Part two of our three-part look at shielded trading.

Last week we argued that radical transparency turns DeFi into open season for front-running and strategy degradation. This follow-on asks a tougher question: what happens when we swing the pendulum the other way and hide everything?

Short answer: hiding everything often hurts more than it helps. Trading into complete darkness is scary.

Early privacy implementations and their shortcomings​

Mixers​

Tornado Cash proved you can break the wallet-to-wallet link. It also proved regulators can break your liquidity. After OFAC’s August 2022 sanction, volume through the mixer fell by roughly 85 percent, sliding from $2.8 billion in the six months before the ban to $425 million a year later. 

Privacy survived, users did not.

Privacy L1s​

Blockchains like Monero and Zcash protect every output, yet liquidity lives where traders meet. When OKX announced it would delist major privacy pairs on 5 January 2024, daily volumes and prices slipped across the sector.

A private rail with no major on-ramps becomes a dead end.

Early Dark Pool DEXs​

Teams built fully encrypted swaps to keep order flow dark. They pushed the science forward, but market depth stayed shallow:

• Penumbra’s TVL hovers near $12k and clears low-hundreds in daily volume.
• Renegade’s TVL is around $210k, with negligible volumes.
• SecretSwap secures about $480k.

These numbers expose the network-effect cliff, not the quality of the code. Big pools attract bigger pools, which hide the signals “Makers” use to hedge.The result is that they will either quote a wide spread or walk away. Users on aggregate follow the tightest spread, so flow migrates back to transparent giants.

UX and compliance friction​

Shielded rails promise safety, but they slow you down. First you deposit, then you wait for an anonymity set, pay proof gas, and bridge or wrap. In a market that clears in seconds, each extra click feels like a tax.

Couple this with regulation and you have unnecessary weight. By using a sanctioned mixer means every compliance desk will freeze your address. The result of this means that big capital that could tighten spreads will steer clear, leading to no meaningful depth ever forming.

Even when the tech hides your address, the timing and size of any trade will still leave a trail. If a grad student can trace it, a sniper bot can too. This meant that teams chased perfect secrecy end-to-end and, in the process, traded away a product people can use.

The takeaway​

Version-one privacy tools hid everything. In doing so they stripped out the information that markets need to function, swapping alpha (strategy) leakage for a liquidity drought.

Markets do not need to see your plan before the trade gets filled. They do need to see the trade’s fill after it lands and is settled. That insight shapes what comes next.

Up next​

Part three tests the hypothesis: keep intent secret, keep execution public. Trusted hardware makes that split possible. Same open ledger, zero alpha leak. Stay tuned.

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Part one of a three-part series on the future of shielded trading.

Decentralized Finance (DeFi) is one of crypto’s boldest promises: an open, borderless financial system that anyone can access with nothing more than a wallet and an internet connection.

And to be fair, it has delivered. DeFi protocols now hold over $114 billion in value. Billions move daily through decentralized exchanges and perpetuals. Financial primitives like lending, swaps, and synthetic assets are now programmable and permissionless.

But for all the technical achievement and excitement, DeFi is still stuck in a loop, haunted by the same issues that have plagued it for years.

This article doesn’t focus on solutions. It focuses on the rot at the foundation, the systemic trade-offs that make DeFi vulnerable, exploitable, and often unusable for the very people it’s meant to empower. If you’re looking for our solutions to some of these problems, read our article on Silhouette’s mission and vision for DeFi.

The Good: DeFi Has Product-Market Fit​

DeFi works. It’s global. It’s composable. And it’s accessible in a way that TradFi never could be. In markets where traditional infrastructure is broken, DeFi fills the gap with programmable money and uncensorable access.

Millions have onboarded. A new generation of financial tools have emerged. But the question is no longer “does it work?” It’s “who is it working for?”

The Bad: It’s Still Broken for Most Users​

Exploits. Bridge hacks. Rug pulls. Phishing. It’s hard to trust an industry where losing your life savings is one misclick away.

