Summary
- Institutions are shaping blockchain design: A new generation of hybrid blockchains are building capabilities that suit the privacy-forward needs of high finance newcomers, while attempting to maintain the features that made public chains successful.
- No one-size-fits-all approach: Four distinct models of privacy are prevalent today, each with different tradeoffs and technical attributes that dictate how compliance teams can operate.
- Chainalysis is building for all: ensuring compliance teams can effectively oversee on-chain activity regardless of which privacy network they encounter.
Public blockchains and the push for privacy
Public blockchains like Ethereum and Solana are open by design. Anyone can create a wallet, submit a transaction, or launch a financial product on a shared digital ledger. Likewise, anyone can read the history of transactions, or initiate their own, on these open systems. Their transparency attracts liquidity, which attracts activity, which attracts more users.
But as blockchains inch into the financial mainstream and institutions begin trading and settling on them, their accessibility risks becoming a competitive liability. Some institutions may be hesitant to embrace open blockchains where they can’t control key factors, like who their counterparties are, and how important information is shared. In other words, they want privacy.
Privacy is nothing new to crypto. In bitcoin’s early days, casual observers incorrectly assumed that all on-chain transactions were completely untraceable. Chainalysis’s work has consistently demonstrated the opposite: using the right tools, blockchains can provide a roadmap for successful criminal investigations, as well as effective compliance regimes. In response, some builders started creating privacy-centric platforms that provided anonymity for transactions.
The institutional desire for privacy is less about anonymity than data protection. Therefore, a new crop of hybrid blockchains, platforms that give their users control over what data is visible, have emerged. They appeal to the institutional desire for privacy without sacrificing key attributes that made blockchains successful in the first place.
The industry’s lack of standardized terms mean these blockchains describe themselves differently. The largest of this cohort, Canton, which explicitly appeals to institutional users, calls itself a “public permissioned” chain because it limits who can access its systems. CoinDesk reports it hosts $6 trillion in institutional assets so far.
Privacy blockchains exist on a spectrum. Some, like Canton, are built from the ground up for institutional users. Others, like Solana, are public blockchains adding features that let users transact privately. And still others, like Zcash, a network that predates crypto’s institutional era, offer privacy features but lack the functionality to host entire financial systems on-chain.
Chainalysis is building solutions that address the unique data challenges of each privacy network.
This blog will break down how each approach works, where they differ, and what they mean for businesses’ compliance efforts.
Approaches to privacy
Regardless of a blockchain’s nature, the institutions who use it must meet the same basic compliance burden: They must understand who is doing business with them on-chain. How they can accomplish this varies drastically depending on which blockchain they use. The monitoring techniques that work on one platform won’t necessarily apply to a different chain with a different architecture. There is no single “privacy network compliance” skill set. Instead, there are at least four distinct models, each requiring different tools, different access arrangements, and different analytical approaches.
Sub-transaction privacy: This model shields all details of a transaction — even the existence of the transaction — from public view. The most notable blockchain under this model is Canton. On Canton, only the parties involved in a transaction automatically get a copy of the relevant parts of that transaction. Stakeholders, like compliance teams, partners, and regulators, get data on a need-to-know basis. Consider an on-chain transfer of cash in exchange for a security, a Delivery vs Payment (DvP) transaction. The bank accepting the payment will see the data for the cash move, but nothing about security exchanged; the securities registrar recording asset transfers will see the data for the security’s new owner, but not the cash exchanged. By sharing segmented information only with stakeholders, Canton builds privacy into the chain.
Shielded pools: Shielded pools are places where users can privately move otherwise publicly-viewable assets. They are opt-in features. The longest-standing example of this model is Zcash. It is a public blockchain that has transparent addresses similar to Bitcoin. But Zcash also has privacy pools (the largest being Orchard) within which spender, receiver, and amount are all encrypted. Even the receiver of ZEC in a shielded pool won’t know where the assets came from. To peer under the curtain a user must either 1. Have initiated the transaction or 2. Hold a viewing key. Either way, Zcash was not designed to support much more than sending and receiving value because it does not host smart contracts. While its viewing keys solve the compliance problem, its limited functionality rules it out for many institutions aiming to build more sophisticated financial services and products on-chain.
Regulated institutions have still been able to interact with Zcash because most activity on the network remains transparent, and Chainalysis supports Zcash in the same way it supports Bitcoin for transactions that do not use shielding. When funds do move through shielded pools, only holders of viewing keys can see their activity. But Chainalysis can identify and monitor transfers into, out of, and between those pools in Reactor and KYT, where they appear as “Protocol privacy” exposure for risk-based review.
