Original author: Oluwapelumi Adejumo
Original compilation: Chopper, Foresight News
TL;DR
- While the current ETH market is sluggish, privacy coins are defying the trend and strengthening, prompting Ethereum developers to expedite the implementation of native privacy features.
- Ethereum's on-chain asset balances and transaction records are completely public, which not only deters institutional investors but also undermines its core competitiveness as the industry's default settlement layer.
- Industry insiders state that Ethereum's privacy features must be launched within 12 months; otherwise, they will remain at the research stage, and user traffic and attention will continue to be captured by competitors.
As market funds gradually shift towards privacy-focused assets, coupled with issues like negative publicity and ambiguous development positioning, Ethereum is struggling to retain investor attention. In response, developers are working at full capacity to equip the world's largest smart contract public blockchain with native privacy capabilities.
Year-to-date, ETH price has fallen approximately 30%, recently trading around $2,000; in contrast, Zcash (ZEC) has achieved double-digit gains, creating a stark divergence in their price movements.
This market contrast has turned privacy protection from a long-term vision of the cypherpunk community into a mandatory product goal that Ethereum must deliver on schedule.
Currently, Ethereum still dominates stablecoin settlement, asset tokenization, decentralized finance (DeFi), and Layer-2 ecosystems. However, the completely public nature of on-chain data poses a major pain point for both retail users and institutions, as asset balances, counterparties, and transaction histories are publicly traceable in real-time.
Tom Dunleavy, Head of Venture at Varys Capital, is highly optimistic about Ethereum's privacy upgrade but emphasizes the need to accelerate progress: "I am extremely bullish on Ethereum's implementation of privacy features, but the entire solution must be launched within 12 months, otherwise it will lose all significance. Ethereum is now in a fierce product race, facing competitors with strong funding, execution capabilities, and industry resources that Ethereum currently lacks. Only by delivering on time can it avoid being left behind."
This warning comes as Ethereum's market position is already under pressure. Data from GSR Research shows that blockchain sector revenue is increasingly flowing to competitors like Solana, Tron, and Hyperliquid; the ETH/Bitcoin price ratio has also fallen to its lowest level since mid-2025.
Blockchain Quarterly Revenue, Source: GSR Research
Data from CryptoQuant also reflects the crisis, showing that medium and small Ethereum holders are exiting on a large scale. Over the past three years, wallets holding between 100 and 1,000 ETH have seen their total holdings nearly halve, dropping from a peak of 16.2 million ETH in 2023 to about 8.75 million currently.
Large holders are also reducing their positions. Addresses holding 1,000 to 10,000 ETH, which fueled the 2024 ETH rally, have been gradually decreasing their holdings since late last year.
Ethereum Holder Balances
The capital outflow cannot be entirely attributed to the rising demand for privacy, but amidst increasing interest in privacy assets and investors actively seeking catalysts to boost ETH's price, the loss of holdings further intensifies the developmental pressure on Ethereum.
Privacy Has Become the New Main Theme in the Crypto Market
While Ethereum focuses on privacy features, a consensus is forming across the industry: financial privacy will dominate the next major crypto market cycle.
A recent Grayscale Research analysis points out that the digital asset industry is on the verge of a third wave of widespread focus on financial privacy.
Search Volume for Financial Privacy on Google, Source: Grayscale
This trend is driven by the widespread adoption of stablecoins, the implementation of on-chain applications, and the rapid development of artificial intelligence technology. Grayscale warns that AI tools have given rise to more sophisticated financial tracking methods, while on traditional public blockchains, asset balances, counterparties, and transaction histories are permanently public.
The market's demand for privacy does not come solely from those seeking complete anonymity; it is also a normal desire from the general public and businesses to keep financial information confidential.
Ordinary users do not want their spending records made public; businesses need confidentiality for supplier payments, salary disbursements, and company fund flows; various institutions simply cannot accept having their wallet address structures analyzed in real-time.
However, implementing privacy features also requires weighing commercial trade-offs. Historical experience shows that strong privacy attributes often reduce asset liquidity and create obstacles for exchange listings, regulatory compliance, and wallet integration.
Despite these challenges, Barry Silbert, Chairman of Grayscale Investments, has stated that the era of privacy in the digital asset industry has officially arrived.
Privacy Coins Begin to Dominate the Crypto Industry
The shift in market focus is vividly reflected in price performance: over the past year, ZEC's market cap has skyrocketed over 900%, nearing $10 billion; Monero (XMR), long troubled by regulatory controversies, has also doubled in price.