But worse than the risk is the UX.

DeFi is still alien to most users. Interfaces are clunky. Transaction flows are unintuitive. There are no safety nets. For most, it’s easier and safer to stay on a centralised exchange (CEX).

And even for power users, there’s a deeper problem that undermines the entire structure: everything you do is public.

Transparency: The Feature That Became a Flaw​

DeFi, up until now, has worshipped transparency. It’s what makes protocols verifiable and trustless. But in practice, it creates an information imbalance - a market structure where the most aggressive, technical actors feast on everyone else.

Every transaction reveals intent. Every wallet exposes a portfolio. Every action is a signal. And for those watching, there’s money to be made.

This isn’t theoretical. In 2024 alone, over $968M was extracted via MEV. That’s not a fringe issue, that’s systemic leakage. Value drained before a trade executes, simply because it was broadcasted in the open.

And MEV is just the start:

• Copy trading scrapes public addresses to replicate positions.

• Sniping bots wait for high-leverage liquidations.

• Quote fading exploits slippage after seeing your size.

In other words, DeFi gives everyone a Bloomberg terminal, but forces you to shout your trades into it.

The surface-level story says DeFi is fair because it’s transparent. But fairness isn’t about openness, but rather about equal footing.

Right now, most users operate blind while adversaries have a real-time edge. Builders are chased by forked clones. Traders are chased by bots. Institutions are chased away entirely.

This isn’t just bad UX, it's a broken market structure.

The Hyperliquid Exception?​

To be fair, some platforms are raising the bar. Hyperliquid has proven that onchain doesn’t have to mean slow, illiquid, or clunky.

It clears over $60B in weekly volume, with over 60% market share among perps DEXs. And it does it all with native support for composability.

But even here, the transparency issue persists. Better performance doesn’t remove the fact that order flow is exposed. Your strategy is still public. And alpha still leaks.

Imagine a president announcing his every move before a public event. The route, the motorcade and the security detail.

This isn’t transparent, it's a security risk.

In DeFi, traders do the same thing unwillingly. The moment you sign a transaction, your intent becomes public. Price, size, direction - everything visible before it executes.

That’s not fair, and it’s not secure. And it’s not how serious markets operate.

What This Series Is Really About​

This isn’t about dismissing DeFi. It’s about surfacing the contradictions we’ve buried under buzzwords.

The next article in this series will look at the failed privacy experiments that came before and why they couldn’t scale.

For now, just remember: in DeFi, transparency is a double-edged sword. And right now, it’s cutting the wrong side.

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Decentralised Finance has come a long way since the DeFi Summer of 2020. What began as a movement for open, permissionless transactions has now matured into a high-speed, scalable ecosystem. But it is all out in the open – every move is completely visible to anyone watching.

At Silhouette, we believe individual confidentiality enhances the foundational benefits of DeFi: accessibility and openness. The latest developments in cryptography enable us to apply verification to outcomes at a speed that matches the current on-chain pace. A transition from full transparency to verification is crucial to the future of an on-chain financial ecosystem.

The DeFi economy will combine open financial markets with the natural desire for users to reduce the visibility of their positions within the market. Silhouette is based on the premise that open public markets and private user interactions are non-negotiable requirements to usher in an on-chain environment that fits the needs of all of finance.

Introducing: The Shield Exchange​

Silhouette shields your Hyperliquid trades from prying eyes, allowing you to move freely and express your ideas in absolute confidence.

We use Trusted Execution Environments (TEE) to provide order flow matching and settlement on Hyperliquid. TEEs enable us to offer a sense of speed and scale while also providing assurances that no one can view or tamper with your orders.

By offering users the choice to protect strategic trade information, we enable a sense of freedom in an ever-increasing industrial bot ecosystem looking to extract every ounce of value. If information is freely available, it will be exploited. Silhouette ensures that your actions, from placing orders to developing your overall strategy, remain protected.

