On-Chain Auctions

On-chain auctions use smart contracts to manage and execute an auction, from the initial asset listing to determining the winner and finalizing the transaction.

Auctions are prevalent in the crypto sphere due to factors like the market’s high volatility, which frequently results in the liquidation of positions, the continuous, round-the-clock trading of diverse assets, and the relatively low barriers to entry for participants.

Each category of on-chain auction alone represents a vast sum of funds.

For example, December 11th, 2023 alone saw over $320M in positions liquidations occur, and while a significant fraction took place on centralized exchanges, trading is increasingly moving on-chain. Meanwhile, ICOs, tending to use auctions, have raised over $50B since 2017.

On-chain carbon credits, NFT marketplace sales, and many more areas of blockchain will require well-designed blockchain infrastructure with privacy & security built-in.

Issues with On-Chain Auctions

On-chain auctions currently struggle with 3 primary challenges:

1. Privacy
2. Integrity
3. Compliance

Privacy is an issue as on-chain auctions can be correlated to one’s real-life identity, making bidders targets for scams. For instance, Mark Cuban recently lost nearly $900,000 to a phishing attack, with many other noteworthy phishing attacks such as one against a key Harmony employee that led to the loss of $100M in funds. Additionally, dissecting one’s on-chain actions can lead to strategic bids made based on one’s identity or other factors. We also believe that blind auctions lead to more efficient price discovery, benefitting the entire market.

Integrity is an issue as publicly visible bid details on the blockchain could lead to issues such as front-running, collusion, or other forms of manipulation. For instance, existing or impending bids could be monitored, with a competing being placed at the very last second for a cent more. Encryption keeps bids secret until the auction concludes, creating a level playing field for all participants.

Last of all is regulatory compliance. Certain jurisdictions have strict privacy and data protection laws that require data confidentiality, and strict compliance around regulated assets. This will also increase as more institutions arrive on-chain, as well as regulated assets such as tokenized commodities, real estate, and financial instruments. For example, auctions revolving around regulated assets necessitate strict privacy and security measures, possible through Fully Homomorphic Encryption.

FHE on the Blockchain

Addressing the above challenges and ensuring the complete encryption of on-chain auctions is extremely easy to implement using Fhenix’s FHE Rollups.

FHE Rollups enable developers to craft custom application chains with built-in FHE capabilities while using well-known EVM languages such as Solidity. For example, an NFT marketplace could be its own FHE rollup that easily connects to both external EVM and non-EVM networks, while having all transactions be fully confidential. Concurrently, another interoperable rollup could be centered around fully encrypted Initial Coin Offerings (ICOs).

Developers can easily deploy any custom-purpose Layer 2 with privacy, security, and compliance built-in from the core while knowing that transactions are auditable if need be.

What about drawbacks?

One challenge is that FHE is cutting-edge, meaning that it’s also quite new.

In our 2-part series, we covered 5 separate challenges:

• Part 1 discussed nascent FHE schemes, libraries & compilers, and a need for advanced threshold decryption.

• Part 2 discussed the need for ZKPs for both user inputs & computations, data availability requirements, and the need for improvements in FHE hardware & software.

These technical aspects still require some modification, but progress has been moving extremely quickly and we expect the same for 2024.

Challenge: Implementing Zero-Knowledge Proofs for Verifiability

While FHE enables arbitrary computation over encrypted data, it cannot prove that something is correct without revealing the underlying information. This is where zero-knowledge proofs (ZKPs) excel, and combining both is useful in three ways:

1. Proof of Plaintext Structure: ZKPs can be used to demonstrate that the input plaintext is properly structured, which impacts the ciphertext (encrypted data) conforming to the encryption scheme. This cannot be done by the typical SNARK/STARK approaches common for ZK rollups because FHE’s lattice-based cryptography is post-quantum secure, and instead requires a proof system designed for lattice-based relations.

2. Proof of Plaintext Input: ZKPs can also prove that the plaintext is not only properly structured, but that it meets the application’s requirements. For example, I cannot send more funds than I have in my wallet. zk-SNARKs can be used here, but the challenging part is confirming that the input for this system is the same as the input for the plaintext structure system.

3. Proof of FHE Computation: ZKPs can be used to prove that computations are correct.

Solutions:
Each of the above 3 is in the midst of ongoing research providing promising results:

a. ZKPs of plaintext structure require a cost-efficient proof system for lattice-based relations, which is an area of ongoing research.

b. ZKPs of plaintext input are being advanced by firms such as Mind Network which have been integrating ZKPs to ensure zero-trust inputs, alongside the use of FHE. Sunscreen’s ZKP Compiler also shows promise here through the use of Bulletproofs, although they are not the most efficient proof system.

c. ZKPs of correct computation can be addressed via “Verifiable FHE” whereby a validator submits a ZKP to prove honest transaction execution. Assuming others can verify the ZKP was done correctly, only a single part is needed for execution. SherLOCKED is an example of an early prototype in this space, which offloads FHE computation to Risc0’s Bonsai zkVM and returns a ZKP.

Each area is advancing rapidly and we will be providing updates via our Twitter on the latest information.

Challenge: Low-Performance FHE Hardware

Latency is a recurring challenge for FHE and this is no different when it comes to hardware.  FHE computations over encrypted data were 100,000x slower than over plaintext data, but newer encryption schemes and FHE hardware advancements mean that FHE computations are now only 100x slower.

The fundamental reason for this is that calculations involve complex polynomial computations and time-consuming ciphertext operations. It’s also harder to accelerate blockchain-based FHE compared to application-specific use cases (such as Machine Learning FHE) as it requires the ability to process more general computations versus a more niche set.

Solutions:
Improvements are being made on 3 fronts:

a. FHE Hardware: FHE Accelerators are specialized hardware devices that enhance the performance of FHE computations by speeding up the complex mathematical operations involved. One example is the Fixed Point (FPT) accelerator that can exploit FHE’s inherent noise through the implementation of TFHE bootstrapping. Another example is BASALISC, an architecture family of hardware accelerators that use the cloud to accelerate FHE computations and is the first to implement the BGV scheme.

b. Optimized Software: F1 and CraterLake are two FHE Accelerators that combine both hardware and software elements to increase performance, and others may follow suit in the future. Fully functional compilers will likely be developed, with this software capable of optimizing FHE programs dependent on the specific For HE scheme chosen.

c. Scaling Out: Currently, FHE hardware accelerators are focused on improving individual accelerators vertically, rather than connecting various ones horizontally. This could drastically improve performance and is comparable to proof generation with ZKPs, where multiple proofs can be generated in parallel. A challenge with this is data inflation: data size increases drastically during encryption and computation, making it harder to connect various FHE hardware accelerators. Therefore, a promising area of research will be to look into the networking infrastructure amongst FHE hardware accelerators.

The Need for Encryption in LLMs

Encrypting LLMs is the answer if you want to use GenAI to:

1. Contextualize LLMs for enterprises

For internal GenAI use, enterprises would want to safeguard internal sensitive information while enabling GenAI to boost employee productivity. Customer-facing GenAI applications require custom data and robust privacy features on LLMs to safeguard proprietary data.

2. Navigate regulatory frameworks

Sharing private datasets with third parties (GenAI chatbots) can open a company to severe fines for non-compliance with regulations such as GDPR and CCPA. Countries such as Italy implemented a temporary ban on ChatGPT over data protection and privacy concerns. Several other European countries are assessing the tool’s compliance with the GDPR.

3. Fortify user interest

Cambridge Analytica comes to mind as one of the most controversial breaches of user privacy, where the political consulting company used the personal information of millions of Facebook (Meta) users for political advertising. Encrypting LLM data would be an ethical step in the general direction of ensuring data privacy.

4. Safeguard proprietary data

In an alarming incident, employees at Samsung Semiconductor used ChatGPT’s AI writer to resolve issues in their source code, feeding proprietary source code into a publicly available OpenAI, which would use the data to train itself. In two other instances at Samsung, proprietary information was provided to ChatGPT, raising IP and data privacy concerns and leading the company to ban the tool.

5. Unlock use cases

Most of all, it’s exciting to see encryption technologies coming to LLMs as they unlock potential use cases of GenAI. Developers get extremely restricted when privacy is insufficient or nearly impossible. Several use cases in industries such as finance, banking, law, and healthcare can’t come to fruition if data privacy remains a bottleneck.

Privacy concerns continue to abate innovation and commercialization of LLMs in enterprises for serious use cases particularly in sensitive industries, including finance and healthcare.

It’s not news that OpenAI’s ChatGPT refines its abilities using user data, and Google’s Bard has retention policies that contradict users’ data privacy expectations. This underscores a growing industry need for a user-centric approach to data privacy in GenAI implementation.

Various Encryption Solutions for LLMs

First, let’s consider encryption solutions that don’t work for modern technologies. Traditional encryption methods, such as AES and DES encryption, fall short in scenarios where data needs to be processed and safeguarded.