Ethereum Co-Founder Advocates for Privacy Upgrade
Recently, Ethereum co-founder Vitalik Buterin has once again placed privacy development at the top of the technical agenda. After years of research and discussion, he is urging developers to accelerate the realization of the privacy vision pursued by cypherpunks.
Ethereum's short-term privacy roadmap primarily focuses on three directions: Account Abstraction and FOCIL, Key Randomization, and Access Layer Privacy Overhaul. The entire set of proposals aims to enhance the censorship resistance of on-chain transactions, sever address correlations, and reduce reliance on trusted third-party infrastructure.
FOCIL, or Forcefully Opened Censorship-Inclusion List, aims to address transaction censorship issues.
Currently, transactions enter a public mempool before being included in a block, allowing block builders and intermediaries to view pending transactions, enabling interception, front-running, and data monitoring. The FOCIL mechanism allows a committee of validators to propose a transaction list, which block builders are forced to include. Blocks that violate this rule are rejected by the network, reducing the risk of privacy-centric transactions being censored at the source.
Account Abstraction addresses another flaw in Ethereum's current design, where most users still rely on externally owned accounts controlled by a single private key. Account Abstraction makes accounts behave more like programmable smart contracts, supporting social recovery, multi-signature authorization, third-party fee payment, and other features.
From a privacy perspective, this feature can optimize wallet behavior patterns, preventing all activities from being exposed through a single account, and also facilitates third-party fee payment.
Key Randomization aims to solve a narrower but crucial metadata leakage problem. Ethereum relies on a nonce to prevent transaction replay; this value increments sequentially, allowing external observers to link seemingly unrelated transactions and trace them back to the same account. The new proposal splits the account counter into multiple independent domains, with different types of transactions using different key randomizations, significantly increasing the difficulty of address tracing.
Additionally, the Ethereum Foundation has launched the Kohaku open-source toolkit, which is the most ambitious part of this privacy upgrade. This project is not solely focused on transaction privacy but also addresses the data leakage issue at the access layer before transactions are submitted to the chain.
Even if transactions themselves are made private, when users query on-chain balances, call contracts, or initiate transactions, their wallets still leak information like IP addresses and wallet identities to the Remote Procedure Call (RPC) node. Kohaku provides wallet developers with privacy and security components that can be directly integrated into existing products. Its features cover private transactions, secure key management, private on-chain queries, and include a reference wallet. The toolkit can also interface with Ethereum's existing privacy protocol Railgun and the still-in-development Privacy Pools. Its goal is to allow users to experience private transactions and private DeFi services without switching their commonly used wallets or using niche tools.
Ethereum researcher soispoke.eth stated that if the aforementioned proposals are implemented simultaneously, Ethereum could achieve native, trustless, censorship-resistant private transactions as early as next year.
Why Privacy Features Are Crucial for Ethereum
Crypto lawyer Gabriel Shapiro believes that the privacy upgrade will help Ethereum compete for the institutional asset tokenization market. Businesses have strong confidentiality needs in scenarios like security tokenization, fund management, and DeFi interactions.
This also touches upon Ethereum's core investment thesis. For a long time, Ethereum's advantage has been its comprehensive ecosystem, covering stablecoins, lending, decentralized exchanges, asset tokenization, Layer-2 networks, and various development infrastructures. However, if all financial interactions remain completely public by default, relying solely on ecosystem breadth will be insufficient to sustain its position.
For institutions, settlement without privacy protection is inherently risky: companies do not want competitors to understand their supply chain dealings; asset managers do not want their trading paths tracked; banks cannot let their clients' tokenized security activities be exposed on a public chain.
Ethereum possesses the underlying infrastructure to serve institutional clients, but the market demands a delivered product, not just theoretical research.
This confirms Dunleavy's 12-month countdown warning. Zcash has long established a clear privacy narrative, and Monero remains a mainstream privacy coin despite regulatory pressure. Meanwhile, competitors like Solana, Tron, and Hyperliquid continue to capture market attention, and Bitcoin still firmly holds institutional capital preference.
Currently, the scale of tokenized assets on Ethereum exceeds $350 billion, and its application ecosystem remains the deepest in the industry, but this leading advantage is not permanently secure.
If Ethereum can launch a mature, usable privacy product within a year, it will further solidify its position as settlement infrastructure for both individuals and institutions. Conversely, if the privacy upgrade remains stuck at the technical planning stage, market funds will continue to flow towards projects that have made privacy their core positioning from the outset.
