Can Privacy and Compliance Coexist in Web3?

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1:35hello everyone welcome it's uh my name is santiago velez welcome to real vision crypto daily briefing uh joining me today is oliver gale the ceo of panther protocol welcome oliver hey thanks for having me. Great. It's a real pleasure. Thank you for coming on the show. Hopefully today we'll do a deep dive into the Panther Protocol and have our audience learn something new about privacy, institutional pools, and many other interesting things. Before we get to that, I'd like to do a little bit of a brief on the crypto markets. We continue to see some retracement in Bitcoin and Ethereum prices are correcting slightly today and it's a kind of a flexion of the phase of the market that we're in.

2:23We're likely to see more sideways consolidation for a while. Ethereum also similar price action responding very much to Bitcoin which is kind of a contrast to overall equities. We're seeing equities continue their rally. Probably a lot of volatility this week with the Fed discussions on rates. So, you know, stand by on that. Any thoughts on the markets, Oliver? What's your view? I think we're in a pretty good place in terms of the markets. From a fundamental perspective, the Ripple case, I don't think we can underestimate the importance of the rulings that were passed and really drawing a distinction between securities offering and a security token and creating that space that the industry needs to have tokens, which are freely traded in decentralized systems.

3:17And for me, that's massive. And price responded, which I would say is more of a fundamental reassessment of what the value of things like Bitcoin and Ethereum, Ripple, et cetera, should be. So retracement, to me, that's short-term noise. This is long versus short traders. They're playing their own microstructure games. where we are is in a pretty healthy place. Maybe markets continue sideways for the remainder of the year, maybe not so long. I certainly think 2024 will be a bull market and we will see Bitcoin in the$60 ,000 range and everything that comes with it. So that's how I feel about the markets.

4:01And we're building technology and we do make educated guesses around where we think the market structure is going. And so we're playing our hand accordingly. That's fantastic. Great assessment. You know, I tend to agree. And we were talking earlier off camera about kind of the energy that we're seeing at conferences at ECC, for example, in Paris. And it's a very bullish atmosphere. It seems the attitude definitely is about building. And those projects and communities that kind of made it through this bear market are pretty resilient. And they're definitely responding to, as you said, some of the regulatory clarity we're seeing in the United States around how courts might look at crypto assets in relation to security status.

4:49So all great points. Thank you very much for that. So let's get right down to it. Tell us a little bit about yourself, how you got into the crypto space, and then what led you to Panther Protocol and kind of what the problem was that you and your team saw and what you're trying to solve. Sure. So I got into the crypto space in early 2013, bought my first Bitcoin around$100. And actually, the first Bitcoin was at$200, which was a local peak in around March of 2013. So many traders came in, got attracted to the excitement around this volatile asset class and read the white paper, got involved in Bitcoin talk heavily, and shortly thereafter set up the first Bitcoin mining company called CarabHash and the first Caribbean Bitcoin exchange called CarabCoin, which later rebranded to Bit.com.

5:46And so through that journey, we lost banking in Barbados. We got banking briefly to power the exchange. Lost it, saw the value and importance of things like stable coins, issued one of the first stable coins in the Barbados digital dollar. Then we lost banking and had to cash collateralize that instrument. And it really was very difficult to run what was the best funded fintech company in the Caribbean, and also the most progressive in terms of using blockchain technology, but using cash counting machines and not even having the technology of a checkbook. So I was the FOM president of the company at that time, one of two co-founders.

6:28And so we turned to central banks and the potential of blockchain technology to issue legal tender directly, secured the first commercial contract with the Eastern Caribbean Central Bank to deploy a central bank digital currency. And around that time, I'd also secured a series A from overstock to build out the central bank digital currency thesis. So that was a global first mover maneuver that we made out of Barbados with fast moving governments devastated by natural disasters and in need of technologies that could help leapfrog payment systems and stimulate economic growth and blockchain technology and Bitcoin were perfect for that.

7:11So that was the first four or five years in Web3. In 2018, I left management entirely at bit.com and set up my own venture studio called Base2. And through Base2, built a number of asset management firm, asset management arm, advisory arm to that business, and then incubated a consumer credit platform called Elemental. And so that took me up to about 2020, at which point I met my co-founder at Panther, Anish Mohamed. And so he and I really connected. First and foremost, the conversation was around how can I apply homomorphic encryption to remove the data silos of national banks and commercial banks that are holding this valuable information that can help provide affordable credit to everyone but have no incentive to do so.

