Privacy Networks — The future of smart contract platforms

By Henrique Centieiro, Senior Research Manager at HashKey Capital

Abstract: Privacy is important to ensure basic safety. Privacy is in fact a fundamental human right recognized by the UN Declaration of Human Rights and it is important to ensure human dignity, freedom of speech, and freedom of association. Imagine for a second that all you have is available online for anyone to see: your bank transactions, your salary, your investments, property, artwork, how much you spent at a restaurant, how much money you have (or don’t have). Does that sound right?

In a world that is moving towards Web3, the value of privacy networks is of utmost importance. Ignoring smart contract privacy networks today is like ignoring SSL encryption on the internet 20 years ago. Everything we do on the internet is encrypted — emails, bank transactions, online shopping — and we probably wouldn’t do these things without encryption and data protection. As we enter the Web3 world, the next phase of the internet, we also need to ensure data privacy.

In this report, we will look at 5 privacy smart contracts networks — Secret, Oasis, Horizen, Phala, Dero — and give you a better overview of the technologies that will help make Web3 become more private. Which one is going to be the next privacy standard we don’t know… but what we do know is that these are rock-solid projects with strong teams tackling the privacy issue.

A. The Privacy Problem

Blockchains are inherently transparent. Although Bitcoin was very often associated with anonymity, the reality is that Bitcoin (and many other networks including Ethereum) are not anonymous at all. Instead, these networks are pseudonymous and the transactions are very trivial to verify. Every Ethereum wallet has an address that a priori is not associated with the real name of the owner, but if Alice sends ETH, UST, or an NFT to Bob, Bob now knows Alice’s address and can check all her assets and all her previous transactions. There’s total transparency and total loss of privacy.

Let’s assume that Bob is a good guy but one day, Mallory discovers Alice’s address that contains 3 Bored Ape Yacht Club (BAYC) and 500 ETH and Mallory manages to easily connect Alice’s wallet to her real identity because Alice is using one of those BAYCs as her Twitter profile image. Then, Mallory can easily launch a hacking attack to try to steal Alice’s private keys or even worse, execute the “$5 wrench attack”. Nowadays, people with a significant amount of crypto assets are a honey pot for hackers that try to spear-fish or physically target them. Having a significant amount of crypto assets in your wallet is pretty much the same as walking around with your bank account balance written on your forehead.

B. Different cryptocurrencies have been trying to solve the privacy issue

Currently, the largest privacy coins by market capitalization are Zcash and Monero. These coins allow private and untraceable transactions by using technologies such as zero-knowledge proofs, stealth addresses, and ring signatures.

Although these blockchains do a great job protecting privacy, they don’t have any scripting functionality. Just like Bitcoin, they don’t allow the creation of complex smart contracts. Other Ethereum apps like Tornado Cash can obfuscate the transaction flow, but it’s far from keeping assets private. There come the privacy smart contract networks. They allow the developers to build smart contracts and applications that go hand in hand with data privacy.

In this report, we will look only at the smart contract networks. These privacy technologies may be more common than you think. For example, although TEEs are used by some of these networks, we all use TEEs every day for enhanced privacy: when you use your biometrics (fingerprint) to unlock an app on your phone, the app doesn’t have access to the fingerprint but has the info from the TEE saying “this fingerprint is alright!”. The fingerprint details never get out of the TEE in your phone’s CPU.

On permissioned enterprise blockchains, the answer to the privacy question is relatively simple. Technologies such as Corda, Hyperledger Fabric, or Quorum’s integration with Hyperledger Besu, allow data to be shared on a need-to-know basis or the creation of encrypted channels. Most times, most data is shared only with the nodes involved in that specific transaction.

Public blockchains are permissionless by nature, meaning that anyone can join as a node/ miner/ validator. How can we keep a network fully open, decentralized, and permissionless but at the same time keep the data private?

Here are the technologies used by the networks analyzed in this report:

C. Secret Network

Overview: Secret is a Delagated Proof-of-Stake (DPos) protocol using the Cosmos SDK. It aims to be a base-layer blockchain network with high throughput and additional privacy features. Secret achieves privacy by using TEEs (Trusted Execution Environments) on the network nodes.

