Why Has the Privacy Sector Fared So Poorly? Nocturne Announces Shutdown
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Why Has the Privacy Sector Fared So Poorly? Nocturne Announces Shutdown
Strategic advancement of compliance and privacy is essential for sustained implementation.
Navigating Web3 tides with focused insightsAuthor: Haotian
Three months later, @nocturne_xyz—an infrastructure project focused on privacy that previously received investment from @VitalikButerin—has announced it is shutting down. The team will pivot toward developing other new products. After Tornado was penalized and exchanges delisted privacy coins, we had hoped privacy projects might still find a way to thrive on-chain. Now it seems that optimism was misplaced. Why? Without elaboration, here’s a brief analysis of possible reasons.
1) In a mainstream context where public blockchains, digital wallets, decentralized exchanges, and other “decentralized products” are already difficult to rationally accept, layering a “privacy” use case atop decentralization makes such projects inevitable targets for regulatory scrutiny and compliance risks.
Under these conditions, privacy-focused projects are often seen as enablers of terrorist financing, money laundering, and other illicit activities. They attract “special attention,” especially in countries with strict crypto regulations, where they may even be treated as adversarial entities. Given this reality, can VC-backed projects realistically withstand government scrutiny and persist in building such systems? The likelihood of teams giving up under pressure is high.
2) Current privacy projects typically create an isolated "black box" environment. Users deposit assets into this black box, then utilize stealth addresses, commitment trees, zero-knowledge proofs (ZK), etc., within the system to obscure token trails. Generally, the larger the pool and user base, the better the privacy conditions become. However, these solutions usually handle compliance through methods like blacklist filtering or proof of innocence—which work reasonably well at entry points—but if funds exit and later appear linked to stolen or illicit flows, serious complications arise.
3) Crucially, switching transaction environments at the infrastructure level requires users to first deposit assets into a dedicated privacy mechanism before any further operations can occur. This means platforms must not only tackle the technical challenge of screening all potentially illegal transactions but also face operational struggles due to slow user growth and difficulty scaling the liquidity pool. They must operate under constant threat of regulatory penalties while simultaneously convincing users of their fairness and resistance to censorship. Right now, achieving the latter may be even harder than avoiding regulatory missteps.
On this topic, I discussed with Madao from another privacy project @ZKTNetwork, and we both agreed that implementing a rigorous privacy product in practice is extremely complex. Some teams may abandon development midway due to R&D pressures.
4) Nocturne stated in its announcement that Layer2 and Account Abstraction (AA) must precede privacy applications. Many people don’t fully grasp why—because Layer2 and AA are foundational infrastructures necessary for mass adoption. The underlying implication is clear: before large-scale adoption arrives, privacy solutions are more likely to enable malicious actors than to serve genuine privacy needs. This logic isn't hard to follow. In today’s market, most users prioritize the financial attributes of DApps rather than privacy as a primary concern.
5) In my view, compliance issues for privacy projects must be resolved before addressing privacy itself. There must first be a comprehensive strategy to block the circulation of illicit assets. Only then should we address end-user privacy demands. Once Layer2 ecosystems grow significantly, Layer3 application environments built atop them could give rise to privacy solutions that satisfy both regulators and market users. Within app-level contexts, regulation becomes more feasible, fund isolation easier, and user management more effective. At that point, privacy applications could become viable onboarding gateways for mass users entering the blockchain world, and mainstream preferences would drive the expansion of privacy-focused DApps.
Rather than relying on privacy to bring about mass adoption, wouldn’t it be more realistic to advance privacy *after* mass adoption has occurred?
In short, the privacy transaction space inherently faces legitimacy constraints. Under current circumstances, a strategic approach prioritizing compliance over privacy is the only sustainable path forward. Who will ultimately claim the holy grail of the privacy sector? It’s undoubtedly a challenging journey ahead.
Note: The privacy sector is niche and sensitive. Will @Railway—the other project mentioned by Vitalik—be affected too?
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Haotian | CryptoInsight
