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Secret Network is the first blockchain with customizable privacy. It allows you to decide what you want to share, with whom, and how.
In this interview, Cosmos Joe interviews Carter Woetzel, a Lead Researcher and Economist for Shade protocol. Carter explains what Secret Network is, how Shade builds on top of it, and how he sees the regulatory environment.
Read our notes below to learn more.
Background of Secret Network
Privacy in web3 is more important than in web2 because everything is immutable in web3.
Secret Network has not only achieved privacy but also has Viewing Keys.
Viewing Keys allow for decrypting encrypted data and transactions, and these viewing keys can be given to a third party (e.g. auditor, tax specialist, etc.).
Staking derivative can be minted by locking up the token in a smart contract. The staking derivative in the background will auto-compound your stake collateral.
How Difficult It Is to Use Secret Network With The Current Wallet Software?
The goal for Secret Network for 2023/2024 is to improve infrastructure and flexibility around viewing keys.
Privacy tech is computationally expensive and the user experience has a long way to go.
Encryption vs Privacy
Privacy is an attribute.
Encryption is a verb, it’s something that is applied to a set of data.
Encryption achieves privacy but there are many other ways how to achieve privacy.
Secret Network achieves encryption by the nodes running a specific set of hardware that not even the nodes themselves can see, called secured enclaves.
It’s in the roadmap to continue to improve the privacy tech by combining the best components of hardware-level encryption with purely mathematical encryption.
Overview of Shade
Shade is built on Secret Network.
The 4 primitives the team wanted to tackle are lending, trading, stability, and payments.
All the revenue of these primitives goes back to Shade, which is the governance and treasury token.
Algorithmic Stablecoin vs Collateralized Stablecoin vs Silk
DAI by Maker Dao is the largest decentralized stablecoin besides FRAX.
It has a few problems including capital efficiency issues and a lack of privacy.
Terra tried to solve the capital efficiency problem, however, it had fundamental flaws, like risks to permissionless minting.
Silk shade is not the same mechanism as UST and LUNA.
Algorithmic stablecoin can be created with over-collateralization.
Silk is starting with an overcollateralized model.
Silk is not targeting a 1 Dollar peg, it’s targeting a price point that’s a basket of global currencies and commodities.
It has privacy attributes.
The team wants to make the protocol over time more capital efficient.
Collateral
4 factors have to be taken into consideration when using an overcollateralized model:
Bridge risk
smart contract risk
compressed volatility
depth of liquidity.
Compressed Volatility Example
BTC at $100, $50 worth of Silk minted, it’s 200% backing. If BTC drops to $50, the backing is now 100%.
At this point, the vault sells the BTC in the market at a discount and in return purchases Silk.
The protocol burns Silk, which stabilizes the collateralization of the system.
Compressed volatility is important here because the process takes time and if the BTC value drops too fast, the vault doesn’t have enough time.
Upgrade
Secret Network just completed one of its big upgrades.
The token standard on the network is SNIP20 which can now be moved onto IBC.
Partnership With Stride
Stride is another staking derivative project.
This project is trying to bring staking derivatives to the entire Cosmos ecosystem.
stAtom is one of the derivatives which will be brought to Shade Swap and it will be able to use as collateral to mint Silk.
Different strategies can be created with this, however, risk management needs to be in place.
Shade Lend
Collateralized lending.
Eventually, there will be a lending and borrowing market for cosmos assets.
On ETH the liquidation price points are visible, with privacy to a lending product, no one knows the liquidation point.
The Shade Swap DEX is completely front-running resistant.
Regulations
Once privacy gets distributed to enough people and there’s enough utility, there will be enough advocates for it that we’re actually able to create good legislation and good frameworks.
Privacy tech and blockchain haven’t been distributed enough.
In the short-term, privacy projects are going to get hurt.
Regulation will short-term hurt and long-term help secret network adoption.
Missing Pieces of Secret Network
Prioritization of the developer user experience.
Privacy tech must continue to push the forefront.
Liquidity problem which should be solved by Shade.
Important Links