End-to-end encryption methods like those adopted by Web2 messaging services such as WhatsApp only protect data in transit. “It’s just a protection, a layer of encryption on top of the transmission”, says Pascal Paillier, CTO at Zama.

Why do these solutions fall short? If you want to process medical health data for predictive analysis, you’d want to preserve data privacy even during processing, which traditional encryption methods can’t achieve.

This is where Fully Homomorphic Encryption (FHE) comes in as a game-changer, allowing operations on data without ever exposing it.

Public LLMs are attack vectors unless you use FHE

FHE enables third parties to perform operations on underlying data without decrypting it. FHE is the third pillar of encryption. “We’ve had encryption in transit. We had encryption at rest. We never had encryption at use.”, says Paillier. FHE represents encryption at use.

This is what we are solving for at Fhenix, along with our partner, Zama. Our mission is to empower developers and data scientists to leverage FHE without having to learn cryptography to secure LLMs.

Here’s how FHE will end-to-end encrypt LLMs and ChatGPT:

• Encrypt the query and contextual data using a secret key known only to the user
• Send the encrypted prompt to the service provider running the LLM
• Compute the LLM on encrypted data and produce an encrypted response
• Send the encrypted response to the user, who then decrypts it using their key

This way, FHE would encrypt all communications between the user and the GenAI bot so that the application owners don’t retain and misuse users’ sensitive data. FHE would enable better use cases of GenAI by eliminating the privacy issue and permitting users to feed custom datasets to derive the most value from GenAI.

While FHE is the solution, the journey to implementing it isn’t without its hurdles. Let’s explore the challenges and how we’re tackling them.

Challenges and the Road Ahead

While FHE computation performance has improved by 20x in the last 3 years, we still have a ways to go before FHE encrypts LLMs. Estimates show that generating one encrypted LLM token would need up to 1 billion FHE operations, due to which FHE remains cost-prohibitive.

However, three significant trends are contributing to FHE readiness for LLMs:

• Compression techniques are making LLMs faster, resulting in less data to compute homomorphically. This will likely bring a 2x performance improvement for FHE.
• The cryptography behind FHE is improving, and we can realistically expect a 5x acceleration in the next five years.
• Several companies, including Duality, Intel, and IBM, are currently developing custom ASICs and FPGAs optimized for bootstrapping and homomorphic operations. These companies are targeting a 1,000x speedup for their first generation (planned for 2025) and up to 10,000x for their second generation. Consequently, you’d only need about 5 FHE accelerators to run an encrypted LLM, on par with the number of GPUs you need today for non-encrypted LLMs.

Our focus at Fhenix so far has been to make FHE possible. Next, we aim to make it feasible.

Challenge 1: Nascent FHE Schemes, Libraries and Compilers

First, let’s look at each term in turn:

1. Schemes: standardized and systematic approaches that help developers manage data or code to efficiently solve problems. This could include architectural designs, patterns, and best practices.
2. Libraries: collections of pre-written code that programmers can use to efficiently perform common tasks or access specific functionalities.
3. Compilers: these translate high-level programming languages into low-level machine code that can be easily executed on a blockchain platform.  Developers require a fully functional FHE compiler that handles complexities on their behalf, such as parameter selection.

Various challenges exist. For instance, existing FHE schemes (particularly TFHE) are around 1000x slower compared to plain computation. Developers need easy-to-use front-end libraries that abstract away the low-level FHE complexities, and a fully functional FHE compiler that handles complexities on their behalf.

We’ll cover the challenges associated with each, before showcasing how the appropriate solution is nearly here.

FHE Schemes

To begin implementing FHE into one’s application, the appropriate scheme must be chosen, which can be summarized in the table below.

While not all terms may be familiar to the reader, they may be worth further exploration if of interest.

Each of the above has inherent trade-offs, such as BGV/BFV being ideal for DeFi, but requiring knowledge of a circuit’s depth in advance. While FHEW/TFHE could also be used in DeFi, BGV/BFV are considered more efficient due to batching operations whereby multiple computations are batched together.

Developers must choose their scheme very carefully as it will impact other design decisions and future application performance, though for blockchain purposes, Exact Arithmetic tends to be most beneficial.

FHE Libraries

Depending on the chosen scheme, there are different libraries available to aid in the front-end programming experience.

Each scheme has a different relationship with each library, and the developer must also set parameters for their choices.

Another challenge for developers is that writing FHE programs requires a mental shift. For instance, one cannot write a branch (if-else) depending on a variable in the program, because programs cannot directly compare the variables like plain data. They also cannot write loops in their code for the same reason.

Solution: Web3 FHE Libraries & Compilers

Both FHE libraries and compilers have already been developed by leading technology firms such as Google and Microsoft, but primarily use the CKKS scheme which is focused on Machine Learning. These cannot adequately support ZKP schemes nor the intricacies of program chaining, which involves the sequential connection of multiple computer programs or software modules. Instead, DeFi-specific schemes such as BFV/BGV are needed. Fortunately, these Web3 FHE libraries and compilers now exist and are addressing all of the above challenges.

1. FHE Libraries

Zama’s open source TFHE-rs (Fully Homomorphic Encryption over the Torus) library enables the creation of FHE-based smart contracts in Solidity for Zama’s fhEVM. Additionally, there are ongoing developments in the TFHE ecosystem, with libraries like TFHE Rust and TFHE C++ (though the latter is still in the process of being fully developed).

2. FHE Compilers

Sunscreen FHE Compiler is a recently emerged Web3 compiler designed for DeFi use cases, allowing developers to program in Rust. It relies on Microsoft’s SEAL library and utilizes the BFV scheme.  Sunscreen simplifies the complexities mentioned earlier by offering features such as automatic parameter selection, circuit setup, data encoding, key selection, and more. Notably, it has demonstrated high performance among FHE compilers.

Moreover, the ongoing development of other FHE compilers signals positive advancements in this field, with the expectation of continued optimizations in the future.

Challenge 2: Secure Threshold Decryption

Given that FHE provides the computation of encrypted data, there’s a need to have a secure encryption and decryption key for the data to start its journey or arrive at its destination.

Therefore, there’s a need for an extremely secure and yet efficient threshold decryption protocol. This refers to a protocol or mechanism used to collectively decrypt data in a secure and distributed manner. It ensures that multiple parties must cooperate to decrypt information, making it difficult for any single entity to corrupt the process.

Currently, there are two bottlenecks here:
1. Overhead: FHE-based computation is complex and therefore requires high-performance nodes, which reduces the potential number of eligible nodes.
2. Latency: While more nodes improve decentralization, this also increases latency.

We therefore require a decryption technique that a) minimizes the chances of collusion (given that we may have a smaller set of nodes), b) is permissionless for new nodes, and c) is low-latency.

Solution: Threshold Decryption or Dynamic MPC

We see a few potential threshold decryption solutions:
1. N/2 threshold decryption: this means that more than half of the participants must cooperate in the decryption process, making it harder for malicious actors to collude.
2. Hardware Security Module (HSM) threshold decryption: these are specialized devices designed to protect cryptographic keys and perform secure operations, which adds an extra layer of security.
3. Trusted Execution Environment (TEE) threshold decryption: a secure environment for executing code involving sensitive data.

Alternatively, we could use Multiparty Computation (MPC), the common wallet security technique. An example of a possible technique that could be used for FHE is a variation of a traditional MPC implementation known as the 2PC-MPC algorithm. It requires all validators to participate, with 2/3 of validators (plus the user) required to generate a signature. One potential trade-off is that MPC may be more computationally complex and with more participants, which affects latency. This is an area of on-going research and may improve over time.

In summary, both threshold decryption and MPC variations such as the 2PC-MPC algorithm are being rapidly developed and show great promise for on-chain FHE.

Penn Blockchain Week: February 23-24

Penn Blockchain Week is one of the leading academic blockchain events. It includes speakers from various top-tier DeFi projects such as Eclipse, Berachain, and Gauntlet, as well as VC firms such as Bain Capital, Portal Ventures, and Union Square Ventures.

Learn more about Penn Blockchain Week.

ETH Denver: February 23 – March 6

Fhenix will be either hosting or attending four different ETHDenver events:

• DeFi Day: Organized by Dystopia Labs, this February 26th event will showcase talks from various DeFi projects, including Fhenix. More information shortly.

• Private Research Dinner: On February 27th we will be hosting a private research dinner for encryption leaders. More information shortly.

• Encryption Day: On February 28th we are bringing together the top minds in the encryption space, including the Founders of Fhenix, Zama, Arbitrum, EigenLayer, and Bankless, as well as researchers from Flashbots, Starkware, and more. Click here to register.

• ETHDenver Hackathon: Renowned for incubating top Ethereum projects, this hackathon stands out as a highlight of the year. Learn more here.