The roots: Secret started as Enigma in 2015 at MIT as an Ethereum L2, allowing privacy-preserving smart contracts. In May 2020, Enigma was rebranded to Secret Network.

The tech: Secret uses the Cosmos SDK and the Tendermint consensus, which is also part of the Cosmos stack. It aims to be a base-layer blockchain network with high throughput and additional privacy features. As of April 2022, the maximum number of validators is 70. The smart contracts are executed in TEEs, which allows the execution/ processing of data while encrypted. This is achieved by using Intel SGX processors that leverage secure enclaves. These processors allow for processing encrypted data without the need to decrypt it.

The DeFi Ecosystem: There are 3 DEXes on Secret: SecretSwap (SEFI), SiennaSwap (SIENNA) and btn.group (BUTT). Although technologically sound, these DEXes have a microscopic size when compared to for example Osmosis (one of the biggest DeFi protocols on Cosmos). At the time of writing, Osmosis’ TVL is $1.6B. For comparison, SecretSwap’s TVL is approx. $37M; Sienna sits at $11M and btn.group, the youngest DeFi protocol, has only $1.2M in TVL. Considering their size, this may imply that the Secret DeFi protocols, although young and inherently risky, may have a huge upside. In addition, there’s also the Secret Bridge to bridge asset and a major NFT marketplace, Stashh.

D. Oasis Network

Overviews: Oasis is a privacy-focused Layer-1 smart contract blockchain network that uses the Cosmos SDK. Oasis achieves data-privacy and confidentiality by separating the consensus layer from the smart contract execution layer. The biggest advantage of Oasis is that it is a fully modular blockchain network that has at its core the consensus layer and it may have several paratime chains that communicate with the consensus layer.

The roots: Oasis Network was founded in 2018 out of Berkeley, University of California, by the hands of Professor Dawn Song. In fact, Oasis continues to have strong ties to the academic community, having the largest university programme among all the L1 blockchains, including over 25 universities in the programme (e.g. top universities like UC Berkley and Tsinghua University)

The tech: Oasis uses the proof-of-stake Tendermint consensus mechanism and it has 110 active validators that are elected via delegation. In this aspect, Oasis is pretty similar to Secret, just with a higher number of nodes. The main difference between Oasis and other chains is that Oasis separates the consensus and execution into 2 layers. This allows multiple paratimes to process transactions in parallel, allowing for more efficient resource allocation, especially with regards to more complex workloads. These paratimes have their own segregated nodes that may have different requirements for each paratime. For instance, the Cipher paratime uses TEE.

Use cases: Oasis privacy preserving layer comes with the Cypher paratime smart contracts, which can be seen almost a segregated chain inside the Oasis network. Multiple companies including BMW has tested the privacy capabilities of the network, aiming to increase data security and compliance with data regulations such as GDPR and CCPA. Oasis data tokenization allows for institutions to have access to some of the data without relating it to the user/provider of that data which potentially unlocks many use cases.

Token economics: The $ROSE token was launched in November 2020 with 1.5 billion in token supply, and the supply is capped at 10 billion. As of March 6 2022, the circulating supply is 3.5 billion , representing only 35% of the total supply.

The DeFi ecosystem: Oasis’s TVL ($148M) comes mainly from ValleySwap and YuzuSwap, both decentralized exchanges on the Emerald paratime. The bridging between other networks and Oasis can be done via the Wormhole Portal.

E. Horizen Network

Overviews: Horizen is the top blockchain in terms of node count: it has the largest node network with approx. 44,700 nodes. Horizen uses a cross-chain protocol called Zendoo. This protocol allows developers to build highly modular blockchains and applications. The Zendoo SDK is zk-SNARK-enabled which brings the privacy layer to the Horizen dApps, enabling developers to decide when they need to use that privacy layer.

