Confidentiality is essential for DeFi to gain traction with institutional use cases and for financial institutions to consider public blockchains as a viable infrastructure. 

To date, there have been two primary approaches to achieving confidentiality on public blockchains. These can be broadly categorized into those that store transaction data onchain and those that store data offchain.

1. Onchain: Balances and transaction values are stored directly on the blockchain.
2. Offchain: The blockchain stores either a proof of transaction: through a hash of the contract between parties;  or a proof of sufficient balance -through a zero-knowledge proof. 

For each on- or offchain approach, we can find multiple solutions, usually with their own specific privacy technology, protocol, and API. As a result, each solution provider faces the same challenges: a lack of compatibility with ecosystem tools such as wallets, custody providers, exchanges, and lending protocols. Solution providers have attempted to solve this problem by either developing their own tools or aligning ecosystem players to fork a version of their tools that would be compatible with their solution. This has resulted in a fragmented ecosystem for confidentiality where each choice is mutually incompatible. A fragmented ecosystem means less liquidity and a worse experience for users, developers, and institutions.

The Need for Standardization

We sometimes forget that without the standardization around ERC20, we would not have been able to create DeFi on Ethereum and compatible EVM chains. The founding members of the CTA recognize that for confidentiality to gain traction on public blockchains, a technology-agnostic confidential yet compliant token standard is necessary. We have based the standard on the foundational pillars that it should be:

• Technology-agnostic to push forward research and innovation in bringing privacy to public blockchains and not narrow the potential use of technologies.
• Standard to ensure that we are able to confidentially transfer tokens and check balances and transaction histories on any compatible ecosystem tool.
• Compliance-friendly, creating robust access control to confidential information that is compatible with existing and future regulation and compliance requirements of financial institutions.

As part of this work, CTA founding member OpenZeppelin has analyzed existing onchain confidentiality solutions and how existing applications leverage the ERC20. This analysis has informed the development of the Confidential Token Standard. The standard has been submitted to the Ethereum Foundation to collect feedback from the community. 

The Confidential Token Association exists to promote the adoption of the standard within the ecosystem. The association is open to any organisation that is considering launching a confidentiality protocol or adding support to existing confidentiality protocols using the Confidential Token Standard. If you’re interested in becoming a member, apply here.