all to see and monitor which is hindering broader adoption.
COTI addresses this challenge head-on, bringing confidentiality to Ethereum through a ground-breaking implementation of garbled circuits. This breakthrough has far-reaching implications for DeF;, solving the privacy issue can unlock the sector’s true transformative potential.
In this article, we’ll dive into how COTI’s privacy tech addresses these challenges, exploring practical use cases that demonstrate its power to reshape DeFi and drive mainstream adoption.
The lack of web3 privacy in DeFi is a serious barrier to adoption
DeFi’s radical transparency, while groundbreaking, creates a double-edged sword that threatens its own growth and adoption.
While transparency is useful for some purposes — such as tracking exploits, hacks, and money laundering — it also creates a complex web of challenges for both users and institutions that go beyond simple data exposure.
One of the biggest problems for DeFi users at the moment is with Maximal Extractable Value (MEV) exploitation. These attacks occur when bots analyze pending transactions in the public mempool and manipulate their order or timing for profit. (MEV) bots extract anywhere from $300 to 900 million every year from DeFi and 2023 analysis of 270,000 MEV attacks found that smaller transactions (under $2,000) were disproportionately targeted, hitting retail investors hardest.
Another major hurdle facing DeFi is regulatory compliance. The decentralized nature of blockchain transactions has created an ongoing tension between compliance and financial freedom. The technology makes it challenging to implement traditional financial safeguards and monitoring systems. This makes it very difficult for DeFi protocols to meet regulatory requirements, and in the worst case, this lack of regulation compliance can shut entire industries down, such as the p2p lending industry in China.
The position of authorities is clear, “DeFi protocols may offer […] virtually none of the oversight that regulators require to ensure safe and efficient financial markets,” warns Rick McDonell, former executive secretary of the Financial Action Task Force. “The lack of effective surveillance creates a substantial risk for fraud, money laundering, sanctions evasions and other criminal activity within these markets.”
The public nature of DeFi transactions doesn’t just affect individual or institutional privacy — it also creates systemic risks. Attackers can analyze smart contracts to identify and exploit protocol vulnerabilities, leading to large-scale hacks like the Euler Finance hack in 2023, which resulted in a loss of approximately $197 million.
Then, for traditional financial institutions, client confidentiality poses a significant barrier to DeFi adoption. Financial institutions manage vast amounts of sensitive client data. The current lack of privacy in DeFi makes it nearly impossible for them to participate without violating client confidentiality agreements and regulatory requirements like GDPR or financial secrecy laws.
The need for privacy and regulatory compliance has also led some DeFi projects to implement more centralized solutions that undermine the key advantages for blockchain. Aave Arc is an example of this trend. It’s a permissioned version of the Aave DeFi lending protocol that requires participants to undergo KYC/AML checks through approved whitelisters. While this allows institutions to access DeFi in a compliant manner, it introduces a centralized element of control and verification, contrasting with DeFi’s original promise of open, permissionless access.
Lastly, many advanced financial products require confidentiality to function effectively, which stifles innovation in the DeFi industry. Without privacy, entire categories of DeFi applications — from undercollateralized lending to dark pools for large trades — remain challenging or impossible to implement securely.
The DeFi sector stands at a crossroads. Its revolutionary potential is clear, but so are the risks posed by its lack of privacy.
Without solving these challenges, DeFi may struggle to reach mainstream adoption or face harsh regulatory crackdowns. The industry needs a solution that can protect user privacy, enable compliance, and nurture innovation — all while maintaining the transparency and decentralization that make DeFi powerful.
This is where COTI comes in.
COTI’s breakthrough in web3 privacy for DeFi
COTI is designed to tackle the privacy challenges in DeFi head-on through its unique implementation of garbled circuits technology, a cryptographic technique that enables secure multi-party computation.
COTI enables a new generation of privacy-preserving DeFi primitives such as private transactions, smart contracts, AMMs, and lending protocols. These primitives form the building blocks for more advanced DeFi applications that were previously impossible due to privacy constraints.
This ground-breaking technology allows for:
Encrypted on-chain data storage: Sensitive information remains protected even on public blockchains.
Selective information disclosure: Users control what data is shared and with whom, enabling compliance without compromising overall privacy.
Verifiable computations on private data: Prove properties about encrypted data without exposing all its details.
Secure multi-party interactions: Enable private transactions and data sharing between multiple parties.
COTI is fully EVM compatible, offering significant advantages over other privacy solutions in Web3, such as zero-knowledge (ZK) proofs and fully homomorphic encryption (FHE). The innovation of Garbled Circuits (GC) is providing faster and cheaper computation at lower latency.
GC has smaller storage requirements, enabling COTI to run on any device, from smartphones to high-powered enterprise servers. This opens up the possibility of privacy for DeFi at scale, which is a game-changer for the sector.
Transforming DeFi with web3 privacy
COTI offers up a new world of possibilities for DeFi. Let’s take a look at what’s set to change.
Eliminating MEV and front-running
Now: Traders and protocols lose billions to MEV extraction and front-running bots due to the public nature of pending transactions in the mempool.
With COTI: Transaction details remain encrypted until execution, making it impossible for bots to front-run trades or extract value through MEV. This creates a fairer trading environment and potentially saves users billions in lost value. MEV becomes obsolete.
Enhanced trading strategies
Now: Sophisticated traders are hesitant to use on-chain DeFi because their strategies become public, which can damage their competitive advantage.
With COTI: Traders can execute complex strategies without revealing their positions or tactics. This includes running private automated trading bots, implementing stop-loss orders invisibly, and participating in copy trading without exposing the underlying strategy.
Regulatory compliant DeFi
Now: Institutional players struggle to participate in DeFi due to regulatory requirements around customer data protection and financial privacy.
With COTI: Protocols can implement selective disclosure, allowing for necessary compliance checks without exposing all user data publicly. This opens the door for institutional adoption, bringing much-needed liquidity and legitimacy to the DeFi space.
Real World Asset (RWA) integration
Now: Bringing real-world assets on-chain is hindered by privacy concerns and regulatory requirements.
With COTI: Tokenized real-world assets can be traded, used as collateral, or integrated into DeFi protocols while maintaining necessary confidentiality. This could unlock trillions in RWA liquidity for the DeFi ecosystem.
Advanced DeFi primitives
Now: Many sophisticated DeFi products are impossible to implement securely due to the lack of privacy.
With COTI: we will see new DeFi primitives emerge, such as:
— Private AMMs that protect liquidity providers’ strategies
— Undercollateralized lending based on private credit scoring
— Dark pools for large, multi-party trades without market impact
— Confidential on-chain options and derivatives trading
By enabling these use cases and more, COTI is paving the way for on-chain privacy, creating a more mature, efficient, and inclusive DeFi ecosystem.
COTI — The future of web3 privacy in DeFi
COTI addresses a critical need in DeFi: robust privacy protection.
By enabling confidential transactions and regulatory compliance, COTI can open the door to broader adoption and innovation in the DeFi ecosystem, from MEV-resistant trading to undercollateralized lending. All of this is achieved while maintaining the core benefits of decentralized blockchain.
As COTI integrates with the broader DeFi landscape, it will contribute to a more secure, efficient, and accessible decentralized financial system. The future of finance is both open and private — COTI is at the forefront of making this vision a reality.
Stay COTI!
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How Web3 Privacy with COTI will Revolutionize DeFi was originally published in COTI on Medium, where people are continuing the conversation by highlighting and responding to this story.