ETHGlobal London: March 15-17

ETHGlobal events are worldwide and focused on fostering a global Ethereum community, with speeches, hackathons, workshops, and more.

Learn more about ETHGlobal.

ETHSeoul: March 29-31

This annual event in Seoul, Korea is known to attract leading Ethereum researchers, developers, and community members from the APAC region.

Learn more about ETHSeoul.

On-Chain Gaming

Trustless gaming is an umbrella term that refers to the various gaming environments taking place on the blockchain, such as player-vs-player games, casino games (poker, blackjack, etc), prediction markets, e-sports, AR/VR-related games, and more. The trustless aspect refers to the fundamental blockchain design principle of eliminating trust between participants, in stark contrast to traditional gaming or gambling platforms that require the trust of a central authority or intermediary.

This sector holds immense potential, especially when considering that Web2 gaming has 2.7 billion annual users and is projected to generate $490 billion in revenue by 2023. And these figures exclude other sectors, such as the $87 billion online gambling market and the rapidly emerging AR/VR sector. However, the public nature of blockchain is currently ill-suited for trustless gaming from both a privacy and security perspective.

Let’s consider on-chain casino gaming.

Various limitations make them ill-suited for the blockchain at present:

• Real-Time Positions:  Player actions are openly visible, enabling bots to exploit them in real-time, compromising fairness.

• Historical Strategies: Blockchain records enable opponents to analyze past strategies, potentially predicting and manipulating future moves.

• Identity Correlation: High-value players’ identities can be linked to on-chain addresses, risking phishing attacks and real-world threats.

• Game Manipulation: Public blockchain allows exhaustive study of game mechanics, leading to potential exploitation and unfair outcomes.

Existing Approaches

A common existing approach used by projects such as Dark Forest and zkHoldEm is to rely upon zero-knowledge proofs (ZKPs) to bring privacy to gaming. ZKPs are great for compression as they can bundle many transactions into a single update, making them quite scalable while maintaining data privacy. This is useful in gaming, and zkHoldEm is one such example that works by having their zkShuffle smart contract provide encryption for each poker hand. Before each hand, players each shuffle the deck once and encrypt the result. When their hand is dealt, they decrypt their cards for all of the players to see. This, and details for other aspects of each poker hand, are verified through ZKPs.

However, this approach requires the game state to be updated on-demand each hand, with players each shuffling the deck and passing it on. We’d also argue that this approach is not very transparent. As mentioned with Snarky Monsters, ZKPs tend to be used for each game, rather than for each action. Even if a game claims to be fully honest and use ZKPs, it can be hard to verify this and reliance is placed on their off-chain integrity and systems. In the context of a Player-vs-Player (PvP) game like rock-paper-scissors, imagine a player losing 8 times in a row. It would be hard to prove the randomization occurred honestly, and the player may refuse to continue playing.

It’s also more complex this way – consider again the rock-paper-scissors game. On the blockchain (without FHE) a commit-reveal scheme is likely to be used, whereby a player’s choice is cryptographically committed, creating a “sealed envelope” of sorts. After all players have committed their choices, they reveal their actual choices, and the game’s outcome is declared. This provides a poor interface as multiple rounds of interaction are required which increases complexity.

FHE enables an improved approach with built-in transparency as each in-game move is on-chain and updates the blockchain’s state, verifiable via decryption. Async updates, rather than requiring players to shuffle cards each hand, are also possible as the card decks can be set up async.

With rock-paper-scissors where responses are encrypted on the blockchain using FHE, blockchain state updates can be made in real-time. The data is then decryptable once privacy is no longer required. This eliminates reliance on a single ZKP, as all data and computations can be verified.

This is possible with FHE technology.

FHE on the Blockchain

FHE is a game-changer for blockchain-based gaming. It ensures data remains encrypted from start to finish, enhancing decentralization and safety. User actions are encrypted on the blockchain, computed upon with FHE, and then decrypted to provide transparency and trust. It is fully on-chain with the blockchain’s state synchronously updated for all, ensuring privacy and security, and enabling new blockchain use cases.

It’s important to note that we are not competing with games themselves, as we wish to see them succeed and advance the industry together. Rather, we are a low-level infrastructure for confidential and secure computing that supports higher levels of the gaming stack. For example, FHE can be a base from which gaming ecosystems develop with privacy and security built-in through incorporating FHE technology at their core.

One promising avenue for achieving this is through Fhenix’s FHE Rollups, which empower developers to create custom app chains with FHE seamlessly integrated, all while using familiar Ethereum Virtual Machine (EVM) languages. For instance, one FHE rollup could be dedicated entirely to casino games, ensuring the complete privacy and security of these games. Meanwhile, another rollup, fully interoperable with the first, could focus on large-scale player-versus-player (PvP) games.

Is this already possible?

Yes, but given FHE’s complexity, there is a latency period that makes FHE best for games where actions are not time-sensitive, such as strategy games or casino games. This is to be expected of a nascent, cutting-edge technology, but we expect speed to rapidly improve throughout 2024 and into 2025, as FHE adoption increases as well.

Kyle Samani:
Guy Itzhaki, this one’s for you. Can you introduce yourself, please? You’ve been working on the Web3 side of things for a while at Intel. What was the most interesting thing for you from those days? And what motivated you to switch over to Web3?

Guy Itzhaki:
Perfect, thanks. Yeah, a little bit of background about myself. I’ve been working for Intel for many years with various projects. I think somewhere around 2017 was when I first got introduced into the blockchain space. Back then I led Intel’s confidential compute ecosystem development, building, and leading projects through an evolving trusted execution environment. One of the first projects I did back then was actually to develop a permission blockchain network for a stock exchange for lending securities. And that’s how I got connected into the entire blockchain space. Back then, I was invited to join many conferences. I was participating there. In one of them I actually met Guy Zyskind, my partner in crime here. And we started chatting about some of the problems that we see in blockchain and the lack of data confidentiality, which eventually led to me joining Fhenix now. And then, last year, I decided that I want to transition from confidential computing and explore further the domain of homomorphic encryption, and let Intel’s homomorphic encryption business development. And we’ll talk more about FHE. And why we think it’s now the right time for homomorphic encryption, and just recently left Intel and joined Fhenix as the CEO.

Kyle Samani:
Awesome. And now Guy Zyskind. We will turn it over to you. Could you please introduce yourself? You’ve been researching and working on Web3 and privacy and confidentiality technologies for the last decade. Can you share some of your OG insights?

Guy Zyskind:
Yeah, of course. Thanks, Kyle. Yeah, I’ve been in this space longer than many people I guess. I have been here for a decade, some consider this as a badge of achievement or the other way to say that I’ve seen too many battles and barely survived to the middle. So either way, you want to look into this fine. I’ve mostly been on the, let’s say, privacy encryption side of things on blockchain, like I’ve been basically the guy with the sign ever since like 2014 saying, “Look, unless we solve privacy. And unless we solve like encryption, then, this whole Web3 thing can actually go so far.” So I still think that message is surprisingly valid a decade later. We’ll probably get a little bit more about it like what were the twists and turns. For those who don’t know, like I actually wrote, like, probably the first two papers to actually describe this whole problem of confidential smart contracts. This was back in like 2015. And then I went ahead and kind of spun that out into a project that became secret network, which kind of spearheaded in production, this idea of private smart contracts. And obviously now continuing data, mostly on research and product side with Fhenix, and FHE. And clearly kind of like, I’d say, at least for me, in my own personal journey is because I think we were waiting for FHE all along, it just wasn’t there yet. But it much like [ZK] wasn’t there yet until like 2015 in the beginning, and so I kind of feel that, like we’re having the same transition right now with FHE. Maybe just like a couple of like, “[Unclear 00:16:53] sites, at least, like in retrospect, two things that I find a bit surprising is that, if I’m thinking about like the early, like, 2014, 13, 14 15 cohorts, like, we all thought that like a decade later, it’s either going to be the case that crypto is like bust, like it’s dead, like, no one’s going to care about it, it’s not going to be useful, or there’s going to be these like explosion and widespread mainstream adoption, it’s going to be everywhere. And I think that we are somewhere in between. Everyone knows about crypto, but it’s still the case that it’s like not mainstream adopted, which is I don’t think any one of us from the early days actually expected that to be the case or a possible outcome. And I think the other interesting part is, if you think about those days, and you extrapolate it today, you see that most of the, let’s say, things that caught on in crypto, they had like the fairest versions or thoughts or ideas, even as far as a decade ago. So no one knew that DeFi would ever be a thing. No one thought about DeFi, the term didn’t exist. But even in 2013-14, people were trying to build decentralized exchanges, which was like one of the first projects I tried to do. No one knew how to solve scalability yet, but everyone knew that’s a problem. And everyone knew that it’s probably going to take one or two directions, either gonna be like off chain layer-2 scalability. And again, layer-2 wasn’t the thing, but people call it like off-chain computing. And that obviously turned into a big thing with rollups. But that was not known back then. Or the other version is that people knew that you’re going to have to find a more scalable layer-1, which I’d say is like another direction that other projects have successfully taken like Solana and others. So to me that’s also a surprising insight, like even 10 years back, people kind of identify the problem and a first approximation of the solution. And then, today, we’re actually seeing how that has manifested sense.