8:10And so that conversation branched into a number of discussions around privacy. I've been a big advocate of privacy technologies, was a miner of Dartcoin before it was rebranded to Dash in 2013, had a large Caribbean-based GPU mining firm, also as an early investor in Monero. And so for me, the role of cash in emerging markets, places like the Caribbean are 60 % cash denominated payments. Obviously, cash is the most anonymous form of payment. It's also a bearer instrument. And that was the genesis of why we thought central bank digital currency should be built on the Bitcoin blockchain as a digital legal tender instrument.

8:59A side story, but that's part of the reason I left. I didn't agree with the architecture being implemented for CBDCs. And so in my discussions with Anish, we were exploring, hey, privacy is a massive need in the Web3 space. Obviously, it wasn't called Web3 at the time, but also one that is ubiquitous. And the need for private digital cash is massive if you look at just the size of the M1 money supply for the US dollar,$32 trillion or so. And so it was that thought process that became the catalyst for Panther Protocol. And as we began to work through the problems of how do we maintain composability for DeFi on protocols like Ethereum?

9:51How do we accept the cross-chain, multi-chain future, which we thought and still believe is likely with L1s and L2s? And also, how do we enable some compatibility with compliance so that we can actually embrace the end game where you have enterprises and retail both utilizing Web3 technology. So all of those sort of problem solution spaces and both, I would say, moral ethical considerations as well as practical considerations went into the thinking part of Panther Protocol. Wow, fantastic rundown. And I'm sure out of that entire summary, many of our users are going to have questions about a lot of what you said today.

10:47Hopefully, we'll try to touch on those in the interview. But if questions remain, please save them for the end of the show. We'll try to hit as many users' questions as possible. But a great summary. Thank you for that. So, Panther Protocol was formed in general to address some of the problems around privacy and as they relate to DeFi. Can you talk a little bit about what Panther Protocol is? Is it a blockchain? Is it a software? What exactly it is and exactly how it implements privacy? We can get a little bit into ZKP and those kind of things. And then why that's an attractive or value added component for both retail and institutions.

11:32So, first of all, what is Panther Protocol? Yeah, sure. So in a soundbite, Panther is an interchain asset agnostic privacy preserving infrastructure for DeFi. It's a privacy layer, and it's a layer that allows existing DeFi protocols to benefit from the privacy that can be afforded using ZK Snarks and a large anonymity set. Panther is not an L1 or L2 blockchain. It is a DAP built on top of L1 and L2 chains. So we made that decision fairly early on because we don't really believe that it's necessary for us to be involved in the arms race between L1 and L2 chains for scalability, security, adoption, and the network effects.

12:23We actually believe that the network effects of Ethereum are colossal as is today, as are some of the contenders that are buying for top spot with Ethereum and probably unlikely to take top spot from Ethereum. So we look at essentially the proliferation of L1 and L2 chains across the Web3 universe specializations here or there and recognize that most of these chains are public blockchains and all transaction history is available on these chains. And therefore, each one of these public blockchains requires some privacy preserving technology. And so by taking the approach of building a DAAP versus being the L1 chain, we get to avoid being in the Darwinistic game of becoming the dominant L1 or L2 and can just work with winners as and when they emerge.

13:22And so that chain agnostic approach is core to our philosophy. Hey, everyone, we're going to take a quick pause and hear a word from our partners. We'll be right back.

13:35You know, I think that's a great point that we should emphasize for our viewers about public permissionless blockchains is that they're pseudo anonymous in the sense that, you know, They're a wallet-based structure, a database structure. There's no user accounts, but through some deep chain analytics and connectivity to off-ramps, you can discern who the user is and then ultimately are privy to all the transactions they've ever done with that particular wallet. And so from a long-term perspective, there is different kinds of risks that arise, both for retail from a security perspective, but also institutional from a business perspective on having all of their transaction history be available to everyone in the world.

14:21And so that's clearly a problem in need of a solution. So could you tell us a little bit about maybe how institutions would benefit from privacy protocols like Panther? Yeah, sure. I think the best example has been the emergence of an entire industry around selling on-chain analytics. So that would have begun probably with Elliptic. They're the first that I can think of in terms of selling on-chain data. Chainalysis followed soon after, and now there's a whole suite of these technology data service providers. And what they primarily are focused on is on-chain analytics as it relates to AML compliance and knowing your customer and knowing their source of funds, which is a necessary function for a financial institution that wants to integrate into the world at large.

15:22So if you want access to Visa and MasterCard and American Express and 100 million point of sale terminals around the world, et cetera, the system as we know it today, then AML tools are required. So this is part of that function. However, what we've seen is the sophistication of this on-chain forensics becoming more advanced and secondary types of markets emerging just for the selling of what I would term alpha. So who are the big wallets? Who are the big institutions or VCs or traders? What are their strategies? What's in their portfolio? What are they buying? What are they selling? Where are they trading?