A key benefit of our system is the seamless ability to trade on HyperCore and HyperEVM. Apps, users, and builder code front-ends can utilise Silhouette to make interacting with Hyperliquid’s order book as simple as possible. We see simpler interfaces benefitting swaps, liquidations, the RFQ mechanism, TWAPs, and VWAPs. We are also excited about the potential of HIP-3, stablecoins and other features we have been working on, which we will share in the coming months.

Our thesis​

In finance, information asymmetry dramatically alters outcomes. When all participants possess the same information, markets tend towards efficiency, with prices reflecting intrinsic values.

Strategies change as information sets shift; if any information is known, then it can be used in a different competing strategy. Strategic decision-making in finance is heavily dependent on the availability and distribution of information, which directly influences outcomes and market dynamics. Disclosure and reporting standards are examples of ensuring that as much information is on the same level for all users to attain.

However, each user has a set of views and preferences, and their trades are an expression of that. In DeFi, users have limited tools to keep their preferences and views private while holding a market position. It is also well established that individual behaviours change when a person knows they are being watched.

Maintaining the public availability of the overall market state while concurrently concealing individual user positions strikes an effective balance between market transparency and user privacy, which we view as the key differentiator for more financial use cases.

This approach upholds market integrity and fairness by retaining public market knowledge while also granting users a degree of protection, empowering them to engage without risk of having their strategies compromised.

Backed by the best, who share our vision​

Our industry fixed the speed and scale problem; Silhouette solves the privacy problem. The vision of Silhouette is to be the catalyst for the rest of the finance to come on-chain. Enabling users to express their views freely, in open and permissionless markets.

Silhouette is backed by a $3 million pre-seed round led by RockawayX, which includes investors such as Amber Group, HiveMind, No Limit Holdings, and Protagonist. We are also extremely thankful for our angels from HyperActive.

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TL;DR

Silhouette is building on Hyperliquid because the future of on-chain needs speed, scale and privacy.

For an introduction to Silhouette, please see Introducing Silhouette.

Silhouette's goal is straightforward: offering a decentralised and full-featured private trading system that does not compromise user experience. A downfall of many other private trading environments is a lack of liquidity. Hyperliquid provides this liquidity and opportunity to support Silhouette’s mission.

Why Hyperliquid?​

Hyperliquid is a purpose-built chain aiming to ‘house all finance’. Its high performance, transaction speed, and robust liquidity create an effective and successful Decentralized Finance (DeFi) trading environment.

Liquidity is the lifeblood of DeFi. Healthy and sustainable liquidity ultimately determines the viability of crypto-economic systems. Rather than bootstrapping liquidity, the Silhouette protocol will be directly tied to the Hyperliquid L1 and HyperEVM, giving users and developers a new way to use their in-place assets in an exceptionally liquid ecosystem.

There is no need to set it up; use your wallet. There is no need to bridge; all traders' liquidity on Hyperliquid is available to use.

As the chain aspires to address fragmentation, Hyperliquid has considered traders in its development with features including:

• Exceptional Performance: Hyperliquid operates in milliseconds, meeting the demands of high-frequency and high-value trading.

• Robust Liquidity: The platform supports sustainable liquidity, ensuring better pricing and lower slippage.

• EVM Compatibility: Hyperliquid’s integration with EVM unlocks new possibilities, from leveraged trading to dApps with enhanced privacy.

Hyperliquid’s roadmap​

The future of Hyperliquid is as compelling as its initial offering. With a focus on expanding its ecosystem, especially the focus on EVM compatibility, there will be even more use cases. These include leveraged trading, aggregation, advanced UIs, and yield platforms - all of which can benefit from privacy enhancements offered by Silhouette.

What Silhouette Brings to Hyperliquid​

Hyperliquid provides the foundation of performance and liquidity, while Silhouette brings a critical layer of privacy that enhances the trading experience for users.

A key reason DEXs struggle with liquidity when compared to CEXs is because of the extra effort required for sophisticated actors to protect their proprietary strategies. For many traders and market makers, their order flow is their intellectual property. Silhouette’s privacy features ensure users can safeguard their strategies without sacrificing performance or liquidity.

