In recent years, few technological advancements have sparked as much excitement and discussion as blockchain. With its rise to prominence during the unprecedented cryptocurrency boom of 2017, blockchain swiftly entered the mainstream lexicon. This technology builds upon well-established principles in distributed transaction processing and encryption, combining them in a truly innovative manner.
Today, the technology has garnered significant attention well beyond cryptocurrency, especially in the financial sector. From tokenisation to stablecoin, remittances, market-making and cross-border payments, blockchain’s decentralised nature and immutability provide countless opportunities for enhanced security, transparency, and efficiency. However, privacy remains a critical concern within the blockchain ecosystem across nearly all the industries and sectors it touches.
The issues arising from the lack of privacy in blockchains include theft, Maximum Extractable Value (MEV), and pervasive surveillance. This lack of privacy opens the door for various malicious activities and puts user funds and data at risk. Unlike this, at least traditional finance affords a satisfactory level of privacy, allowing transactions to be executed without exposing sensitive details to the world. Without privacy, blockchain falls short of its lofty ambitions. It’s a fundamental requirement for its adoption as a core infrastructure for value transfer. If blockchains are to achieve their full potential and become a bedrock of our financial systems, the issue of privacy needs to be addressed effectively.
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Addressing this challenge requires innovative solutions that can enhance privacy without compromising the core principles of blockchain. Fully Homomorphic Encryption (FHE), a cryptographic technique which has been talked about for many years but only now starting to realise its full potential, holds immense promise in mitigating the privacy issues associated with blockchain.
Confidentiality and data security
One of the primary privacy concerns in blockchain transactions is the lack of confidentiality, as the design of blockchain inherently promotes transparency and visibility to all participants. This openness potentially compromises the confidentiality of sensitive information, posing a significant challenge for industries that handle private and personal data. Storing sensitive data on-chain further increases the vulnerability to attacks and unauthorised access.
However, FHE arises as a powerful mechanism to potentially address these privacy concerns, enabling data encryption while preserving functionality. Participants can perform computations on encrypted data without the need to decrypt it, ensuring the confidentiality of sensitive information throughout the entire process.
This transformative approach allows blockchain participants to engage in transactions and data processing activities while maintaining the utmost privacy and minimising the chances of unauthorised access or data breaches.
User protection
Blockchain transactions are typically pseudonymous, with transaction details being publicly accessible. This inherent transparency can raise concerns about the privacy of users, as their transaction history becomes visible to anyone on the network. It is certainly telling that there are companies — like Arkham and Chainalysis — currently working to de-pseudonymise blockchain.
FHE introduces an additional layer of protection by encrypting the transaction data and enabling computation on encrypted data, offering a compelling solution to this challenge.
This means that participants can perform transactions on the blockchain while keeping their transaction details private, reducing the potential for data breaches or unwanted exposure of personal information.
This increased privacy fosters trust among users and promotes a more secure environment for conducting transactions on the blockchain.
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Regulatory compliance
Alongside user privacy and confidentiality concerns, blockchain adoption also faces challenges due to regulatory requirements surrounding data privacy and protection. Many industries have strict compliance frameworks that must be adhered to when handling sensitive data.
However, encrypting sensitive data using FHE can provide a privacy-enhancing solution that aligns with these regulatory frameworks, encouraging greater trust and widespread adoption. FHE enables organisations to securely store and process sensitive data while ensuring privacy and data protection. This not only helps blockchain platforms comply with regulations, but also provides users with the assurance that their data is handled in a secure and privacy-preserving manner.
Smart contract privacy
Another integral part of blockchain ecosystems often requiring access to sensitive data for execution are smart contracts, again raising concerns about the privacy and confidentiality of the data involved.
Because FHE can enable smart contracts to operate on private information securely, sensitive data remains confidential, even during contract execution. By incorporating FHE into smart contract design, blockchain platforms can preserve the privacy of the details of the contract, as well as the underlying data, while maintaining the trust and integrity of the overall system.
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Unleashing the power and overcoming challenges
FHE holds tremendous promise in addressing many privacy problems within the blockchain ecosystem — including the preservation of confidentiality, enhancement of data security, assurance of user privacy facilitation of regulatory compliance, and protection of smart contract privacy. However, it is important to acknowledge that further research and development are required to overcome its current computational complexity and performance limitations.
As the technology continues to evolve, efforts must be made to enhance its efficiency and scalability, ensuring that FHE becomes a practical and viable solution for blockchain privacy.
By combining the strengths of blockchain and FHE, we can forge a path towards a more private and secure future that empowers individuals, protects sensitive data, and instils confidence in the blockchain ecosystem.
Jason Delabays is blockchain ecosystem lead at Zama.
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