Kyle Samani:
Already, and now next up, Tarun, could you please introduce yourself? Could you share your initial impressions and understanding about the chief technology and how it relates to blockchain?

Tarun Chitra:
Yeah. Hey, So I am Tarun, Founder of Gauntlet and also an investor in Ever Above ventures. I think my experience sort of, actually goes back more to 2011 or 2010. I was like about to graduate college and I was like, “Oh, should I really do this PhD in physics that I got accepted to or not?” And around the time I started reading Craig Gentry, his PhD thesis, which came out around then. And Craig Gentry is sort of this kind of crazy guy who was the first to figure out how to make FHE actually work in his PhD thesis. And at that time, it just felt like this kind of very magical thing. But it also seemed a little bit crazy, because the objects, the mathematical objects you needed to deal with were just very unruly, I couldn’t imagine someone actually figuring out how they implemented it. But it just had this very nice, elegant feel of, “Hey, I can do all these operations completely privately, and separate sort of the execution of something from the privacy of the inputs and the privacy of the entire execution trace.” So I’ve always kind of, in the back of my head, had that as the thing that inspired me way before, the outside sort of blockchains and DeFi stuff. But I think what has kind of over the last couple years, been, the reason for that this captivated me, is that there’s a lot of mechanisms within Defi, that, basically can’t be made private, alone with ZK, you can get some forms of privacy for those applications, but you can’t sort of completely make them private. So the simplest example is an AMM. AMM always has to have a public price. But from the public prices, you can kind of reverse engineer what trades cause those price changes because you know exactly the sort of deterministic way the AMM function has to change. And so, no matter what you do, even if I ZK the reserves of the AMM or I ZK certain states that users have, I’m still not really actually preventing people from figuring out what the trade sizes and front running are doing different types of actions with that form. The second thing is things like MEV, you could view them as sort of, really arising from this tradeoff between utility and privacy, where the more information you reveal, the potentially better execution you get. But at the same time, it also, you have kind of some of these adverse effects. And when you start thinking about how to design MEV auctions, things like suave, things of that form, where you have the split between private state and public state, you inevitably come to run into some of the limitations of just ZK alone. And so that sort of the lens, I view this from.

Kyle Samani:
All right. Now next, we’re gonna get back to Guy Itzhaki for a handful questions. Guy Itzhaki, could you please explain what is FHE? Someone who knows very little about FHE?

Guy Itzhaki:
Yeah, for sure. So I think in the most simple way to describe FHE, which I will say is a very novel encryption technology that’s existed for several years, is an ability to run computation and data while the data is encrypted. And if we take a step back and actually think about it, prior to FHE, when we encrypted data, we couldn’t really do anything with this data, if we wanted to do anything. We basically had to decrypt it, whether we decrypt it in a trusted executed issue environment or outside of it, and then we ran the computation on top of that. The normal thing about FHE is that now we don’t necessarily need to encrypt the data in order to run whatever computation we run on top of it. But rather, we can actually do the computation on the data while it’s encrypted. And that opens a whole new set of applications around that specifically in the blockchain space. We’re all familiar with the challenge that we’re facing today in the blockchain world that the data is transparent for everybody to see. And that’s actually one of the reasons that we’ve decided to start Fhenix is the ability to finally provide a way to do operations on data while it’s encrypted, and in that way, meaning that we can have data on chain, still encrypted, but still do us use cases that I’m gonna talk about later on.

Kyle Samani:
Okay, awesome. And then the next question is what is going to make FHE implementation and Web3 so exciting.

Guy Itzhaki:
Okay, maybe Guy Zyskind can take this one and I’ll answer in a minute.

Guy Zyskind:
I don’t know, this is like an open-end question. But I guess, there are several ways to look at this. If I’m putting the research ahead, then like, until Bitcoin people were trying in cryptography and distributed systems to kind of build this one machine or distributed system that solves eCash, like the ability to cryptographically send transactions from one to another without double spend and all that. And that was like a huge thing, when Bitcoin came because it kind of solved what cryptographers have been talking about since like the 80s and the 90s. And I feel that, cryptographers have been talking about this world, where there’s like, these trusted, if you really like a world computer on the cloud, like this trusted computer on the cloud, that allows everyone to basically, run whatever logic or functions or code or application that they want, but they can trust it to hold their data securely, not leak it. And then, run those computations faithfully. This is basically called Secure Computation, literally, it describes what it is, and blockchains, with smart contracts kind of got us halfway there. We trust the blockchain not to cheat because it can’t, unless it’s broken in some really bad way. But we don’t trust it to keep our data private or encrypted or secure. And that is basically what kind of like FHE complements. And I think having that kind of system having that kind of power outside in the world, if we can make it happen, that very smart people have been trying to conceptualize for, like 40 years now, is very exciting.

Guy Itzhaki:
And maybe just adding to that, I think one of the biggest promises of blockchain was that it enabled users to own their data, but not really to control who they share their data with. And I think the addition of FHE into that space is that now for the first time, we’re actually enabling users to control who can see their data, who they share their data with, and potentially even monetize that, which I think is one of the more exciting parts of that.

Kyle Samani:
Okay, and then next question for I guess, Guy Itzhaki or Guy Zyskind, whoever can take it, but why is now the right moment for Fhenix to launch?

Guy Itzhaki:
I think everybody mentioned it already. But FHE has been discussed for many years. But up until now, it was quite hard to implement. It’s computation bound. It’s very complex. But there’s been several advancements in that space, both in terms of computation. And in terms of simplifying the complexity. If you ask people who are involved in the FHE space for many years, they’ll say, “Yeah, in theory, we can do FHE. But trying to run it on a large amount of data, it would just not be feasible.” But what we’ve noticed then, was that by actually running FHE computation on right hardware plus improvements that’s happened in the FHE algorithms themselves, made it quite feasible for deployment today. And a lot of the complexities that we’re considering in the past or obstructed by the right usage of compilers and libraries, that absorbs the complexity. And when we decided to start Fhenix, one of the key goals for us was to make it as easy as possible for developers to develop, they don’t need to learn a new language, or they don’t need to become experts in FHE. And once that was able to be done, it was quite obvious that is a great time to start Fhenix, since we have a known problem in that space, right? The lack of data confidentiality, plus we have the right cryptographic solution here that can bring the solution. So I think it’s quite exciting because we’re literally seeing the hockey stick coming up in the next, I would say 12 to 18 months, with the introduction of dedicated hardware for FHE which would speed up performance even further standardization bodies that are working on FHE will be released in 2025. As well as a shift in how the blockchain community starts treating data confidentiality.

Guy Zyskind:
Also, this is like a great place to mention Zama. We’re working with Zama very closely on these Zama has been at the forefront of FHE from the last few years. They have like some of the most brilliant minds, and engineers working on making FHE much faster. And, just working with them to get on the journey. It’s pretty clear, at least to me, and hopefully to others that like this is like Guy Itzhaki was saying, we’re experiencing this hockey stick moment, in the sense like, I feel this is very similar to what we saw with ZK technologies, like 2015, people were like, “Yeah, maybe it’s okay for payments, but it’s not gonna scale for anything else.” Then 2017, people started to pay attention. And then it just like hit critical mass, and the rest of the story. So it does seem that there’s a lot of similarities, at least when it comes to how fast like FHE is going to scale now similar to what we saw with the ZK.

Guy Itzhaki:
And it’s probably worth mentioning that one of the more exciting things about FHE is that, yeah, we’re starting the journey, and the blockchain space. But the potential of FHE goes way beyond the blockchain world. We see the interest in Cloud service providers, financial institute’s which will eventually drive significant investment and resources, education and hardware. And definitely, since we’ve announced Fhenix and the work that we’ve done with Zama, we saw a spike in the interest and FHE, that’s a good sign. And we definitely believe that the next two years are going to be quite phenomenal in terms of the market education and market need for data confidentiality.

Kyle Samani:
All right. Next up, guys, I think we have FHE different from zero-knowledge cryptography such as STARKs?