By enabling secure, private trading, Silhouette enhances the overall value proposition of Hyperliquid, making it the go-to choice for serious DeFi traders.

Being Fit-For-Purpose​

While we see ourselves as multi-chain in the future, our immediate focus is building a platform that is fit for purpose, and Hyperliquid makes this possible. Backed by real performance, liquidity, and neutrality, we can create a next level experience currently unavailable in DeFi.

Users choose their trading venues for multiple reasons - the experience, the rewards, the community, and more. We want to enhance that experience and align with a chain that has a mission closely linked to ours - providing tools that make on-chain finance fairer and more valuable.

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Silhouette is a decentralised trading platform that offers alternative trading types to the Hyperliquid ecosystem. Using the latest privacy technology, we provide a hidden matching engine to optimize trade executions.

Submit and complete your trade without sharing your strategies with the market.

DeFi and Privacy​

Private trading is an environment designed to keep specific trade details secret. It allows trading strategies to be executed discreetly without broadcasting every action.

This concept is not new; it is a standard part of the traditional financial system, but it has not been successfully implemented in decentralised finance (DeFi).

DeFi, as a fully open and transparent trade environment, is one of the most compelling financial innovations in recent times. But it’s not perfect or immune to problems.

With such radical transparency comes ample opportunities for exploitation and negative trading practices. Information leak through decentralised exchanges open opportunities that diminish the value of the average trade, such as the well-known Maximal Extractable Value (MEV). This reduces the length of time an alpha-generating strategy can be useful.

Even though traders know this limitation of DEX environments, few have switched to the existing DeFi private trading exchanges. This is partly because private technology for DeFi platforms often has a poor user experience, discouraging traders from continuing after battling to place simple trades.

Liquidity also presents a challenge. It is well established that privacy for the sake of privacy is not a strong enough draw for DeFi traders. If a platform does not have adequate liquidity, traders won’t see value in keeping these low-quality trades private.

We strongly believe that end-to-end privacy is a different product. Specifically, we are not designing our product to focus on privacy as the killer feature but on execution guarantees enabled by privacy.

To build this valuable private trading environment, we bring together three key elements:

Effective privacy: Protect trade details without compromising user experience

High-quality strategies: Create the environment for trading strategies to last

Liquidity: Leverage existing liquidity

Bringing Private Trading to DeFi​

DeFi and traditional finance each have their own set of standards and drawbacks. Understanding the differences between these two markets is important, as transferring the offering from one market does not guarantee success in the other. Each market has its nuances and patterns.

In traditional finance, private trading venues ensure back-channel order flow and avoid signalling large sales to the market. In DeFi, we like the idea of transparently knowing the state of the market. So, privately pushing orders as if we were a traditional private venue doesn't work. Instead, we see the application of privacy in strategies as more important. You can see the state of the market, but you can't see someone's specific strategy.

An example can be seen in centralised exchanges (CEXs). These platforms have public, open-order books, but user account information and trades are private. This allows for some information protection on who places orders and their strategy, offering only the aggregate view of the market to on-lookers.

Our Approach​

Leveraging Liquidity

Our traders can use the native liquidity they have on-chain through Hyperliquid. Powered by the Central Limit Order Book, trades on Silhouette will feel like a private layer on top of Hyperliquid.

Diverse Trading Options

Our aim is not to replace the fully transparent DEXs but to act as another avenue for traders, diversifying what is possible and bringing more value to DeFi.

Once privacy is on the table, traders can keep their views on the market secret, protect their leveraged positions, avoid front-running swaps, and not reveal a hedge. These are just a few of the trading benefits privacy opens up.

Looking Ahead​

We’re working hard to build the foundations of the next generation of DeFi trading. In our next update, we’ll share why we chose Hyperliquid as our partner on this journey and details of our technical design outlining our trading environment.

Join Us​

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