16:09All of this is information that can be discerned on chain using statistical analysis and is discerned on chain and now being sold to anyone willing to pay for these services. And so that erodes the alpha of these players. And as you mentioned, it also opens up security risk for them in terms of, you know, where they're custody and you know, where they're trading and executing. So this, you know, it becomes a series of data points that you can analyze and monitor to really find out more about your counterparty and figure out what the attack surface can or should be. So Panther addresses all of this from the perspective of an enterprise or fund or a venture firm that wants to trade their assets or even transact or interact with Web3 protocols on chain.

17:05And it provides this level of anonymity through what is a privacy set. And so at the heart of the Panther protocol is what we call a multi-asset shielded pool. And what the multi-asset shielded pool does, as the name suggests, it accepts multiple asset types, so fungible, non-fungible assets, different types of fungible and non-fungible assets. And all of these assets go into this macro mixer, if you will. And the Panther Protocol itself then interacts with DeFi contracts on behalf of the users within that multi-asset shielded pool, the shielded pool, if you will. And so these users, they might be retail users, enterprise users, have a zero-knowledge proof of ownership.

17:55And that is a claim against some of the assets that are held within the multi-asset shielding pool. And so the user can deposit assets into the Panther protocol, which involves an onboarding process and connection to and creation of a zero-knowledge digital identity and some zero-knowledge compliance services to sort of authenticate and verify who they are in a confidential fashion. And from there, these users can then do things like swap their assets on Uniswap or Curve, take a loan on Aave, as well as a series of other functions which are native to Panther Protocol, such as peer-to-peer transactions and also an internal on-chain dark pool.

18:40So once you're onboarded into the Panther Protocol, there's this powerful universe of tools that is being made available to users. each of these tools is essentially made available through an adapter. And so as the Panther Protocol grows in the ecosystem, adapters will be built to different DeFi service providers to enable users to execute transactions with those services without having to leave the confidential and safe environment that the Panther Protocol affords. Wow. Okay. So there's a lot to unpack there really quick. I'd love to first, my understanding of the zero knowledge proofs involved is that you can disclose a particular set of information without revealing the entirety of the data set.

19:31In other words, you can prove something without having to, you know, say exactly what it was that you're trying to prove. And then that's a very essential aspect to, for example, AML or KYC, knowing who your counterparties are. because, frankly, in DeFi, you go on Uniswap and connect your wallet, you don't know who your counterparties are. You don't know who the other person is on that side of the trade. And that's problematic for institutions, I believe, because you could be trading with anybody, and you don't know whether they're compliant. So what I understand here is that not only do we have a privacy aspect to this, but we have a way to disclose certain aspects about ourselves, our digital identity, and our counterparties.

20:17And we then know that we are in appropriate sets of eligible traders or pool of traders. And I think that's a hugely underestimated aspect that is precluding large institutional adoption of DeFi. So can you talk a little bit about maybe how these blinded pools and these large sets of assets, how does that work? do I have to worry about having a large quantity of an asset so that it is mixed and blind? Or can I share some of the properties of other assets in the pool? How does that work? Yeah, that's a good question. And that's really the, you know, the multi-asset component of our shielded pool was one of the first innovations that we sought to and managed to achieve architecturally.

21:10So I mentioned earlier that composability was one of our fundamental pillars of if we're going to create a privacy preserving protocol, one pillar is that we do not want to have to bootstrap the anonymity set and the network effects from the ground up. That's a really underestimated challenge, building liquidity, far less building a universe of liquidity from multiple different financial products. So that composability component, preserving that's important. We then started looking at, well, the challenges around bootstrapping an anonymity set for say Ethereum and then having to bootstrap a new anonymity set for USDT as an example, or DAI.

21:56Each one of these would pose a problem. So by implementing a multi-asset shielded pool where essentially the instruments themselves are on the same Merkle tree and shielded under the same ZK SNARK scheme, you are able to share the network effect of privacy for one asset type with another. And that also then extends to things like NFTs. So there is this collective requirement to build a large anonymity set. And however, that anonymity set will provide the privacy properties to a new asset type that is deposited into the shielded pool. Now, there is no such thing as perfect privacy and anyone who claims that that's the case, maybe doesn't understand it well enough.

22:46So there's a statistical or probabilistic level of privacy available. And And there are, so if you have very, very large deposits into a pool of moderate size and then very, very large withdrawals, then there is some ability to statistically infer what might be happening. And that's unavoidable. It will happen anywhere. So what Panther is doing is, however, as that pool is larger, it becomes more difficult. So the longer assets are held within the shielded pool and the larger the pool of assets and the more transactions taking place within the shielded pool, the better the privacy set is. And Panther Protocol is incentivizing this behavior, depositing assets in the shielded pool, transacting within the shielded pool using RCKP governance and utility tokens.