Guy Zyskind:
Yeah, that’s a very good question. Because, I feel that’s like a pretty big misconception. Although people are starting to kind of pick up and understand the differences. I think the best way is to just give maybe a couple of examples and kind of like frame FHE and ZK in each of those. So, FHE, first of all, FHE is, people said before, basically allows you to compute over encrypted data without decrypting it. So again, like given maybe an example or to imagine like, Kyle, Tarun, myself and Itzhaki, we want, for example, compute, which one of us earns the most money, like, who gets the highest salary, but we don’t want to share our own salaries with each other, we just want to get a result, like, who is that person, this is basically computing the max function between the four of us. So I mean, with FHE, it’s conceptually, trivially forever FHE, like each one of us can encrypt the data using the same key, then each one of us, we can sell it to some Cloud server out there that understand, that can run FHE computations, can basically take all of our encrypted inputs, and basically compute the max function of them and just send them the result. And if you try to do that with ZK, for example, this is impossible. ZK doesn’t work that way. In ZK, there’s a prover and there’s a verifier. The prover, basically, is the one doing the computation. So, basically the prover has some data, it can run some computation of the data. And then it can send someone else that someone could be like, anyone, the result and say, “Here’s the pool that I actually computed over the data that I have, but I’m not going to show you the correct result. And here is the result. And here is the proof that it was done correctly.” So if we take the same example, where we want to compare all of our salaries, now we have this single point of trust that we just can’t avoid. So maybe we trust or maybe we settle Kyle on trusting you, meaning each one of us is sending you our salary. And then you compute the max, like, who earns the most money. And then you send a proof, a ZK proof to everyone. You don’t reveal the underlying salaries, although you solve them. But you do tell everyone else with the proof who is earning the most money. Another similar example of this, maybe, let’s say, for example, is using something like an encrypted ChatGPT. So I think I speak for everyone, when I say that sometimes, you ask ChatGPT some questions that you might not actually feel that comfortable sharing, especially if there’s some business secrets, or some very private information about yourself. Now, imagine that all of this was done in FHE. So you could theoretically have a solution where you encrypt your prompts to ChatGPT. And then ChatGPT basically runs the same thing it does today, but over the encrypted data, and then sends you back the result without actually ever decrypting or seeing your own query. Again, that is possible with FHE. But that’s not something you could do with ZK, like, the best you can do with ZK, for example, is you can send a ChatGPT your query, your prompt in the clear, and it will see a query. So, [no better than], but it can at least maybe verify to you like to prove to you that it actually ran the latest model, and it didn’t run ChatGPT 3 instead of 4, for example. So the bottom line is like the two actually solve different problems. They’re useful in different contexts. But if you really want to combine data from different people, that’s private, if you really want to be able to just get a level of privacy, like ZK only gets you so far, and FHE actually gets you all the way.

Kyle Samani:
All right. Next up, we are gonna get to Guy Zyskind, what is your vision for Fhenix and FHE and Web3?

Guy Zyskind:
Yeah, so this can be much shorter, we kind of touched on that. Like I said, I’ve been the guy with the sign for 10 years saying that, like we have to solve problems like on-chain, like lack of confidentiality, lack of privacy, not just because people care about the data, that is obviously a very important thing. But because of how Web3 works. In Web3, everything is published, which means that there’s just a lot of use cases that you simply cannot do without FHE. So you want to do private voting, you need something like FHE. Again, there are other solutions, but that’s probably like the Daisy Swan, you want to do MEV Auctions, as Tarun mentioned, you need something like FHE. You want to do an on-chain game. You want to do a simple game of [on-chain] poker, you can’t actually do that with ZK, you can do it on a blockchain because everyone is going to see your cards, and then there’s no game. So you need to FHE. So there’s clearly a world of applications that you just cannot do unless you have on-chain FHE. And to me, that’s like what’s exciting and that’s really the vision. The vision is that five years from now, using Fhenix, using FHE like people will realize in retrospect that there were so many applications that they could not have done today without FHE being available to them.

Guy Itzhaki:
And maybe just adding on top of that clearly Guy Zyskind gives examples of where a Fhenix and if he can bring value to existing Web3 applications today. My background is, I’ve been in the corporate space for many years. I have no doubt that if we want to make blockchain a success and actually have it widely used, and have corporations and financial Institute’s start seeing Web3 as the future. You have to have data confidentiality. There is no way that financial institute’s will put anything financial if they know that others can see it. So yeah, it’s a longer term and it will take time, but for me, transparency is a feature in some applications, but it’s definitely a blocker to many of the use cases that Zyskind described. But the ones that we’re actually haven’t even started thinking about.

Kyle Samani:
All right, next up. Guy Zyskind, can you tell us about your recent research and findings in FHE, and the rollups and the white paper you all just published for Fhenix?

Guy Zyskind:
Of course, and obviously, we can go as deep or shallow as we want. But just at a very high level. I think first of all, the white paper basically makes two observations. One observation is that, although the technologies are very similar, ZK and FHE, they share a similarity where both ZK and FHE, they require very heavy to do cryptography, which means that there’s no going around it, like whoever runs computations with FHE, is probably gonna have to run like either very expensive servers, or gonna have to utilize like, specialized hardware. Again, we’re seeing the same thing with ZK provers so that’s the similarity there. And that kind of bottleneck, let’s say, is a much better fit for a rollup architecture, where not all validators basically replicate the computation on the first layer, and duplicate it, and then you have like an x50, x100, x1000 depends on the number of nodes, cost factor for each computation. Plus, you have to wait until kind of like, the weakest link, the slowest node in that. So FHE, if you feel that you need rollups, when you’re not using FHE, where you are using it on plaintext, you definitely want FHE to be running in the world of architecture. That’s observation number one. Observation number two, and that’s a bit more nuanced. So hopefully, at least some of it will be clear to others. But it’s not that bad. The fact that FHE is, unlike other privacy technologies, like secure multi-party computation, when you’re doing FHE, you’re basically just working with encrypted beats, with like cipher texts. And everyone can see the cipher text, like you can publish them on-chain, is the whole on, like, you can publish the actual encrypted transactions on-chain, you can send it around, you don’t need to be selective in what you share with other parties. So again, it’s very, very amenable, it’s very constructive for a rollup architecture. Compare that with, again, sometimes secure multi-party computation, where you kind of have different validators and each validator, you have to share some different version of the encrypted data. And you can’t actually make the public because then you actually repeat the data. So those were the two observations why it’s needed and why it can work. The biggest open question that we had was, how do we do it? So you can actually do a ZK on top of FHE all up? But that is very expensive. Like the latest research says, this is three folders of magnitude slower. There’s a lot of people working on advancing it, including Zama, including [Unclear 00:43:45], we’re talking to, but it’s not there yet. That’s gonna take a while. So then the other question was, okay, on the optimistic avenue, the optimistic FHE rollup avenue, can that be done? And there the problem was, we want to build this on top of Ethereum. But then how do you actually do settlement of transactions or smart contract executions that are under the hood not running, like playing solidity. Well, solidity, but they’re not running, playing EVM under the hood, they’re actually running some pretty sophisticated technology. And we solve that, like we actually had to work for a few months to actually make sure that we solved that and we worked very closely with the [Unclear 00:44:35] team, who wrote the general purpose Web Assembly prover that works on the Ethereum L-1, which plugged beautifully into what we’re doing. But I think that’s the biggest breakthrough, like the fact that you can actually build an FHE rollup on top of Ethereum L-1 today, and you don’t actually have to make any changes, or any hacks to get it to work on Ethereum. You don’t need some special EIP, an opcode to actually make them for Ethereum that it seems.

Kyle Samani:
Alright, and then just kind of following up on that. How did the FHE rollups actually work? What are the key components here? What are the other kinds of major pieces here?

Guy Zyskind:
Yeah, all of the pieces are the same for the most part, they work differently to an extent, but they are generally the same, we have a sequence cell, who orders the transactions, again, transactions can be encrypted, then you have like an execution node that is actually executing those transactions, those are smart contract executions. And that has to be a pretty beefy computer, like ZK prover, this has to be something beefy that runs FHE computations. And then you have a settlement layer, which can be the Ethereum L-1. But it can obviously be other blockchains as well. And you have a data availability layer, which again, can be the Ethereum L-1, or it could be some other solution, like IDTA or Celestial, or maybe something that we cook up, there is there is a caveat here, cipher text ever blow up, they’re bigger, it takes more storage and we’ll actively working on improving that. But that is something to consider. And then the one piece that is definitely unique and different, and doesn’t actually exist in other places, is a threshold network. So without getting into too many details, whenever you read encryption, you should imagine there is a secret key somewhere. And where does that end? Who holds that secret key? In this case, we want all users to be able to encrypt via the same key or maybe there’s different keys, but at least more than one user should be able to [Unclear 00:47:06] using a single public key. So where does the secret key live? Well, that secret key lives in some treasure network. Ideally, over time, that can be something that we scale out, but probably we’ll start with something that’s fairly small. And that network is needed. Because just to give you an example, imagine you have a contract that is like a [Unclear 00:47:26] voting contract, where people basically vote on whatever outcome, we want the votes themselves to be encrypted. You can use FHE to tally the votes without decrypting or revealing anything. But at the end, do you want to be able to publicly decrypt? Like who won? Which option one or who won the election? So you need to be selected with that. And for that, you need to use the secret key in some form. So that network actually does threshold decryption, to publish the result.

