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Today, confidentiality is ingrained in our online interactions and ensures that sensitive information stays private and secure. From online payments, such as Venmo, to enterprise supply chains, multiple facets of our digital world rely on the confidentiality of data. As web3 evolves from a concept into a reality, the need for on-chain composable confidentiality remains a significant barrier to its widespread adoption. While decentralization and transparency are core tenets of decentralized technologies, absolute transparency isn’t relevant to every industry.
Imagine playing poker on a transparent board, your hand exposed for all to see. Not fair, right? Poker is a game where players depend on the secrecy of their cards and the unpredictable nature of the game to strategize and outwit their opponents. Hence, developing poker decentralized applications on public blockchains, where all transaction data is transparent, would be impossible.
Confidentiality unlocks web3’s potential
Industries such as gaming, payments, identity verification, voting, and institutional finance, therefore, rely on confidentiality to function effectively. Without it, many potential uses of dapps would remain unexplored.
For instance, user confidentiality is the biggest concern for individual and institutional users when conducting financial transactions. While cryptocurrencies provide improved platform reliability, they still lack the privacy of traditional payment methods. At the same time, blockchain as the value layer is unusable for mass adoption if it’s completely transparent—you wouldn’t want your family and colleagues to know how much you earn, nor neighbors or those with bad intentions to know how much money you have in crypto because you risk being targeted. On-chain confidentiality can unlock private yet traceable transactions, which address user concerns and comply with regulations like the European Union’s General Data Protection Regulation (GDPR).
Similarly, video games, including multiplayer card games, battle arena games, and strategic RPGs, demand the secrecy of certain game elements to maintain an exciting and challenging experience. Without implementing confidentiality, blockchain platforms would not be able to host such games, significantly limiting the on-chain game library.
Apart from these two issues, the “all or nothing” authentication approach of blockchain networks also hinders their adoption in cases such as voting, identity verification, and healthcare.
Confidentiality concerns and the confidentiality dilemma
The introduction of confidentiality while transitioning into web3 also presents a complex dilemma. On the one hand, the absolute transparency of blockchains and decentralized ledgers can hinder users’ fundamental right to data privacy. On the other hand, complete confidentiality can create tempting opportunities for illegal activities, such as money laundering and fraud. Striking the right balance between these two competing interests could potentially lead to web3 and decentralized technologies being adopted much broader on a global scale.
The open-source nature of public blockchains, such as Bitcoin and Ethereum, makes all the data available to everyone with access to the internet. While this enhances the platform’s trust and accountability, it also exposes transactional data, which may lead to problems such as privacy infringement.
Indeed, sensitive data, like transactional information, medical records, and identity information, can easily be stolen and shared without adequate security layers. This creates the possibility for unwarranted public scrutiny and crimes such as identity theft and identity piracy. Yet, complete privacy and totally anonymous transactions can also be exploited for criminal activities by malicious users.
Money laundering, tax evasion, and terrorist financing are risks that may arise in transactions under truly anonymous conditions because the lack of specific transaction details makes monitoring and enforcing compliance harder for regulatory bodies.
Challenges with current cryptographic methods
Though the blockchain industry has already started working to incorporate confidentiality into its protocols, the current cryptographic methods—zero-knowledge proofs (ZKP) and trusted execution environments (TEEs)—have limitations that restrict their usability or effectiveness for on-chain, composable confidentiality.
Zero-knowledge proofs enable one party to prove to another that a statement is true without revealing any information beyond the validity of the statement. These protocols have been successfully implemented in various blockchain applications to provide transactional privacy. However, they face challenges in scenarios that involve multiple parties, making them unsuitable for dapps with complex computations. Moreover, integrating these protocols requires specialized knowledge and tools, presenting an additional barrier for smaller businesses and individual users.
Trusted execution environments are used to provide a secure environment in which applications can perform confidential computations by running the applications in isolation from the operating system; this enhances the security of the application and its data. The uses of this cryptographic technology extend beyond the blockchain industry, as it is widely used in industries like mobile payments and cloud computing. However, TEEs remain susceptible to side-channel attacks that can potentially leak sensitive information. This vulnerability compromises the overall security of the platform.
Fully homomorphic encryption: the solution for on-chain confidentiality
Among the ongoing efforts in the blockchain industry to develop an optimal solution for on-chain confidentiality, fully homomorphic encryption (FHE) stands out as a promising technology. Unlike traditional cryptographic protocols that are designed to secure data in transit or at rest, FHE enables the computation of encrypted data without the need for decryption.
As a result, FHE’s approach to encryption makes it ideal for providing on-chain composable confidentiality for dapps and web3 protocols. It enables the computation and manipulation of the encrypted data without ever decrypting it, thus preserving the confidentiality of sensitive information throughout the entire process.
Moreover, whilst the transparent nature of blockchain can be a bug because you need to be able to verify historical transactions, FHE is fully cryptography-based and deterministic so that anyone can replay and verify the integrity of the computation.
With FHE, developers are now able to create on blockchain platforms complex, multi-party applications—from decentralized, private social media platforms to medical data management systems. This expands the utility and appeal of web3 technologies, attracting a more diverse user base and driving adoption across the various use cases mentioned above, such as voting, identity verification, supply chain, payment, gaming, and more.
Nonetheless, it’s important to note that FHE technology is still in its early stages and currently faces performance limitations, particularly in processing speed. The computational demands of FHE operations are significantly higher than those of traditional cryptographic technologies. However, this may change soon with advancements coming to the market, especially with the development of field-programmable gate array (FPGA) chips designed specifically for such computations.
Moreover, web3 solutions with FHE will be able to comply with data privacy and crime prevention regulations and facilitate industries with strict data security requirements. Unlike most of the standard cryptographic methodologies, FHE offers security that is, in theory, unbreakable and even proves to be resilient against future quantum computing technologies.
Final thoughts
Confidentiality is the missing link in web3, and addressing this critical issue is essential for driving adoption and unlocking the full potential of decentralized technologies. Only by establishing the complete privacy and security of sensitive information can the blockchain industry attract universal sectors such as healthcare, finance, banking, and entertainment.
Novel cryptographic protocols like fully homomorphic encryption can create a decentralized ecosystem that empowers users with control over their data without compromising the security and reliability of the digital ledgers.
