ERC-5564: How Ethereum Addresses the Privacy Shortcomings of Receiving Funds

Author: Vaidik Mandloi

Translation: Luffy, Foresight News

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Have you ever opened Etherscan to search for your wallet address, not to check transactions, but just to see what it looks like in the eyes of others.

Your current balance, every token you’ve ever held, NFTs you've purchased, protocols you've interacted with, those late-night DeFi attempts, every claim or ignored airdrop... everything is there, fully public.

Imagine sending this address to a freelancer who needs to pay you, to a DAO that funds you, or even just to someone you just met at a meeting. You’re not just giving a payment address; you’re exposing a complete on-chain financial profile.

The reason is simple: like most public blockchains, Ethereum treats each address essentially as a public ledger.

Most people have felt this awkwardness. Hesitating for a second before pasting a wallet; some even open a “new wallet” specifically for receiving payments; others move funds first to avoid revealing too much balance information.

This instinct is not limited to native crypto users. A 2023 global survey by Consensys covering 15,000 people shows: 83% value data privacy, but only 45% trust existing internet services.

ERC‑5564 is precisely designed to address this address correlation problem. It brings native privacy addresses into Ethereum: a standard that allows you to receive payments without exposing your main wallet every time.

What exactly does ERC‑5564 bring?

The core issue is that one address permanently records all your actions. So why must you reuse the same address?

Think about how you receive payments in the real world: when someone transfers money to your bank account, they need your account number, which doesn’t change every time. Over time, the bank account becomes a complete record of your income, expenses, and savings. The difference is: only you and the bank can see it.

On Ethereum, wallet addresses are structurally the same: they are permanent accounts in the global network state. When someone sends you money, they need your address; the address remains unchanged, and all transactions are recorded under the same public address.

Researchers call this the “Glass Bank Account” problem. The issue isn’t that transactions are visible, but that all actions are automatically bound to a nearly unchangeable address.

In early crypto, this only exposed basic transfer records. But later, blockchains evolved into lending markets, NFT platforms, governance systems, payment, and identity layers. Today, an address can reveal far more information than a few years ago.

A common analogy in privacy research: imagine playing “Battleship” on the blockchain, with every move visible. The rules are correctly enforced, and the system faithfully records everything. But when both parties can see each other's ship positions, strategy disappears.

The system operates exactly as designed, but the experience is completely different because transparency destroys privacy.

Financial cooperation is similar. Not every payment needs to carry the entire history of an address.

ERC‑5564 does not attempt to eliminate Ethereum’s transparency nor introduce complex designs like balance encryption or privacy pools. It focuses on a narrower, more practical problem: reducing automatic address linkage at the payment layer.

The core logic is simple: instead of directly giving your wallet address to the other party, you give a “secret meta-address.” This meta-address is not the payment target; it contains cryptographic information that generates a unique, temporary receiving address for you.

In other words, when someone pays you, the funds are not sent to your public main wallet but to a newly generated address for that transaction. On-chain, it looks like transferring to a never-before-used new account.

From the network’s perspective, everything remains the same. The change is that each payment is sent to a different address, not continuously recorded under a permanent account.

Does Ethereum really need this?

Look at user behavior to find the answer.

Take Tornado Cash as an example: a mixing protocol that lets users deposit funds into a public pool and then withdraw to a new address, breaking the link between sender and receiver. Despite sanctions and strict scrutiny, Tornado Cash processed over $2.5 billion in funds by 2025. This shows users are willing to take legal and reputational risks to separate transactions from their main wallets.

Similarly, Railgun uses zero-knowledge proofs to enable private transactions, hiding balances and transfer details. By 2025, Railgun’s locked value remained stable at around $70 million, with over $2 billion in total transaction volume.

In terms of secret payments, Umbra has implemented application-layer private payments on Ethereum: users publish confidential information and receive payments via one-time addresses. By 2026, Umbra had generated over 77,000 active secret addresses.

These figures are not huge relative to the entire market, but they demonstrate a strong user demand for “isolation.”

At the same time, these tools all have compromises:

Mixing requires entering and exiting separate contracts, increasing friction, damaging composability, and operating in regulatory gray areas.

ZK privacy tools are still an extra layer; users must actively choose to use them.

Umbra proves secret payments are useful but remains an independent application, not a wallet standard.

On Ethereum, achieving privacy always requires an extra step.

ERC‑5564 takes a different approach: instead of building a new privacy protocol, it standardizes secret payments at the wallet layer.

Where does Ethereum stand in the privacy space?

The privacy in the crypto world is not black-and-white but a spectrum of trade-offs.

At one end are protocols like Monero, which embed privacy directly into the protocol. Transaction amounts are hidden, and sender and receiver addresses are obscured. Privacy is not optional but enforced by design. Users don’t need to choose to enable privacy because confidentiality is the network’s default.