Guy Itzhaki:
And, just listening to that, people should understand that even though it was a core underlying infrastructure is FHE based, the long term solution will require us to build a platform that uses ZK, for proving on the user side. FHE, for encryption, and MPC for the threshold network. So it’s not one versus the other in terms of encryption capabilities, but rather, it’s actually a combination of all three to really fulfill what’s needed here.

Kyle Samani:
All right. Next question. What makes FHE rollup such a big deal for our space? And especially for Ethereum?

Guy Itzhaki:
Tarun, do you want to take this one?

Tarun Chitra:
Yeah, for sure. So I think, if you look at the Ethereum roadmap, a lot of it is definitely focused on increasing proving capacity and increasing points where there’s aggregations of information. And that can be verified by anyone kind of relatively cheaply. I think a fundamental tenet of the Ethereum community is that nodes are relatively easy for people to run that kind of inherent belief and kind of in a lot of ways, the only ways to do that are via advanced cryptography. So that’s sort of like the highest level philosophical view of this. I think, a place that one should think of, FHE at least in my mind, when I think of threshold FHE is, you have on one hand, something like MPC where you can really– That’s used in a lot of places. It’s used in wallets, used in fire blocks, and used in Coinbase. But MPC has this problem of tons of rounds of communication, as Itzhaki mentioned earlier. On the other hand, you have ZK, which, via a lot of tricks and a lot of things that kind of people invented from 2012 to 2016, you kind of have this distinctiveness aspect. And you can kind of do things in a single step non-interactively. I think FHE sort of is in the middle in a lot of ways, there’s more communication, in some ways than the ZK. But for that extra communication, you get a lot of units of better mechanism design. So, when you think about a lot of mechanisms, say MEV auctions, people submit their transactions, the MEV searchers kind of aggregate transactions and try to figure out how to add in, either front running transactions or arbitrage transactions, then they submit that to block builders, who then kind of give the right to the proposer who wins a block in current Ethereum. In that entire sequence of that chain of events. At every step, once the user discloses their transaction, that’s completely public to everyone in that entire chain of third parties. And in a lot of ways, that’s where most of this extracted value that is not necessarily good for the end user gets lost. Now, there’s obviously efficiency that comes from people being able to see order flow, and figure out where to send it. But FHE provides, in my mind, one of, the most foolproof way of trying to make the vision of not having that value, as high as it is now, be able to reach its full potential. So if you think about the direction people are going with MEV options on Ethereum, a lot of things are looking at things like STX and that’s purely from the perspective of it being practical. But from a sort of threat model standpoint, STX is sort of one of these sorts of things where, A, it has historically had an insane number of attacks against it. B, at the end of the day, you’re still trusting Intel with the key, which is different from trusting this network of [structural] designers. And I think what we’re going to end up seeing is that STX does provide this kind of lower net value extraction for the network while keeping throughput up and keeping usability up. But people at some point, will realize  the kind of end state that is a lot more, is kind of at the level of security that the room desires is going to end up having to look more like FHE and less like ZK. So maybe that was kind of a long winded answer to this. But I think within a lot of places within how transactions are processed, Ethereum improved privacy with better user outcomes for non-validator users.

Kyle Samani:
Alright, next question we’ve got here. What are one of the most interesting use cases that FHE rollups can support? Anyone can jump in here.

Guy Zyskind:
I actually agree that MEV auctions are a big thing. I’m kind of curious what other interesting mechanisms like that we can do. Like, I think we’re only scratching the surface and I completely agree with Tarun. One thing and it’s not that flashed out. But one thing that I’m pretty excited about is and I think that’s a combination of what FHE can do and simplicity and the fact that it’s, at the end of the day, developers just write like solidity contracts, is like you can build something like native BTC like native Bitcoin, native Solana, native other assets, [Unclear 00:54:58] of a smart contract Ethereum, and then you can build something like, like cross chains swap between assets without actually wrapping them first and all that, you can do something like a fully on Ethereum, very simple kind of like version like uniswap. But they actually operate cross-chain like THORChain or THORSwap. So that’s something exciting. I actually think there’s a place– That’s not necessarily a very popular thing. Or at least that creates like a lot of– There’s a lot of, let’s say disagreement in our space between like, what you can approach. But I think that you can do things like private and compliant devices or both private, but you can actually add a lot more safety features and compliance related features, just because of the level of programmability that something like FHE gives you compared to something like, private transactions using ZK. And finally, I mentioned that I think on-chain games are also very interesting. I don’t know if the market is ready for it yet or not. Maybe it is, maybe it’s not. But generally speaking, I think that on-chain game is basically dead on arrival, without FHE.

Tarun Chitra:
One thing I would add, at least just from the perspective of like, trying to write programs, is, while I think there’s a lot of, obviously, given the increase in ZK proven capacity, and the improvement in tools, I think SERCOM looks 100 times better than it did even a year and a half ago. There’s kind of this inherent overhead on developers when writing with ZK code where you have to keep track of a lot of the state that you’re using. And it’s not as clear to the end user, like which pieces of state in their program need to actually be completely private, which pieces need to be put into STARK, which parts of the circuit have to read, there’s a lot of sort of design decisions that one has to make in ZK, that I think, add a lot of overhead and complexity to the developer experience. One thing that I think I’m personally most hopeful for FHE is it actually makes it so that I might be a junior developer, who probably doesn’t know anything about how cryptography works. But I could write an application without having to have this insane overhead of like, really understanding every piece of the circuit to know where the privacy guarantees are, and, this is not necessarily a flaw in decay, and then FHE will have some of this overhead too. But it’s just that I think, if you want to have this kind of dream future where I can write F of X, and F of X does all the encryption without me having to be like, “Okay, X needs to be partitioned into secret state and public state, I need to map X to this particular representation of F,” which is the circuit, I have to take the output, and then I have to mangle it back into whatever the output of F is supposed to be. Like, all of that stuff should be a lot easier if FHE just works. And I think that to me, that’s sort of like a mega application. But it makes it much easier development wise.

Guy Itzhaki:
I think people that have heard me speak in the past, I like to give the example of a limited access hackathon that we’ve done in July, together with Zama. And that was really, in the early days, a definite that we had. And I think we were really overwhelmed with developers ability to achieve their goals in, I would say probably less than 24 hours, we had a team to try to build private voting. And they’ve tried doing that using ZK for several months. And in less than 24 hours, they were actually able to achieve 80% of their goals. And the reason for that is just FHE is the right tool for the job. It’s very easy to use. In terms of the actual development, you’re using solidity, as well as an FHE library that enables you to just decrypt and encrypt the data that you want to encrypt and decrypt. And that’s pretty much it. So of course, there are design considerations that need to be taken into account. But actually, it’s very user friendly. The developers don’t really need to understand FHE in order to use it.

Kyle Samani:
All right. Next up, we are gonna get into, I guess a kind of a community question here and maybe Tarun you take this one. Since we can’t eliminate MEV on Ethereum, I was wondering if we can create an application that’s going to be similar to Flashbots that could run on Ethereum, I’m using FHE to minimize MEV?

Tarun Chitra:
Yeah, I mean, if you look at the roadmap, Suave is something that right now is planning on using STX for giving partial privacy to users. So users can encrypt their set of transactions and then reveal some metadata about it, say, “This transaction has a trade whose price needs to be at least X,” but doesn’t tell you exactly the quantity or it doesn’t tell you exactly the price. And then it runs an enclave that is used to determine how to sequence the block and how to charge for it. But I think the and, if you talk to Flash about themselves, I think they also agree that like in a world where FHE is efficient, and a world where they could do it fast enough. They would rather use that than STX. I think it’s really a question of, how do we get to the point that FHE latency wise is competitive with things like the [Unclear 01:01:32], and I think by trying to actually build real applications, like rollups trying to build real applications, like DeFi protocols that are able to give you better guarantees on how interest rates are calculated without revealing a lot about, say, the interest rates that are revealing a lot about the users who are have loans out? I think there’s a lot of stuff in that part of the world that will naturally lead to people figuring out how to make these optimizations, to make things more MEV resistant at the application level. And then as FHE, the latency for execution goes down, being able to use it in more real time systems.

Kyle Samani:
All right. Ah, got it. I guess I think there are just all community questions from here on out. We’ve already kind of touched on this one, but maybe it should recap. What are the biggest differences between ZK and FHE rollups?

Guy Itzhaki:
I can take this one. I think even though it sounds like we’re using the same term. It’s actually not though. The FHE rollups that were discussed in the white paper are really based on using optimistic rollup while introducing data confidentiality through FHE. ZK rollups, they’re mostly for scalability. So I would say, there’s not really a comparison here. And it’s not as if we’ve created the third type of rollup, which is now FHE rollups. But rather, we can say that we’ve taken the optimistic rollups and now for the first time introduced data confidentiality, we’re definitely planning to do the same with ZK once this becomes available, but this is more of a matter of a couple of years, down the line.

