🔐 Privacy Is the Missing Link Between Institutions and Ethereum

🏦 The Institutional Privacy Challenge

Ethereum faces a fundamental paradox: it offers deep liquidity, programmable infrastructure, and new business models that traditional institutions desperately want to access — but its transparent nature makes it incompatible with institutional requirements. The missing piece? Privacy.

In a recent conversation, Mo Jalil and Oscar Thorne, co-founders of ETH Systems, outlined how privacy isn't just a nice-to-have feature for Ethereum — it's the critical infrastructure needed to unlock trillions in institutional capital. Their work, which began at the Ethereum Foundation and has now spun out into a for-profit entity, focuses on building the cryptographic bridges that allow institutions to access public Ethereum while maintaining confidentiality and compliance.

"Anyone that listens to Bankless already knows this... institutions generally have two things that they really care about. One is their business and the second is that they're compliant. You can't get both without cryptography." — Mo Jalil

📊 Why Privacy Matters for Institutions

Traditional finance operates in a world where business intelligence is guarded carefully. Revealing trading positions, client relationships, or transaction flows on a public ledger isn't just uncomfortable — it's often legally prohibited or commercially catastrophic.

The institutional demand is clear:

• Confidential payments: Business-to-business stable coin transfers that don't broadcast amounts or counterparties
• Private asset management: On-chain tokenized deposits and real-world assets without exposing holdings
• Secure trading: Access to DeFi liquidity pools without front-running or information leakage
• Regulatory compliance: Privacy that still allows for selective disclosure to auditors and regulators

As Oscar noted, institutions aren't just looking at basic payment rails — they're examining sophisticated use cases that have been operating in traditional finance for decades. One example: interdealer compressions, where investment banks currently pay tens or even hundreds of millions of dollars annually to trusted third parties to net out trades and reduce capital requirements. These processes could be done on Ethereum with shared state and cryptographic proofs — if privacy exists.

🔬 Research vs. Engineering: Where We Are Today

The good news: Most of the hard cryptographic research is done. The Ethereum ecosystem has been developing privacy infrastructure for years through groups like the Privacy and Scaling Explorations (PSE) team at the Ethereum Foundation — a research lab that's been operating for approximately seven years.

The challenge now is primarily engineering. While the cryptographic primitives exist, each institutional use case comes with specific requirements shaped by jurisdiction, regulatory constraints, and business logic. As Mo explained:

"I think largely it's more of an engineering problem as opposed to a research problem."

But this doesn't mean privacy is solved. Different institutions face wildly different constraints:

• Some have 20-person R&D teams with cryptography PhDs who have been studying this space for years
• Others need white-label solutions with minimal technical overhead
• Use cases range from high-TPS retail applications to ultra-high-assurance security for high-value transfers

🌍 Real-World Use Cases: Beyond Generic Privacy

ETH Systems isn't just building generic privacy infrastructure — they're working on the hard, unsexy problems that institutions actually face. One striking example came from work with a nation-state looking to implement confidential payments at scale.

The country had a regulatory requirement that payments involve four parties — sender, receiver, auditor, and government — rather than the typical two-party model. After attempting to solve this for two to three years with existing privacy protocols, they couldn't find an acceptable solution. When they discovered research coming out of the Ethereum Foundation, they saw a potential path forward that could work for tens of millions of people.

Other sophisticated use cases include:

• Interdealer compressions: Netting trades across banks without revealing positions
• Multi-party payments: Systems that accommodate auditors and regulators while preserving confidentiality
• Private RFQs: Request-for-quote systems that don't leak trading intentions
• Tokenized equities: On-chain stock trading with confidential holdings

🏗️ The For-Profit Approach to Privacy Infrastructure

Unlike many privacy projects that operate as nonprofits or public goods, ETH Systems chose a for-profit structure for pragmatic reasons:

1. Sustainable Funding
Multi-year institutional engagements require reliable, long-term funding. Grant-based models create uncertainty, whereas commercial relationships provide stability.

2. Procurement Requirements
Many large institutions require for-profit counterparties to navigate procurement processes. Being a nonprofit can actually be a red flag in traditional finance.

3. Demand-Driven Development
There's clear willingness to pay for privacy solutions. As Oscar noted, institutions were literally asking how they could pay the Ethereum Foundation team for continued work — something the nonprofit structure couldn't accommodate.

"We had a lot of engagements and collaborations with various institutions and there were many cases where people were like, 'We would love to sort of continue working with you guys, how can we sort of pay you?' and we basically had to say no because we're nonprofit." — Oscar Thorne

The model balances two work streams:

• Business-driven work: Paid engagements with institutions to understand specific requirements and build custom solutions
• Open-source contributions: Generalizing learnings into public building blocks, technical specifications, and educational resources

🔐 Privacy ≠ Hidden: The Transparency Question

A common concern about privacy in DeFi is that it removes the transparency that makes decentralized systems trustworthy. If TVL is hidden, how do we know anything is actually happening? If trading volume is private, how do we verify market activity?

