Competition among Ethereum layer2 networks has entered a new phase. As Vitalik Buterin puts more weight on strengthening layer1, layer2 chains are in a position where they must differentiate in areas Ethereum cannot or does not pursue.

In this context, a key word Buterin himself pointed to is privacy. According to crypto media Bankless, the most watched project related to this is Starknet, a layer2 developed by StarkWare. StarkWare has been developing Starknet since 2018.

True to a company founded by a Zcash co-founder, StarkWare has treated privacy as a core task and recently produced concrete results. That is STRK20. STRK20 is a standard that makes any ERC-20 token private by default.

At the core of STRK20 is a “privacy pool.” It is a single smart contract that accepts any ERC-20 token, including a Bitcoin wrapper, stablecoins, ETH and STRK. When a user deposits tokens, the privacy pool bundles the tokens and gives the user encrypted “notes.” A note is a private record stating “this address holds this amount of this token.” The token itself does not leave the pool. Only ownership information remains, in the form of notes that the user can decrypt.

The way notes are sent is similar to Bitcoin. It uses Bitcoin’s UTXO method. When a note is sent, the existing note is burned and new notes are issued for the recipient’s share and the remaining balance. On-chain it looks like a regular transaction, but it does not reveal who sent how much.

Starknet blended in regulatory response mechanisms while emphasizing privacy in STRK20.

The privacy function also connects to DeFi. Users can use notes to swap tokens and stake them. If a note is burned, tokens are withdrawn from the pool and swapped on an exchange, and the result returns as a new note. The entire process is completed within a single transaction. According to Starknet, processing time is within 5 seconds and fees are below $0.2.

STRK20’s privacy function is scheduled to open on mainnet in late April. The first flagship asset will be strkBTC, a privacy-processed Bitcoin version.

But there are still tasks to be solved. Bankless said, “Pressure from law enforcement authorities on privacy developers is a reality. The trial of Tornado Cash developer Roman Storm is a representative case. Entities that participate in the STRK20 audit committee will be stepping into an actual law-enforcement environment, not a theoretical one. Starknet also embedded regulatory response mechanisms from the design stage in this context.”