Encrypted extensions: This model provides selective privacy to users of an otherwise public blockchain. Solana follows this model via its confidential transfers extension. Token issuers can choose to bake confidential transfers into their assets at the time of creation. If they do, then the amount of value being transferred, and the balance of the sender and receiver, are hidden from view – but their identities are transparent. Like with Zcash, auditors who hold a viewing key can decrypt the transaction details. Solana launched confidential transfers in early 2025 but shut it down until June 2026 to patch bugs; it is now back online.
Private smart contracts: A privacy-first model that bakes confidentiality into the very execution of transactions. The most notable user of this model is Aztec, an Ethereum Layer 2. Users perform the computations locally on their device, broadcasting only a zero-knowledge proof that the transaction was valid. Contract state, transaction details, and execution logic are all invisible to outside observers. The only public signals are bridge deposits and withdrawals on Ethereum Layer 1 — the entry and exit points. The protocol has no built-in auditor key or backdoor for third-party access. But Aztec’s “programmable privacy” model allows application developers to write smart contract logic requiring users to selectively disclose transaction data — for example, to a compliance provider — as a condition of transacting. Without such conditions, funds inside Aztec are untraceable without the holder’s cooperation. If funds enter Aztec, they are untraceable without the holder’s cooperation inside the protocol. The network launched its alpha mainnet in early 2026 and is still nascent — roughly one transaction per second — but its architecture represents the most opaque privacy model of the four discussed here.
| Privacy Approach | What’s Hidden | What’s Visible | Examples |
| Sub-transaction privacy | Transaction existence and details, unless you’re a direct party | Only what participants explicitly share via permissions | Canton Network |
| Shielded pools | Sender, receiver, amount | Pool boundaries, voluntary disclosures via viewing keys | Zcash |
| Encrypted extensions | Transfer amounts, account balances | Sender/receiver addresses, full transaction graph | Solana confidential transfers |
| Private smart contracts | On-chain state, contract interactions | Public function calls, bridge deposits/withdrawals | Aztec Protocol |
At Chainalysis, we have been deploying our monitoring technology across all four models. Our main takeaway: no single approach works for all. Solana’s confidential transfers are built on an entirely different tech stack than Zcash’s shielded pools. The trick is tailoring our efforts to each chain, ensuring institutions and other compliance-oriented partners can effectively monitor all relevant on-chain activity, no matter where it originates.
How compliance can prepare for convergence
Institutional adoption of blockchains is accelerating the creation of privacy networks. But it also places a demand on each compliance team. They must ensure their organization is 1. Adopting the right technology for their needs, and 2. Adapting their monitoring practices for the nuances of the chosen platform.
Achieving that process begins with understanding how each model makes room (or doesn’t) for compliance oversight. As discussed, different privacy networks have different solutions. On Canton, a token issuer can grant an analytics provider visibility into transfers of its specific asset. On Zcash, holders can share viewing keys with an auditor or regulator, but only if they choose to. On Solana, a designated auditor can decrypt how much was transferred, but who sent what to whom was never hidden in the first place. On Aztec, the protocol provides no third-party visibility by default, but application developers can require users to selectively prove or disclose transaction details as a condition of use. Each carve-out has its own set of trade-offs that will appeal to some user bases, but fizzle with others. Compliance teams need to weigh them effectively.
They also need to be prepared for the public side of things. These networks’ privacy controls don’t exist in a vacuum; they often coexist (and interact with) the public transaction flow that makes blockchains distinct. Compliance teams must account for the bridges, smart contracts and deposit addresses where publicly viewable funds become private, and vice-versa.
Additionally, they must remain cognizant of the convergence between public and private, and their evolution. Many networks are refining their operations to fit the hybrid model better. Canton’s Zenith initiative is a prime example of this. It is building tech that allows Solana and Ethereum-based developers to easily deploy their smart contracts within the Canton environment – without needing to retool how they work. Well-established networks are also in flux. Solana’s confidential transfers have only just entered viability following their year offline for bug fixes. AI is also changing the dynamic. The emergence of frontier models –– experts in code exploitation –– recently prompted Zcash developers to patch a potentially calamitous bug in how the network’s shielded pools work.
Privacy is now a key infrastructure component, no longer a niche in the blockchain world. Monitoring these new systems requires a tailored approach. What worked on transparent chains won’t be enough for this new breed.
Chainalysis is closely reviewing all developments in this field. We are constantly improving our monitoring capabilities for the changes in how networks operate, and expanding our breadth to cover more privacy chains.
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