The roots: The Horizen project started in March 2017 and the team has approx. 40 employees. In addition, the project also relies on IOHK (Charles Hoskinson’s company that is responsible for Cardano’s development) for research and development, among other tier 1 partners. In fact, Charles Hoskinson himself, Cardano’s Founder and Ethereum Co-Founder, was also involved in the development of Horizen.

The tech: Horizen’s modular side-chain SDK is available for anyone and it allows developers to customize their new sidechains, and enable Cross-Chain Transfer Protocol (CCTP) if they want to talk with other Horizen chains. According to Horizen, the side-chain SDK Blaze can handle up to a whopping 10 million transactions per second.

Use cases and ecosystem: Horizen, on the other hand, has a very flexible architecture and consequently it can handle multiple use cases. Some examples of the existing use cases (some of them leveraging the privacy features) include DeFi applications, CeFi entities and other blockchain networks.

DeFi ecosystem: Horizen has yet to boast the capabilities of building its DeFi ecosystem. Its tokenization platform is, at the time of this writing, on the testnet, with a scheduled release on the network sometime during the first half of 2022.

F. Phala Network

Overview: Phala tackles the issue of trust in the computation cloud. It aims to be a cloud computing network that offers cloud computing services like Microsoft Azure, AWS and Google Cloud, but is built on the Web3 tenets of trust and decentralization. Phala implements a confidential smart contract built on TEE-based privacy technology embedded into processors compatible with TEEs such as the Intel SGX, so that the data transfer and computational cloud can run on the confidential layer.

The roots: The Phala Network was born in Beijing in March 2018.

The tech: The Phala Network can be considered an innovation for Web3 that combines a few technologies that ensure a trustless cloud-based computing with many potential use cases. Similar to the Secret Network, Phala also runs confidential smart contracts. Both rely on hardware enclaves, using Intel SGX TEEs. However, while Secret is part of the Cosmos ecosystem and relies on its own Cosmos-based network for the consensus layer, Phala relies on Polkadot. Another important difference in the Phala architecture is that Phala adopted a rollup architecture, separating the consensus layer and the computation/ execution layer.

Use cases: Phala aims to build a decentralized cloud service with computing power coming from thousands of computers. This computation layer is where Phala’s fat contracts take place. In Phala’s terminology, “fat contracts” are not smart contracts. Instead, they are basically the layer where dApps can have access to the decentralized cloud computing network that is provided by the miners. The fat contract layer allows dApps to have access to real-time, low-latency computing power, and access to internet services.

DeFi ecosystem: At the time of writing, Phala does not have its own DeFi ecosystem just yet.

G. Dero Network

What is: Dero brings to the crypto space innovative ways of keeping data private and it’s definitely a trailblazer when it comes to data encryption. Dero is a general-purpose, private and scalable decentralized application platform that allows developers to deploy dApps that let users retain total control over their assets with complete privacy. Dero achieves this by using homomorphic encryption.

The roots: Launched in 2017, Dero is the first homomorphically encrypted protocol, and its team is comprised of cryptography specialists.

The tech: Dero is a hybrid blockchain, with an average block time of about 18 seconds. It is the first blockchain protocol to employ the integration of the proof-of-work mechanism with Directed Acyclic Graph block structure while ensuring anonymity. To achieve confidentiality, Dero is homomorphically encrypted. Homomorphic encryption, or HE, is a type of encryption that allows users to perform computations over encrypted data without requiring access to a decryption key.

Use cases: There are many potential uses cases for the Dero protocol. However, considering that the smart contract functionality has only been implemented recently, its dApp ecosystem is still small.

DeFi ecosystem: At the time of writing, Dero does not have its own DeFi ecosystem just yet.

About HashKey Capital
HashKey Capital, HashKey Group’s venture capital arm, is an institutional asset manager investing exclusively in blockchain technology, digital assets and crypto-financial infrastructures. It provides accredited investors and professional investors with secure access and diversified exposure to digital assets. HashKey Capital combines the agility and independent risk-taking traditionally found in the best venture firms, while offering differentiated access to the network of relationships found in one of the largest industrial and financial conglomerates in the world.
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