Kyle Samani:
All right, and then we are going to keep rolling with these community questions. FHE is advanced, but requires a lot of computation. How can Fhenix offer relative performance? What is the block time?

Guy Zyskind:
Yeah, I’ll take this. I mean, just in general, I’d say that, a big part of why we’re doing like FHE rollups and not like FHE, a side chain over the one is because, like, we feel though, we can scale it much better and much faster using the rollup architecture, that’s obviously true for non-FHE and true for FHE. We’ll still like optimizing and doing a lot of stuff. So I expect people will see things get much better and much faster all the time, the next like one to three years. Right now for the first version, again, it depends on transactions. It depends on stuff, but like we’re trying to aim at something like, comparable to Ethereum level on the layer-1. So not quite as a non-encrypted rollout phase that’s going to take a bit longer, but like between the Ethereum level scalability, maybe actually even slightly less for the first version. So maybe block times will be like, 30 seconds, instead of 15 seconds, maybe you can feed about like half of the transactions, you would in a blog, or you would feed the same amount of transactions, but the blocks are like two weeks longer, something along those lines.

Guy Itzhaki:
And it’s probably worth mentioning that I think there are over a dozen companies that are actually now either building or looking into building dedicated hardware for homomorphic encryption. And once this comes into the market, which I would say timeline is like 12 to 18 months, this will definitely make a transformation in FHE computation.

Kyle Samani:
Oh, all right. Next up, are there any competitors to Fhenix? And if yes, how is Fhenix different from them?

Guy Itzhaki:
Yeah, I have to take this one. I think the right term to look at the landscape in general is not so much in terms of competition, but rather, I’d say maybe even coalition. And the reason is that, no, there’s a lot of market education that needs to happen. Now. I think we all need to make sure that people understand the value of data confidentiality, the value of FHE. So from our standpoint, if there are others, and yes, there are a few that we can mention, whether they’re doing a through ZK, or through Trusted Execution Environment or through FHE. That’s really in the benefit of everyone, we believe that this market is going to exponentially grow. And there is going to be a place for multiple entities, we have the ones that are leading the market with the FHE infrastructure. So we’ve mentioned Zama, you know, earlier along the way, and they’re definitely one that are in the most advanced place and providing the FHE core capabilities. Sunscreen is another one that’s out there. But these are, you know, I’d say providing the FHE components needed for the blockchain world in terms of others that are actually building IoT infrastructure. So on the Trusted Execution domain, we have the likes of secret networks that we’ve mentioned, that are offering great capabilities using ties. And then we have ATO and Aztec that are doing the same. Same with zero knowledge. I think our unique value here is twofold. A were the first one to actually do the FHE rollups with a FHE. And second is that I would also add the amount of people that really understand FHE is not very high. And we have a really great team here with tons of experience, and both the developer and the business development part. So I would say to summarize it, yeah, we’re doing the rollups, we’re probably the only ones doing FHE roll up at this point, even though we suspect that there will be others. And that’s pretty much it.

Kyle Samani:
Okay, I know, we’re basically over on time. Got two more questions, guys. Let’s go through this quickly. I want to make sure I answer, are we happy to answer all of the community questions? Next one is FHG seems to deal with tons of data, where’s that data stored?

Guy Zyskind:
All so very quickly, there were the usual suspects that you can do it on day one, you can do it on dedicated, like L twos, like data availability layers. We’re still considering which one to choose, or maybe we allow, like both options. FHE I mean, although FHE, uncompress Kali, is there’s quite a big blow up in terms of storage. I mean, that’s right, there’s a technique called Trans ciphering, which, I believe, will be greatly improved, like in the next like, year or so. And trans ciphering is, you know, in very simple terms, a way to compress the cipher text. And you can do that before you store and then you can decompress after you load them. So, generally speaking, the overhead might not actually be as big as is, people might think. But it’s a tradeoff. And, that’s something that we’re kind of gonna have to play with and experiment with. And also see like, you know, what people feel comfortable with in terms of like, cost of storage and all that.

Kyle Samani:
Okay, and the last question here, guys, what does it gonna take to implement Fhenix on top of Ethereum? Is that possible, or does Fhenix only work on its own blockchain?

Guy Zyskind:
Yeah, that’s literally the white paper. The white paper is a car that proves that like, you know, you can build it on top of your favorite, and we’re doing it right now.

Kyle Samani:
Awesome. Well, hey, everyone, I know we ran a few minutes over. Thank you all for tuning in this morning or afternoon or maybe middle of the night, depending on where you maybe appreciate all of the community questions coming in and all of the excitement around Fhenix. I’m very honored to be an investor along with some of the other folks here. And thank you, Guy and guy and team for committing your life to building Fhenix.

A New Era of Encryption

Vast amounts of sensitive data now exist online due to the digital nature of the new world. At best, this requires businesses to adhere to strict data laws, and at worst leads to massive data exploits. Even the most advanced encryption techniques are insufficient, with exploits having impacted 422M users in 2022 alone.

This isn’t at any fault of encryption researchers – these techniques are extremely complex and advancements take years, if not decades. And a major weakness is that data must first be decrypted in order to be computed upon, before being reencrypted. This exposes the data to more attack vectors, contributing to exploits.

The superior method would be to keep data encrypted its entire journey. That is why it’s incredibly exciting and aspirational that Fully Homomorphic Encryption (FHE) has now arrived. Research into FHE began in the 1970s, and recent advancements have finally made it possible.

This has major implications for nearly every industry in existence. FHE can now be integrated into the blockchain, making that privacy and security is the status quo. It’s a naturally superior technology that benefits society as a whole, and the best part is that it’s easy for any EVM-based developer to implement through our fhEVM programing language.

The Three Phases of Progression

Bringing FHE to the blockchain means that all on-chain can have FHE built into it from the ground up. As the amount of on-chain data grows exponentially in the coming years and impacts every industry, it’s hard to understate the significance of this.

We are undergoing a true renaissance of how computing is done. This technology will have far-reaching societal implications on three levels:

• Phase 1: Security & Privacy

• Phase 2: New Applications

• Phase 3: The New Web

Phase 1

This can be considered the low-hanging fruit, but already this has major implications for nearly every industry. By enabling computations on encrypted data, privacy is preserved while attack vectors are significantly reduced.

In the context of consumers, this means data privacy and security. For businesses, it means a reduced likelihood for data corruption and easier compliance with relevant laws. It also means reduced data security costs, and the ability to engage in private transactions on-chain. This is relevant for every Web2 or Web3 business.

Phase 2

The next area of impact will be focused on the development of new applications. Some of these are already known and possible today, such as:

• Private voting

• Trustless gaming

• Payments

• Healthcare

• Anything else involving sensitive data

There are already 200,000 developers using Solidity. We believe this will rapidly increase, alongside other EVM languages, and our fhEVM enables any EVM-based developer to incorporate FHE technology into their work.

For example, it took a Web3 developer less than 24 hours to build out a fully private voting application on the Fhenix Devnet – something previously unimaginable.

Phase 3

The final tier is where things get really interesting, and we don’t quite have all the answers yet as to what may happen. Think of it like A.I. – yes, we know it will have an unimaginable global impact, but we don’t quite know exactly how as of yet. We do know that it will impact every industry and all other
cutting-edge technologies.

Consider the following: blockchain is a naturally superior technology that suffers from inherent transparency. Regular encryption techniques are critical for data privacy and security but continue to suffer from exploits and may soon be cracked by quantum computing. Cloud computing requires data to be decrypted before being processed, leading to delays, increased costs, and security flaws. Fully Homomorphic Encryption is the end game for all of these.

It builds privacy into blockchain, is secure against quantum computing, and will improve data processing and data integrity for every industry that operates to some extent digital (which is all of them).

The best part is that it’s also extremely accessible While other cutting-edge spaces like A.I. and quantum computing
require years of extensive research experience to work in, any EVM
developer can implement FHE into their blockchain workflow
through the easy use of the fhEVM.No technology this powerful has ever been available to so many people at once, which is also why we believe that true innovation will occur.

It’s a true renaissance of how we compute data, which will ultimately increase security and privacy in every industry. We believe this will reduce security costs, but it may also make data flow much more efficient due to not requiring decryption before computation. However, the true extent of where this takes us depends on how innovators decide to implement the technology.

FHE Encryption – A Quick Primer

In a recent blog post, we covered Fully Homomorphic Encryption (FHE), a cutting-edge technology that allows computation over encrypted data. Research into FHE began in the late 1970s, but only recently has computing power and technology advanced enough to bring it to fruition.

