The rise of confidential blockchains

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Contributed by Pralhad Deshpande, Ph.D., Senior Solutions Architect at Fortanix.

Cryptoeconomics is the study of economic interaction within a potentially adverse environment. The development of the crypto economy has drastically changed the way value is transferred globally through decentralized peer-to-peer networks. Today, two entities can transfer value globally, almost in real time, without even having banking relationships. Simple transfer of value, manifest in payments made through digital means CRYPTOCURRENCIES, it is only the beginning of the revolution of the crypto economy. There are a variety of centralized and decentralized exchanges, trading desks, and lending platforms, and these platforms provide financial services to cryptocurrency users.
It has been interesting to observe how different aspects of computing have allowed the development of cryptoeconomic problems. Technologies that would have otherwise remained hidden in academic journals have had the opportunity to impact the way electronic value is created and transferred around the world.

Cryptoeconomics has long relied on the proof-of-work consensus algorithm. This algorithm has proven to be truly resistant 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 also consume a lot of power. Today, the process of creating Bitcoin consumes about 91 terawatt-hours of electricity per year. This is more energy than is used by Finland, a nation of about 5.5 million people. Although, there is a section of commentators who consider this to be a necessary cost to protect the global cryptocurrency system, rather than just the cost of operating a digital payment system. There is another section that thinks this cost could be eliminated by developing proof-of-stake consensus protocols as they offer much higher transaction throughput. In fact, proof-of-stake blockchains built on the Tendermint framework deliver over 10,000 transactions per second.

However, proof-of-stake blockchains also have some downsides. For starters, they are much more centralized than proof-of-work blockchains, typically on the order of 50 validation nodes that control the system. Also, in proof-of-work blockchains, you do not need to own any network resources (blockchain tokens) to be part of the network. In proof-of-stake blockchains, this is not the case, and a node must own 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. In order to stake coins and become a validator, a node would have to submit a transaction to that effect and existing validators have the power to approve or disapprove said transaction. This means that proof-of-stake blockchains are likely to be controlled by a handful of collaborating parties.

However, there is a hidden advantage to proof of stake block chains, as they can be designed in such a way that only validators running in trusted execution environments provided with sensitive computing resources can join the network. In addition to demonstrating sufficient participation in the network, a validator node can also be ordered to demonstrate that it is operating within a reliable execution environment that provides protection for the blockchain application and the data that the validator processes. This is a simple extension to the proof-of-stake protocol that provides additional security for blockchain users. Note that this requirement to use sensitive computing resources is not possible on proof-of-work blockchains because membership is open to all.

Now, if all validators must run inside trusted execution environments, then we have a new type of blockchain: a confidential blockchain. Indeed, a privacy-first approach to designing blockchains is highly desirable. Projects like ZCash and Monero have taken advantage of cryptographic techniques to offer privacy-preserving cryptocurrencies.

While it has been possible to develop privacy-preserving protocols for simple payments, it has proven extremely difficult to deliver programmatic blockchains that enable smart contracts while using cryptographic techniques. The Enigma project, with roots at MIT, attempted to build a confidential blockchain using multi-party computing (MPC) technology, but the project didn’t really take off. MPC technology is notoriously difficult to implement and carries performance penalties that increase with complexity. Computing encrypted data without using a hardware root of trust has proven very challenging based on real-world requirements.

Confidential blockchains or privacy first block chains with full smart contract capabilities exist. For example, consider the Secret Network project. The Secret Network project, which can also trace its roots to the Enigma blockchain project, has maintained the goal of building a blockchain that prioritizes privacy, but has chosen another route to deliver it. It is based on validators that operate within trusted execution environments that use the confidential computing implementation of Intel® Software Guard Extensions (Intel® SGX).

Another project that also relies on sensitive computing to provide transactional privacy is the Oasis Network. Its design unlocks several novel use cases, including private lending where the lender’s and borrower’s account balances are kept private from each other. The amount borrowed also remains private, as does the address of the transaction.

Private and automated market making decentralized exchanges, think private Uniswap, are also important use cases, in which swap pairs, swap amounts, and contributor identities remain private. Private stablecoins also benefit from the protection provided by confidential computing, as all account balances and transactions remain private, unlocking the potential of a truly private global payments system.
We have found that proof-of-stake blockchains can provide improved performance and are not characterized by exorbitant power consumption. When operating within a sensitive computing framework, they can provide transactional privacy, even for programmatic blockchains. A variety of highly desirable use cases can be built on private proof-of-stake blockchains. However, aside from these benefits, there is another hidden benefit of using confidential computing, as it can be used to increase the openness of proof-of-stake blockchains; an issue that was highlighted in the previous text.

When a validating node signs a transaction, all we know is that a certain key was used to sign a certain transaction. We are not aware of the code that was used by that validator to process the transaction. The validator could be using code that discriminates against admitting new validators or sequencing transactions. Perhaps it maintains a white list of entities it trusts and only approves staking transactions from this pre-approved list.

Can we use confidential computing to ensure validators operate with high integrity? The answer is yes”. It is possible to orchestrate the implementation of validators so that only validators with the correct hash size of their application code receive the necessary certificates to participate in the proof-of-stake network. By using attestation to verify that the node is deployed within a trusted execution environment, the integrity of the validator code is verified at runtime to ensure that only the validator application authorized by the blockchain is executed, this ensures transparency for the participants of the blockchain while providing the intrinsic security of confidential computing for transactions.

In short, confidential blockchains are here to stay and many, many more will be released. A wide variety of use cases previously thought impossible will be implemented by leveraging sensitive computing technology and proof-of-stake blockchains. Trusted execution environments will play a key role in the development of the global electronic cash and financial services system that depends on them. As the crypto economy becomes a part of everyday life, the application of confidential computing will enable new efficiencies, use cases, and features of blockchain that we have yet to imagine.

Pralhad Deshpande, Ph.D. is a senior solutions architect at fortanix.

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