The rise of confidential blockchains

Cryptoeconomics is the study of economic interaction within a potentially adversarial environment. The development of cryptoeconomics has dramatically changed how value is transferred globally through decentralized peer-to-peer networks.

Today, two entities can transfer value globally, in close to real time, without even having banking relationships. Simple value transfer, manifest in payments made using digital cryptocurrencies, is only the beginning of the crypto economics revolution.

A variety of centralized and decentralized exchanges, trading desks, and lending platforms exist, and these platforms provide financial services to users of cryptocurrencies.

It has been interesting to observe how different aspects of computer science have enabled the development of cryptoeconomic problems.

Technologies that would have otherwise remained hidden in academic journals have been given the opportunity to impact the way electronic value is created and transferred around the world.  

Crypto economics has long been founded upon the proof-of-work consensus algorithm. This algorithm has proven to be truly resilient to Byzantine attacks. But there are downsides.

First, the performance of proof-of-work blockchains remains poor. Bitcoin, for example, still operates at seven transactions per second.

Second, proof-of-work blockchains are also extremely energy-intensive. Today, the process of creating Bitcoin consumes around 91 terawatt-hours of electricity annually. This is more energy than is used by Finland, a nation of about 5.5 million people.

While there is a section of commentators that consider this to be a necessary cost of protecting the global cryptocurrency system, rather than just the cost of running a digital payment system.

There is another section that thinks that this cost could be done away with by developing proof-of-stake consensus protocols, as they deliver much higher throughput of transactions. Indeed, the proof-of-stake blockchains built on the Tendermint framework deliver upwards of 10,000 transactions per second. 

However, proof-of-stake blockchains also have some downsides. For starters, they are a lot more centralized than proof-of-work blockchains, typically in the order of 50 validator nodes controlling the system.

Also, in proof-of-work blockchains, one does not need to possess any network resources (blockchain tokens) to become part of the network. In proof-of-stake blockchains, this is not the case, and a node needs to possess and stake a minimum number of tokens to become a validator.

Consequently, proof-of-stake blockchains present effective barriers to entry that are not a feature of proof-of-work blockchains. To stake coins and become a validator, a node would have to submit a transaction to that effect and the existing validators have the power to approve or disapprove such a transaction. This means that proof-of-stake blockchains are susceptible to control by a handful of collaborating parties. 

Nevertheless, there is a hidden advantage to proof-of-stake blockchains, as they can be designed such that only validators running in trusted execution environments provisioned using confidential computing resources may be allowed to join the network.

In addition to proving a sufficient stake in the network, a validator node can be mandated to also prove that they are operating within a trusted execution environment that provides protection for the blockchain application and the data being processed by the validator.

This is a simple extension of the proof-of-stake protocol that provides additional security for blockchain users. Notice that this requirement to use confidential computing resources is not possible in proof-of-work blockchains because the membership is open to one and all.

Now, if all the validators are to run inside trusted execution environments, then we have a new kind of blockchain – a confidential blockchain. Indeed, a privacy-first approach to designing blockchains is highly desirable. Projects such as ZCash and Monero have leveraged cryptographic techniques to deliver privacy-preserving cryptocurrencies.

While it has been possible to develop privacy-preserving protocols for mere payments, it has proven extremely difficult to deliver programmatic blockchains which allow for Smart Contracts while using cryptographic techniques.

The Enigma project, with roots in MIT, attempted to build a confidential blockchain using multi-party computation (MPC) technology, but the project did not really take off.

MPC technology is notoriously difficult to implement and carries with it performance penalties that increase with complexity. Computing on encrypted data without using a hardware root of trust has proven to be very challenging under real-world requirements. 

Confidential blockchains or privacy-first blockchains with full smart contract capabilities do exist. For example, consider the Secret Network project.

The Secret Network project, which can also trace its roots to the Enigma blockchain project, has retained the objective of building a privacy-first blockchain but has chosen another route towards delivering it.

It relies on validators operating inside trusted execution environments using the Intel® Software Guard Extensions (Intel® SGX) implementation of confidential computing. 

Another project which also relies on confidential computing to deliver transactional privacy is the Oasis Network. Their design unlocks several novel use cases., including private lending where the account balances of the lender and the borrower remain private with respect to each other. The borrowed amount also remains private, as does the direction of the transaction.

Private automated market-making and private decentralized exchanges – think private Uniswap – are also important use cases, whereby the swap pairs, swap amounts and identities of the contributors remain private.

Private stablecoins also benefit from the protection provided by confidential computing as all account balances and transactions remain private – unlocking the potential for a truly private, global payments system. 

We have observed that proof-of-stake blockchains can provide improved performance and are not characterized by exorbitant energy consumption. When operating inside a confidential computing framework, they can deliver transactional privacy, even for programmatic blockchains.

A variety of highly desirable use cases can be built on private proof-of-stake blockchains. Apart from these benefits, however, there is another hidden benefit of using confidential computing, since it can be used to increase the openness of proof-of-stake blockchains; an issue that was highlighted in the text above. 

When a validator node signs a transaction, all we know is that a certain key was used to sign a certain transaction. We have no knowledge of the code that that validator used to process the transaction.

The validator could be using code that is discriminatory to the admission of new validators or the sequencing of transactions. Perhaps it maintains a whitelist of entities that it trusts and only approves staking transactions from this pre-approved list.

Can we use confidential computing to ensure that validators operate with high integrity? The answer is “Yes”. It is possible to orchestrate the deployment of validators such that only validators with the correct hash measurement of their application code receive certificates necessary for them to participate in the proof-of-stake network.

Using attestation to verify that the node is deployed inside a trusted execution environment, the integrity of the validator code is checked at a runtime to ensure that only the validator application authorized by the blockchain is executed. This ensures transparency for blockchain participants while providing the intrinsic security of confidential computing for transactions.

In summary, confidential blockchains are here to stay and many, many more will be launched. A wide variety of use cases that were previously considered impossible will be implemented by leveraging confidential computing technology and proof-of-stake blockchains.

Trusted execution environments are going to play a key role in the development of the global electronic cash and financial services system that depends upon them. As cryptoeconomics becomes a part of everyday life, the application of confidential computing will enable new efficiencies, use cases, and blockchain features that we have yet to imagine.