UX Is Becoming The Key Battleground In The Layer 2 Privacy Wars

Privacy presents a difficult paradox for blockchain core developers. A concept that’s held dear by many in the Web3 community, true privacy – in contrast to pseudonymity – has been difficult to put into practice due to the need to publish data on-chain so it can be verified. It’s taken over a decade for solutions to emerge that can truly claim to offer transaction privacy without compromising on elements such as decentralization or security – and while guaranteeing a user experience that can compete with non-private L2 rivals.

On-chain privacy started out with privacy coins, which offered limited utility from a privacy standpoint and were inconvenient to boot. Users wanting to transact privately had to change their BTC into ZCash, Monero, or one of the other privacy coins.

In fact, ZCash was the first iteration of zero-knowledge technology, which would subsequently be harnessed as a scaling solution, leading to the proliferation of Ethereum L2s. These platforms rely on ZK encryption to validate batched transactions, avoiding the need to validate each one individually.

However, encrypting each transaction using ZK for privacy comes with an extremely high computational load and comes with limitations, such as requiring a trusted setup.

Consequently, the increasing adoption of blockchain and crypto combined with the demand for private transactions has created a flood of research and development efforts. The catch is that privacy platforms now have to compete in a crowded Layer 2 ecosystem, meaning that the singular USP of privacy won’t be enough to attract users. Platforms need to offer a compelling user experience combining privacy with scalability, affordability, security, reliability, and interoperability. Many of these are no mean feat when you consider the higher computational load required to process encrypted transactions.

Trusted Execution Environments (TEEs) were an early frontrunner in blockchain privacy. TEEs effectively move private computations off-chain into a hardware-based secure enclave. The drawback is that this environment isn’t decentralized – TEEs are run by firms such as Intel or SGX. This means users need to trust the hardware provider, which can be a sticking point for Web3 users who favor decentralized solutions. Using multiple TEE providers or backing up encryption with ZK-based solutions can mitigate risks; however, other solutions are emerging.

Fully homomorphic encryption (or FHE), considered to be the “holy grail” of encryption, enables the processing of any type of data without it ever needing to be decrypted. Until relatively recently, it was considered far too computationally heavy for most practical uses. However, Fhenix has found a novel way to address the problem by using a decentralized network of co-processors that can work on encrypted data without it ever needing to be decrypted.

The project recently teamed up with EigenLayer, tapping into the latter’s cryptoeconomic security to allow fast processing guaranteed by the EigenLayer validator network. This offers high-speed, scalable throughput with a guarantee of confidentiality and security, creating utility for blockchain in scenarios such as healthcare records, or identity and personal data management.

Garbled circuits are another cutting-edge privacy technology at the beginning of practical development, but the solution has demonstrated significant promise in its first implementation by COTI. Garbled circuits effectively translate the function to be computed into a Boolean circuit, which is then “garbled” by encrypting the inputs and the gates through which the inputs pass. A set of evaluation keys enables anyone to evaluate the output without revealing the input.

The net result is private transactions that can be processed up to 1000 times faster than standard FHE encryption. COTI foresees use cases such as DeFi lending, where a lender could assess loan suitability without ever needing to see the identity, credit history, or wallet contents of the loan applicant.

Poor usability – whether it’s in terms of fees, speed, or security – has been the Achilles Heel of blockchain technology throughout its development. Therefore, it’s reassuring to see that now privacy is on the table, projects are tackling usability as a pivotal enabler from the outset. Ultimately, this should pay dividends in the pace of development and extent of adoption.