This is a guest blog from Zac Williamon, The CEO is also the co-founder You can also check out our other articles. Aztec.
Blockchain industry at crossroads Although the blockchain industry has seen significant advancements in the development of scaling solutions, one fundamental issue remains: privacy that can be programmed. Blockchains are not adopted in situations where privacy of users is important, such as real-world assets and supply chain management.
In order for blockchain to be adopted into mainstream use, the industry has to prioritize programmable privacy—a requirement essential for institutional users. This is a key aspect of the next-generation Ethereum Layer 2 solutions. Privacy-oriented L2s can bridge the privacy gap by leveraging innovations in Zero-Knowledge cryptography.
Privacy: the missing element to scaling Ethereum
Blockchain’s enforced transparency creates a significant limitation. To validate the ledger’s correctness and ensure no fraudulent activities occur, users must be able to verify all transactions occurring on the network. When blockchains are connected with assets or identities in the real world, this transparency is problematic.
As of now, the only way to link real-world identity with crypto accounts is by either broadcasting information publicly onchain (or relying upon data custodians) or using trusted intermediaries. The first option proves unworkable for most use cases—imagine if every ATM transaction broadcast account balances publicly, or if all online purchases could be viewed by anyone, including mortgage payments, credit card debts, and late billing fees.
While data custodians may seem attractive, they break blockchain’s fundamental value proposition: composability — the ability of smart contracts, protocols, and dApps to seamlessly interact. Composability can achieve efficiency gains that are similar to vertically integrated industries in traditional sectors, and act as a power multiplier for small companies. This allows companies to access services that they might otherwise have to acquire from third-parties or develop themselves.
This model is fundamentally disrupted by data custodians. Third-party applications that want to be integrated with an application that relies on data custodians must interact first with the custodians. This can create permission barriers which may not be surmountable. This mirrors the theoretical scenario of needing to ask for permission from the Ethereum Foundation just to deploy smart contracts—a situation that would have severely limited Ethereum’s success.
Zero-knowledge cryptography: A game-changer for private transactions
L2 privacy-first architecture powered by Zero-Knowledge Proof (ZKP), enables verification of transactions while maintaining the complete confidentiality of sensitive information. ZKPs enable the validation and execution at large scale of business transactions while maintaining complete privacy.
ZKPs are different from other privacy solutions because they provide mathematically secured privacy in applications such as payments, compliance, and identity verification. ZKPs are a better solution for protecting data than earlier blockchain privacy solutions that hampered functionality. They protect sensitive information without slowing down the technology.
Developers can use ZK even if they lack domain knowledge when combined with tools which lower the technical barriers. It is possible to easily integrate privacy-preserving technology into apps using universal programming languages.
Since Ethereum’s launch, the vision has been to provide traditional financial services in a user-focused manner, minimizing intermediaries and creating an open, competitive environment. What was missing for legacy industries like healthcare, finance, and supply chain management was programmable privacy—the critical ingredient for institutional adoption.
Institutional adoption of blockchain: Enterprise use cases
ZKPs make it possible to combine data protection and compliance with regulatory requirements. Privacy-oriented L2s that can store sensitive encrypted information on chain, which users can then query and verify, can host transactions networks in which only compliant participants can participate. The result is a significantly more secure environment compared to traditional finance where the compliance process has an extremely poor record for catching wrong behaviour.
In a privacy-focused L2, it is possible to deploy isolated miniature networks, ensuring proprietary smart contracts can only be viewed by entities with permission. This is not the best pattern to use for a wider ecosystem but it does allow institutions to implement sensitive code with licensing restrictions such as proprietary algorithms that match trades.
L2 solutions enable private transactions to eliminate the risks associated with open-source software, giving institutions access to blockchain benefits while minimising downsides. L2 architectures that are privacy-focused offer a bridge to institutional adoption. They establish the Web3 area as an important foundation for enterprise applications and provide access to sectors which demand the highest level of privacy and regulatory compliance.
Look to the Future
As Ethereum’s capabilities evolve, privacy-focused L2s are leading the way for broader institutional adoption across finance, identity, and beyond. The solutions that prioritize both privacy and scaleability transform blockchain to a viable alternative for institutions. This allows traditional systems and decentralized systems to be bridged while upholding user privacy standards and regulations.
Commented in: Ethereum, Analysis. Featured. Guest Post. Layer2. Opinion. Privacy. Guest Contributor 
Zac Williamon
Zac Williamson, Co-Founder and CEO at Aztec Labs is the privacy-first Layer 2 on Ethereum. This Layer 2 empowers developers by enabling them to create applications that protect user privacy whilst ensuring compliance. Prior to that, Williamson founded CreditMint. PLONK is a zero-knowledge-proof system widely used. Zac is a Doctorate in Particle Physics graduate of the University of Oxford. He was also a physicist with CERN, T2K Japan and Oxford. Zac also serves as an EF9 cohort member at Entrepreneur First. This program supports early-stage technology startups.
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