Additionally, Zcash introduces shielded transactions using zero-knowledge proofs. Zcash allows users to choose between transparent and private transactions, but it operates within dedicated shielded pools rather than the entire system. This architecture supports confidentiality but remains an independent mode rather than a fundamental network feature.

Ethereum, by contrast, has prioritized transparency and composability from day one.

This openness has fueled the rapid growth of DeFi, NFTs, and DAOs. The cost is structural linkage; privacy ecosystems can only be built outside the protocol.

ERC‑5564 signals a shift: instead of adding privacy as an external layer, it embeds privacy as a core component within Ethereum’s existing design, especially at the payment layer.

If Monero considers privacy as fundamental, and Zcash treats it as an optional mode, then ERC‑5564 makes privacy a standard infrastructure within wallets, rather than relying on separate chains or applications.

Industry narratives are evolving: the debate is no longer “should public chains be fully transparent or fully private,” but rather: “where should privacy be, how much is needed, and how can it coexist with verifiability and composability?”

What can privacy truly bring to users and markets?

Privacy is not just about hiding transactions; it fundamentally changes incentives and power distribution in financial systems. In this sense, privacy unlocks three core elements, which we can explore one by one.

On transparent blockchains, all operations are visible. This may seem trivial, but it’s not.

When all transaction data is public, the biggest beneficiaries are not ordinary users but those with the best data analysis tools—hedge funds, MEV bots, analytics firms, and AI models. Ordinary users’ behaviors are exposed, while experienced participants observe, model, and extract value.

This creates structural asymmetries.

The problem isn’t transparency itself but that transparency turns every economic action into a public signal, leading to strategies that develop around these signals and profit from them.

When transactions are hard to abuse, competition among participants shifts from who has better monitoring tools to who can better assess prices and risks. This leads to healthier, fairer markets. That’s the first step of privacy: limiting value extraction solely because transaction activity is visible.

The second, more significant unlocking is that privacy can facilitate capital formation, which transparent systems cannot.

Retail investors might tolerate full transparency, but institutional users never will.

If each position can be monitored in real-time, funds cannot effectively deploy capital into DeFi. If a fund holds a certain asset, the market might react unfavorably; if it hedges, competitors can track the hedging actions. Strategy protection becomes impossible. The same applies to corporations: if supplier relationships are visible, they cannot tokenize invoices on a public ledger; if salary structures are transparent, payroll cannot be issued on-chain. Transparent systems are conducive to experimentation but hinder autonomous decision-making.

This confirms the saying: “Token cross-chain is easy; key cross-chain is hard.”

On public chains, since all information is public, transferring assets across networks is straightforward. In private systems, once outside the privacy domain, historical transaction records are exposed, creating friction. Privacy-conscious users prefer environments where transaction history isn’t leaked upon exit.

This creates a new network effect.

Traditional blockchain competition focuses on throughput, fees, and developer tools. Privacy introduces competition in information isolation. Larger private anonymous pools hold more value; liquidity begins to concentrate there because confidentiality increases with scale.

The third unlock we can call “selective disclosure.”

Current systems treat privacy as binary: either fully public or fully hidden. Cryptography introduces a third option: you can prove certain facts without revealing underlying data.

Protocols can demonstrate solvency without revealing all holdings. Exchanges can prove reserves without disclosing account balances. Users can prove compliance with certain rules without revealing all transaction history.

This reduces systemic data honeypots and lowers the trade-off between privacy and regulation, opening doors to new financial applications.

For example, private lending markets can enforce collateral and liquidation rules while hiding borrower identities. Platforms like Aleo and Secret Network are experimenting with confidential DeFi designs.

On-chain dark pools can match trades without revealing order size or direction beforehand—an infrastructure that Renegade is building to prevent front-running based solely on intent visibility.

Regulated stablecoins can provide authorities with access under proper legal procedures while preventing the public from analyzing user behavior through transaction graphs. Private stablecoin projects like Paxos and Aleo, as well as Zcash’s key-viewing feature, explore this concept.

Trade finance platforms can tokenize invoices and prove they haven’t been used for double financing without revealing supplier relationships. Enterprise networks like Canton are piloting such confidential infrastructure, enabling companies to share ledgers efficiently without exposing sensitive commercial data.

All these will have long-term behavioral impacts.

Transparent systems permanently link identities and financial actions. Over time, this reduces their willingness to try new things because actions cannot be decoupled from long-term identities. Privacy restores the separation between participation and permanent exposure. It allows users to act without recording every decision in an immutable public record.

Conclusion

The original purpose of transparency is verifiability. Native privacy encryption, while maintaining verifiability, supports institutional capital and selective disclosure. ERC‑5564 does not aim to turn Ethereum into a privacy chain but to enable programmable, lightweight, native privacy for payments.