Mo offered a reframing:

"I think some people often mistake privacy to be meaning hidden. I think privacy really is who can see what when and how. When I do a transfer in my bank account right now I can see it. The person receiving can see it but the public can't see it. That's great."

The solution: Zero-knowledge proofs allow systems to prove aggregate metrics (total volume, TVL above a threshold, etc.) without revealing individual transaction details. You can verify that a pool has sufficient liquidity or that a trade executed at fair value — without seeing who traded, when, or for how much.

This gives the best of both worlds:

• Institutions get the confidentiality they need for competitive and compliance reasons
• Markets retain transparency on the metrics that matter for trust and price discovery
• Regulators can still audit specific transactions through selective disclosure

🚀 The Path Forward: Parallel Infrastructure First

The most likely path for institutional adoption isn't immediate deep integration with existing DeFi protocols. Instead, expect to see parallel infrastructure emerge first:

Phase 1: Separate Sandboxes
Institutions begin with private, compliant environments that leverage Ethereum's settlement layer but operate in relatively siloed systems. This allows them to learn, test, and build confidence.

Phase 2: Gradual Integration
As comfort grows, bridges start forming between institutional privacy layers and public DeFi. Think private on-ramps to Morpho, confidential order flow to Uniswap, or tokenized RWAs that maintain holder privacy while tapping into DeFi liquidity.

Phase 3: Convergence
Eventually, the distinction between "institutional Ethereum" and "DeFi Ethereum" begins to blur. Privacy becomes infrastructure-level, not application-level, and capital flows freely between previously separate systems.

As Mo put it:

"When you talk to them you notice that there's like a path right and they are some are further along and some are extremely sophisticated and they're already thinking about how do we integrate with these institutions, how does this compose with everything else so that's naturally happening."

⏳ Timeline: What Does 2033 Look Like?

Looking seven years ahead, the optimistic vision is surprisingly straightforward: invisibility.

In Mo's words:

"The best technologies, you don't see them, but you get the affordances of it. Imagine I could trade US stocks without being in the US, without giving away my identity because I have digital identity systems. Like that'd be amazing, right?"

By 2033, if the institutional privacy infrastructure succeeds:

• Trillions of dollars of traditional finance activity operates on Ethereum
• Users (retail and institutional) access global markets seamlessly
• Privacy is a default feature, not an opt-in afterthought
• Compliance happens through cryptographic proofs, not trusted intermediaries
• The vast majority of people interacting with this infrastructure don't even realize they're using blockchain technology

🤝 How the Ecosystem Can Help

For DeFi protocols and Ethereum developers looking to support this work, the ETH Systems team offered clear guidance:

For DeFi Protocols:

• Reach out and explore how privacy layers could extend your protocol for institutional use cases
• Think beyond retail users — institutions represent massive pools of capital with different needs
• Consider contributing to open-source privacy infrastructure and specifications

For the Broader Ecosystem:

• Engage with the privacy market map that ETH Systems publishes
• Contribute to open-source repositories — this work directly influences institutional decision-making
• Stay open-minded about regulatory constraints and business requirements that shape institutional behavior

"Contribute to our open source repo. I will tell you right now the number of banks that look at it is pretty large. So if you have a product, if you've made something that's really kind of intuitive or cool, come to our repo, contribute, it's open source, fork it if you want." — Mo Jalil

🌉 Cypherpunks in the Boardroom

Perhaps the most striking insight from the conversation was this framing: ETH Systems positions itself as "cypherpunks in the boardroom" — bridging two worlds that historically haven't spoken the same language.

As Mo explained:

"What we would like to be is that bridge where those defaults that could be generally good for humanity have them built in. But the only way to do that is to get into the rooms that these decisions are made."

There's surprising alignment between decentralization advocates and institutional compliance officers — they just use different vocabulary. When Ethereum developers talk about removing trusted intermediaries and banks talk about reducing counterparty risk, they're describing the same underlying goal.

The challenge is translating between these worldviews and building systems that satisfy both the cypherpunk ethos and the regulatory reality institutions must navigate.

✅ Final Thoughts

Privacy isn't a feature. It's foundational infrastructure for Ethereum's next phase of growth. Without it, institutions remain locked out of the most liquid, composable, and innovative financial infrastructure ever built.

The work happening at ETH Systems and across the Ethereum privacy ecosystem represents more than just technical development — it's about making Ethereum functionally accessible to the trillions of dollars sitting on the sidelines in traditional finance.

The institutions have landed. Now it's time to build the rails they need to go further west.

🔗 Resources:

• ETH Systems: Building privacy infrastructure for institutional Ethereum adoption
• Privacy Market Map: Open-source guide to privacy solutions and institutional requirements
• Privacy and Scaling Explorations (PSE): Ethereum Foundation's cryptographic research lab