5 ways in which FHE can solve blockchain’s privacy problems

Blockchain technology has gained significant traction due to its decentralized nature and immutability, providing transparency and security for various applications, especially in finance.

Having gained notoriety during the 2010s with the boom of cryptocurrencies such as Bitcoin, skilled observers quickly identified the technology’s underlying potential to be used as a trusted means of recording value transfers.

fully homomorphic encryption (FHE)

Since then, blockchain applications have exploded: from smart contracts and supply chain management applications to asset registers and other recordkeeping tools spanning healthcare, retail, and other sectors.

But despite the obvious merits, privacy remains a major concern within the blockchain ecosystem.

The key challenges stem from blockchain’s decentralized structure and openness by design. The very nature of blockchain grants every participating node direct access to all the data stored within the chain. In other words, everything on a blockchain is public – the transactions, the data, and the accounts.

The benefit of this approach is that it ensures full transparency and immutability. However, on the flip side, it poses a significant challenge in relation to data privacy laws and regulations.

An introduction to fully homomorphic encryption

Fully homomorphic encryption (FHE) – a technique that allows data to be processed encrypted without the need for decryption – shows great promise in addressing the privacy issues associated with blockchain.

With FHE, data can be encrypted using a secret key, and then sent to a remote entity for “blind” processing to occur. The results from this processing are also encrypted and returned to the original user, and they can be decrypted by using the original secret key.

In this way, the user can still send data to a computing service and get a response. However, the entity processing that data never needs to see that data, nor does it have to secure it at rest or in transit. In other words, FHE delivers end-to-end encryption for remote computing.

Nobody can see your data but you – not (un)trusted third parties, not governments, and especially not malicious actors. FHE, like other encryption techniques, is incredibly robust, having proven to successfully resist decryption efforts even with the help of (yet-to-come) quantum computers.

Here, we’ll explore FHE’s potential in more detail, looking at five ways in which it can provide a solution to some of the key problems that persist in relation to blockchain use.

1 – Computational confidentiality

Blockchain transactions are typically transparent and visible to all participants, which compromises the confidentiality of sensitive information, be it transferred amounts, account balances or identities. Here, FHE allows data to be encrypted in a way that retains its full functionality. With FHE, blockchain participants can perform computations on encrypted data without the need to decrypt it, ensuring the confidentiality of sensitive information.

2 – Data security

Blockchain networks often store sensitive data on-chain, making it vulnerable to attacks or undesired behaviors such as MEV extraction. FHE can enhance data security by allowing computations to be performed on encrypted data, reducing the risks pertaining to data exposure. With FHE, sensitive data can remain encrypted throughout the entire transaction process, minimizing the chances of unauthorized access.

3 – User confidentiality

Blockchain transactions are usually pseudonymous, with transaction specifics being open to the public. FHE can provide a veil of confidentiality by hiding the transaction information and facilitating calculations on this encrypted data. Thus, participants can execute transactions while preserving the privacy of their identities and transaction particulars.

4 – Regulatory compliance

Blockchain adoption faces challenges due to regulatory requirements surrounding data privacy and protection. FHE can provide a privacy-enhancing solution that aligns with regulatory frameworks such as anti-money laundering (AML). By encrypting sensitive data using FHE, blockchain applications can meet privacy compliance requirements, fostering greater trust and widespread adoption.

5 – Smart contract privacy

Smart contracts are an integral part of blockchain ecosystems, but they often require access to sensitive data for execution. FHE enables smart contracts to operate on private information securely, ensuring that sensitive data remains confidential, even during contract execution.

Paving a path to blockchain privacy success

FHE presents a promising solution to blockchain’s privacy problem by enabling secure computation on encrypted data.

The ability to preserve confidentiality, enhance data security, ensure user anonymity, facilitate regulatory compliance, and protect smart contract privacy make it a powerful tool for privacy preservation within the blockchain ecosystem.

Integrating FHE into blockchain networks could lead to increased privacy and trust, fostering broader adoption of blockchain technology across various industries. However, further research and development are necessary to overcome FHE’s computational complexity and performance limitations, to make it a practical and scalable solution for blockchain privacy.

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