23:37So that acts as a reward mechanism for simply providing essentially for self-custody in your assets within the shielded pool environment. There is no counterparty risk. There is no volatility risk. This is not a loan, this is self-custodying assets and being paid for providing an actual utility function. And I think that that's one of the things that's underestimated. It's not the case with yield farming where there really is no utility. It's just a subsidization mechanic to get people to use it to boost the metrics. This is a real utility that's being provided to the commons within the Panther Protocol.

24:11And so that's an important component. Now, you asked really around the institutional component. I have worked and onboarded national nation states into blockchain technology. Nigeria is a client of bit.com for their CBDC as is the Eastern Caribbean, which has eight independent countries under their umbrella and currency union. I've also been part of Web3 fintechs that have onboarded over 20 banks to these type of systems. I've built to run licensed fintechs in the Web3 space. So I know what is required and what that thinking is. And the thinking is essentially, if I cannot verify who counterparties are, either absolutely or statistically with a high degree of certainty, I'm running a risk where that risk is that my regulator will revoke my license, I'll lose access to any national payment system, any ancillary services, compliance, and all of the things really necessary to offer the type of one-click financial service that the world has come to expect.

25:19In other words, if you are not able to satisfy these requirements, you are not going to be in this next wave of mass adoption for Web3 technologies. So what Panther has done in terms of being able to selectively disclose transactions using zero knowledge to sort of, hey, I am over the age of 18 and my identity is valid, and here is proof of that. you don't need to know anything about me verify the proof cryptographically right now you've verified it you know that my claim is actually intact and i haven't had to disclose anything about myself so zero knowledge compliance has massive implications in terms of reducing cost structures of securing data and repeating compliance costs at every on and off ramp to a service.

26:09What Panther has done is, and this is, I think, one of the biggest value propositions, aside from the multi-asset shielded pool that we've come up with, is segregate the shielded pool into logical partitions known as zones. And each zone has a zone manager that essentially represents the equivalent of a virtual asset service provider who has applied for and received the license to operate that zone. They can set, it's a walled garden at this point, so they can set what the credentials and requirements are to get in and out of the zone, and they are able to collect the data of what transactions take place within their zone.

26:50The protocol never custodies this data, the foundation never custodies, the development company never custodies it, is exclusively the purview of the zone manager. examples of zone managers would be brokers, fintechs, wallet operators. In fact, we've had a discussion with one government about operating a zone to allow all of their financial institutions to participate in a zero knowledge national tender instrument, which is quite interesting. So zones can be big or small actors. They have the ability to federate and allow transactions to be settled between zones, they all share the same privacy set.

27:29So there's no requirement to bootstrap liquidity. So if you get licensed as a zone manager and you have zero assets within your shielded pool on day one, that does not mean you have no privacy. You have the global privacy set available to you. That is a major problem being solved here. Again, Hunter's constantly thinking about how do we deliver product and a useful tool for users as opposed to how do we recreate the wheel and invite people to bootstrap all the network effects once again. So I hope that's not too long-winded in that answer. Hey everyone, we're going to take another quick break and hear a word from our partners.

28:09We'll be right back to the Real Vision Crypto Daily Briefing.

28:16no it's great you know i i think it hits on several really important aspects um there's a lot of concerns with with individuals about governments rolling out cbdc's uh and a very dystopian view of privacy and control over uh money in general um and then on the opposite end of the spectrum um you know there's the cyberpunk movement that it has in its core values the idea of privacy, and that's enshrined in many laws around the government, around the world regarding citizens' rights to be private. Of course, we've talked about the business risks of not having privacy for institutional actors and being front-run and those kinds of things.

28:54So I think this is a very important aspect that will quickly dawn on many of the protocols in the industry, that you don't have to just solve scalability, security, those kinds of things. You really need to solve some of these real world problems around privacy and business risk, counterparty risk and compliance. So the thing that I found super interesting about Panther was that it really is trying to almost skate where the puck's going, right? That eventually this is the kinds of problems that we're going to need solutions for. And it won't be this, you know, bifurcated world of everything is 100 % transparent and everything is 100 % private, like Monero, for example, we're going to have a spectrum in between of solutions.

29:42And it's going to vary. It's going to vary, as you said, depending on the jurisdiction and the rules of the road. It's going to depend on the assets and the L1s. So I think it's a very comprehensive view of where the space is going. So right now, where is Panther Protocol in this kind of this mission, this vision? How much of the product is rolled out or are we in production yet or still testing that kind of thing? Yeah.