Layer One: Major L1 chains launch competing solutions for institutional privacy

Welcome to Layer One: the newsletter and podcast on the intersection of crypto and the real world. Hosted by The Block's Kelvin Sparks and John Wu, President of Ava Labs, Layer One brings you inside the conversations driving blockchain forward.

Last week on the podcast we were joined by Andre Frank, COO of Tassat, and Jerald David, CEO of Lynq, to discuss the growing institutional demand for real-time settlement, data privacy and compliant, risk-managed infrastructure solutions.

In this week’s newsletter, we're taking a look at how major L1 blockchains are competing to meet the privacy demands of major financial institutions.

Major L1 chains launch competing solutions for institutional privacy

For years, crypto critics argued that anonymity was one of the industry’s fatal flaws. A financial system with pseudonymous accounts and limited Know Your Customer checks, they claimed, was suited mainly for money laundering and other illicit activity. But this framing missed a key point: public ledgers are actually a poor way to move money privately.

Now, as crypto goes mainstream and the narrative shifts, it’s actually the technology’s lack of privacy that’s become a hurdle for institutional adoption.

On the podcast last week, David of Lynq shared an anecdote from Mike Reed, Senior Vice President at Franklin Templeton, that neatly captures the problem. Just days after launching BENJI, the first tokenized U.S. money market fund, in 2021, all of the firm’s wallets were de-anonymized. Their onchain activity — past, present, and future — was exposed for anyone to track.

For individuals, that level of public exposure creates security risks. For institutions, the operational implications are even greater. Large financial firms spend billions on research and technology to maintain a competitive edge. Having all of their activity visible on a public blockchain can undermine those efforts, with transaction details potentially exposed to competitors before they are even confirmed onchain.

That renewed interest has helped push the combined market capitalization of privacy-focused tokens to $63.5 billion over the past year, according to CoinMarketCap data. Zcash has led the move, rising nearly 1,250% year over year.

Analysts at Galaxy Digital expect the sector's market cap to surpass $100 billion by year-end, driven by growing developer activity across the privacy niche.

Some major smart contract platforms have started retrofitting their tech stacks with opt-in privacy features. Solana last year rolled out Confidential Balances, a set of token extensions that allow balances to move between private and public states. Over the past year, the Ethereum Foundation also pushed privacy higher on its roadmap. A draft improvement proposal filed last month, EIP-8182, would introduce native private transfers to the network if adopted.

The team behind Cardano has taken a different approach. Charles Hoskinson last week unveiled an entirely new sister blockchain called Midnight. Its “hybrid ledger” allows users to choose which transaction details are kept private and which are disclosed. Midnight may already be gaining more institutional traction than its partner chain: the U.K.’s Monument Bank has said it plans to tokenize $330 million of retail deposits on the network, more than double Cardano's current total value locked.

Avalanche has likewise taken its own approach to institutional privacy. While the network’s main C-Chain remains fully public and permissionless, institutions can create their own permissioned subnets. These private Layer 1 networks provide configurable privacy and access controls, while remaining interoperable with the broader ecosystem.

Despite their different approaches, the goal is the same: attracting institutional capital. The blockchains that best balance compliance and privacy could capture a significant share of institutional adoption as privacy increasingly becomes a competitive advantage.

Podcast Recap: How Tassat and Lynq Are Rebuilding Financial Infrastructure

In the Headlines: The stories driving the conversation this week

• AI agent payments and identity platform Kite AI has gone live on mainnet. The L1 network — previously featured on the Layer One podcast — enables AI agents to make native stablecoin payments for goods and services, while allowing human users to set parameters such as daily spending limits for deployed agents. 
• Trading volume on Grayscale’s Zcash Trust surged last month, averaging $1.7 million per day. Analysts are watching the trust closely as a potential signal of institutional appetite for privacy-focused tokens. Grayscale plans to convert the trust into a spot ETF later this year after filing with the U.S. Securities and Exchange Commission last November.
• Binance has introduced new safeguarding features to combat so-called "wrench attacks." The platform now lets users trigger withdrawal lockdowns lasting up to a week, amid a rise in kidnappings and home invasions where victims are forced to transfer crypto holdings. Binance France’s CEO was reportedly targeted in one such incident in February.

Top of the Charts: Franklin Templeton's BENJI fund is the fourth-largest of its kind at ~$2 billion AUM

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Layer One is brought to you in collaboration with Avalanche.