The computation of encrypted data has far-reaching implications across many industries but is particularly important for blockchains where data is publicly visible. By encrypting data on the blockchain and being able to compute upon it, use cases revolving around sensitive data become possible. This could include trustless gaming, private voting, and privacy-preserving AI, but we expect the full range of possibilities to be much greater. It also includes institutional use cases, such as payments, which would otherwise not be possible without sacrificing privacy.

Implementing FHE on the blockchain, especially on the Ethereum Virtual Machine (EVM), brings privacy to the blockchain and is a critical advancement for the space.

The Move Towards Rollups

Ethereum and EVM-compatible networks are leading the blockchain race but suffer from scalability limitations. A Layer 2 (L2) architecture has been proposed by leaders in the space (such as Vitalik Buterin) as Ethereum’s primary proposed scaling solution.

While Ethereum typically works by handling both execution and consensus itself, an L2 handles execution off of Ethereum. Transactions are then “rolled up” into one big update that is periodically sent to Ethereum for settlement. This is significantly more efficient given that smart contract execution is the heavy-duty part of block validation, but security is maintained as these executions are then sent to Ethereum for validator consensus.

There are two primary architectures for L2s:

1. Optimistic Rollups: Transactions are assumed valid unless otherwise challenged. They post all transaction data to Ethereum, allowing anyone to verify for themselves that the off-chain execution was done correctly. If any verifier detects malicious behavior, they can submit a fraud-proof on-chain which instigates a dispute process.

2. Zero-Knowledge (ZK) Rollups: Rather than post transaction data on-chain, they submit cryptographic proofs. These proofs are constructed using advanced cryptographic techniques known as ZK Proofs. They can be efficiently verified on-chain directly, without posting the full transaction data or having a dispute period.

Optimistic rollups require a dispute period but are much easier to implement than ZK Rollups. The reason for this is that ZK Rollups require significant computational power (and time) to create ZK Proofs, and are also much more complex to build. This also provides room for error in the code, which should be minimized.

If we were to implement our platform as a ZK Rollup, we would be combining two heavy-duty cryptographic techniques together. While research in this space may advance over the coming years, at the present moment the implementation of FHE through an optimistic approach is much better. A ZK approach would be orders of magnitude less efficient.

Therefore, we have chosen to implement the FHE Rollup as an optimistic rollup.

How does this work?

At a high level, we ensure data integrity by running a variation of Arbitrum Nitro’s fraud prover, which can do fraud proofs over the WebAssembly Virtual Machine (WASM). This has allowed us to compile FHE logic to WebAssembly and run it in a secure way on WASM code, rather than on the native Ethereum Virtual Machine (EVM) itself. Without using Arbitrum Nitro’s fraud prover, there would be challenges given that Ethereum does not natively support FHE operations.

Existing Solutions

The FHE Rollup is not the first proposed confidential smart contract platform.

Some existing solutions include:

1. Trusted Execution Environments (TEEs): transactions are decrypted and computed upon within a secure environment. TEEs are already in production and considered quite efficient, but they require reliance upon the environment’s security and are susceptible to vulnerabilities such as side-channel attacks.

2. Secure MPC: similar in nature to the FHE Rollup but use linear secret-sharing and garbled circuits rather than FHE technology. A drawback to this approach is that it is challenging to manage as data loads increase. it is also not suitable to a rollup architecture.

3. Zero-Knowledge (ZK): ZK techniques are more suited for verifying computations, instead than actually running confidential smart contracts.

Our FHE Rollup PoC is instead the first solution that operates fully and natively as an L2. This means that we have built a platform whereby FHE technology is built directly into the network, rather than being an external technology that comes with associated vulnerabilities and/or limitations.

Below we’ll provide an overview of our design that enables this.

Design Overview

Our platform aims to be modular which means it separates different components of the blockchain. In particular, it separates the Sequencer, Validator, and Data Availability (DA) layers. Ethereum handles the data settlement and DA component, while Fhenix handles the Sequencer (execution) and Validator (transaction validation).

This separation of components allows FHE Rollups to execute more efficiently while still having the necessary access to Ethereum’s DA.

The core FHE logic sits in our fheOS library. It is a programming library that contains everything that a developer needs to begin implementing FHE logic into their smart contracts. There are other components to fheOS, such as the TFHE-rs, which is a full FHE library built by our partner Zama. These technical specifications are beyond the scope of this article but we will cover them in future pieces.

A key technology used is our Threshold Services Network (TSN), useful for tasks such as decrypting data when necessary. An example of decryption being necessary could include announcing the outcome of a vote, which requires tallying votes. The TSN would decrypt the data and then return it. More information on the TSN can be found in the full whitepaper.

While in Web2 space data encryption is a well-established and required standard, it seems that the ‘lack-of-encryption’ for commercially sensitive and personal data in Web3 is still a growing and evolving threat. To scale the industry forward, privacy must be an integral part of blockchain, meaning that data encryption and computation capabilities should be key features of all blockchains.

To address this challenge we need to bring developers the infrastructure and tools that allow easy integration of robust data encryption capabilities in the applications that are essential for this space to grow.

Fhenix is rising to this challenge.

Fhenix is building the first confidential smart contract platform using fully homomorphic encryption (FHE). FHE is a novel cryptographic scheme that enables direct computation over encrypted data without ever revealing the underlying data. Fhenix’s goal is to advance application development in the blockchain ecosystem by bringing data encryption and encrypted data computation to smart contracts, transactions, and on-chain assets for the first time.

By leveraging the power of FHE, Fhenix redefines how sensitive data is being managed in the blockchain ecosystem, envisioning a future where privacy and decentralization are not at odds, but rather, complementary aspects of a secure digital economy.

Fully Homomorphic Encryption

FHE is considered the holy grail of cryptography, as it enables direct computation over encrypted data while never revealing the data to the server, or in the context of blockchains — to validators or sequencers. This is all groundbreaking, with recent breakthroughs paving the way for Homomorphic Encryption data processing to arrive at last on the blockchain.

This means that Fhenix now enables a wide array of versatile use cases such as:

• • Trustless Gaming: Every game that requires players to hide their information from other players, like on-chain casino gaming, where you need to hide information between opponents or the dealer, while still allowing computation on the data.
  • Private Voting: Both on-chain and off-chain voting mechanisms can operate with fully encrypted variables, ensuring confidentiality without sacrificing trustworthiness.
  • Privacy-Preserving AI: The ability to compute encrypted data opens the door for on-chain artificial intelligence applications, thereby expanding the range of possible use cases exponentially.
  • Confidential Token Transfers: P2P payments, commercial transactions, and other sensitive transfers can be made private, yet auditable.

These are all multi-billion dollar industries growing at a rapid pace, but applicability also extends to areas such as blind auctions, MEV protection, account abstraction, and confidential DAOs. We are also merely at the beginning of what’s truly possible, with many use cases undiscovered.

This is all possible due to fhEVM, which we’ll cover next.

The Gold Standard: fhEVM

fhEVM is a set of extensions for the Ethereum Virtual Machine (EVM) that allows Solidity developers to seamlessly create encrypted smart contracts without any cryptographic expertise. Solidity is the most popular Web3 language to date and comes with an extensive suite of developer tools and libraries, making fhEVM extremely easy to begin working with.

This is important, as blockchains that rely upon entirely novel programming languages have significant costs associated with attracting and training developers to begin using their unique language. In contrast, fhEVM taps into the expansive EVM community and enables developers to easily begin deploying new, innovative projects.

Fhenix also has a modular, extension-like design which means that its ability to compute encrypted data can be integrated across all blockchain layers, enabling the easy development of confidential smart contracts on public blockchains. For example, developers can now build applications around encrypted data, such as decentralized email services or private voting.

This comes in the form of the Fhenix SDK which can now be used by developers to add encryption capabilities to their existing products, seamlessly, without any changes to their existing smart contracts.

Fhenix’s limited access devnet was deployed in July 2023, and provides an approachable FHE playground where the fhEVM is already functional and in use. To apply for early access click here.

The Confidential Compute Constellation: Blockchain’s Encryption-First Future

While public blockchains are pseudonymous in nature, this is insufficient for many blockchain applications and will become increasingly easy to correlate on-chain activity with real-world identities. Also, It is important to understand that confidentiality is not a “one-size-fits-all” issue solved by one technology alone. Like in blockchains, there are multiple tradeoffs between confidentiality technologies, such as security, scalability, decentralization, complexity and cost.

This insight led to the formation of the Confidential Compute Constellation: a collective of interconnected confidential solutions serving as an encryption hub for Web 3.0.

The Confidential Computing Constellation starts by combining Secret Network’s battle-tested platform, experience and community with the novel Fully Homomorphic Encryption technology that Fhenix introduced into a full-fledged smart contract platform.

The goal of the Constellation is to combine a wide range of confidential-computing technologies and solutions to create a single hub for privacy and confidentiality on Web3, offering confidential computing applications on member networks and providing privacy as a service to the EVM ecosystem and beyond.