Aztec Bets Financial Privacy Will Weather 'Crypto War'

Andreessen Undeterred by Regulatory Threats as His Firm Leads $100M Round in 'VPN for Ethereum'

By: Aleksandar Gilbert Loading...

Aztec Bets Financial Privacy Will Weather 'Crypto War'

Aztec founders Zac Williamson and Joe Andrews got the venture firm they wanted. They’re counting on it for the fight ahead.

“Marc Andreessen, he’s fought this battle already,” Williamson said, referring to the founder of venture capital firm a16z. “He fought the first generation of this battle in the 90s when basic cryptography was legally considered a munition.”

Andreesen co-founded Netscape, a web browser secured by 128-bit encryption. The browser was “classified in the same export control category as Tomahawk missiles,” he recalled in a 2019 interview. The fight to sell that product in international markets was called the “crypto wars” and was eventually won by a coalition that included Netscape and civil libertarians.

Today, we can send messages and browse the internet using far stronger encryption. Transactions on the blockchain, however, are broadcast for all to see. Williamson and Andrews want to change that, and liken the Aztec protocol to a ‘VPN for Ethereum.’

The prospect of private blockchains — of digital cash outside their control — has struck a nerve among regulators and lawmakers. But not investors, the pair told The Defiant in an interview the day after Aztec announced a $100M Series B round led by a16z.

The regulatory landscape has shifted markedly this year, and led some to raise the specter of another “crypto war.” The US Department of the Treasury sanctioned crypto mixer Tornado Cash — a decentralized software protocol — in August, an unprecedented move according to some legal experts. Several days later, one of the developers who contributed to Tornado Cash was arrested in Amsterdam. On Wednesday, a pair of U.S. Senators introduced a bill that would effectively ban Tornado Cash-style mixers and “anonymity enhancing software,” a designation that would likely include Aztec.

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“Seasoned investors who see the value of encryption … stood firm” after Tornado Cash was sanctioned, Andrews said. “There were definitely less seasoned investors who [were] kind of reactive to those headlines.”

Balancing Act

Working at the intersection of blockchain and privacy-enhancing technology has already proven a balancing act, however.

Shortly after the Tornado Cash sanction, Aztec announced changes to frustrate criminals who might use its software.

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Those changes included system-wide daily asset deposit caps, IP-specific deposit rate-limiting and single-address pending deposit caps. Aztec also announced that it was using publicly available information from outside its system to “identify and unmask” users who transfer stolen money.

Those changes would “practically eliminate the ability of bad actors to move stolen funds through Aztec,” the company said at the time. “To would-be illicit users of our network, we want to send a clear message…We will not be passive in stopping illicit behavior.”

That balancing act will continue going forward. Williamson and Andrews believe that cutting-edge cryptography, known as zero-knowledge proofs, can make regulators’ jobs easier without sacrificing privacy.

ZK Proofs

Zero-knowledge proofs make it possible to prove a statement is true without demonstrating why it’s true. A person could prove she is, for example, not on a Treasury Department sanctions list without sharing any personally identifying information, such as a name or government ID number.

“You can perform preemptive compliance,” Williamson said.”You can say, ‘By definition, this transaction can only happen if the transaction sender possesses the correct certifications.’”

He envisions a world with fewer regulators.

“In many ways, it removes some agency from regulatory authorities,” he said. “Take FTX — how do you prevent FTX from happening again? Well, you need a very strong, empowered government agency to enforce regulations to make sure that centralized providers actually follow certain defined rules. And if you can actually put those rules up inside a blockchain protocol and follow them automatically … you’re automating the job of that regulator and reducing their influence.”

The crypto community embraces privacy, but often chafes at the prospect of regulation. Whether it will embrace “preemptive regulation” is an open question.

In a conversation with Williamson on Twitter earlier this year, Chris Blec, an outspoken libertarian and decentralization advocate argued “enhanced ‘privacy’ will make it easier for [government] to justify using the tech to control us.”

“How does Aztec as a company and as a protocol juggle that? Well, the simple answer is we don’t, because that’s not our job, that’s why we’re building a programmable network,” Williamson said. “The goal is for this network to be completely decentralized [and] permissionless, where we don’t have any kind of control or agency over what people use the network for.”

Andrews acknowledged there was no consensus yet on private, digital transactions — not from regulators, and certainly not on crypto Twitter.

“So we have to present a technology and … over a period of time, social consensus will emerge,” he said.

Aztec 3

Aztec currently has 42 employees, according to Andrews. With a fresh infusion of cash, they plan on doubling that. Next year, they hope to introduce a testnet for what they have tentatively dubbed “Aztec 3.”

In July, the company launched Aztec Connect, which allows users to interact privately with select DeFi protocols.

When Aztec Connect users transact, they are doing so over “cryptographic circuits that we have developed internally,” Williamson said.

With Aztec 3, they hope to decentralize the Aztec protocol and make the technology composable, such that Ethereum applications accessed through Aztec, like Uniswap, share data and liquidity across Ethereum mainnet and various Layer 2 blockchains.

“If we can give the ability to write those programs to anyone, then the things that can be built [will] kind of really transform what’s on the internet,” Andrews said. “We’ve kind of sprinkled some private state and encryption onto Ethereum … What’s left to be done is give that power to developers and see what they build.”