Multicoin Capital The Dawn of Fhenix and On-chain Fully Homomorphic Encryption

Multicoin Capital Fhenix and On-chain Fully Homomorphic Encryption

Author: Kyle Samani, Co-founder of Multicoin Capital; Translation: LianGuaicryptonaitive

For the past decade, two of the most challenging technical problems in the cryptocurrency field have been clear: scalability and privacy. Most of the industry’s discussions have been focused on scalability, while a few teams have quietly been building various advanced cryptographic technologies to achieve privacy.

Today, I am pleased to announce that Multicoin has led a $7.5 million investment in Fhenix, who is pioneering a fundamentally new approach to achieving on-chain privacy.

Fully Homomorphic Encryption (FHE)

What is FHE? FHE is an advanced form of encryption that allows for arbitrary computations on encrypted data. To understand what FHE can achieve, let’s consider one of the most popular applications in the world: Telegram.

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Telegram has over 800 million monthly active users. The application performs incredibly well and is very smooth to use.

To achieve this performance, Telegram made a significant trade-off: no encryption. This means that Telegram’s servers store copies of all your messages in plaintext (meaning Telegram’s servers, employees, and any hackers can read them). Storing messages in plaintext is crucial for performance, and it is also crucial for one of the most important features in any text-based application: search. When you search on Telegram, the servers search through all your previous messages to return search results. Running such searches locally would be very slow, especially on low-end Android devices (representing the majority of Telegram users).

Now, let’s consider an alternate version of Telegram where they store encrypted messages on their servers. Intuitively, server-side search wouldn’t work. If the server can only see encrypted data blocks, how can it search?

With FHE, Telegram can run server-side searches on users’ encrypted data without decrypting or reading the content of the messages.

This is insane. It even sounds impossible. But it is possible.

FHE is the holy grail of cryptography. Over time, FHE will reshape the foundations of all computation, whether in Web2 or Web3.

Fhenix

Fhenix is pioneering on-chain FHE, which will unlock not only confidential payments but also enable universal, confidential DeFi and a range of other applications. We are excited about the following areas:

1. Cross-chain – With FHE, private keys from Chain B can be stored on Chain A, and vice versa. This can reduce the overall complexity of cross-chain interactions by 100 times or more.

2. Governance – Currently, cryptocurrency governance voting has been public from the start, meaning that the voting results gradually become visible as the voting progresses. This can lead to voter bias and groupthink, which goes against the intention of voting. FHE enables confidential on-chain voting.

3. Metaverse – Many blockchain games can leverage FHE, especially games involving location and business strategy.

Fhenix is compatible with Zama’s fhEVM technology, which has custom opcodes for advanced FHE-specific operations. This has two main implications:

Developers will be able to easily port their existing EVM code to Fhenix. They will also be able to turn their existing code into FHE-native code with only minimal adjustments. Developers will have the ability to select which parts of their data they want to encrypt and perform computations between encrypted and plaintext data.

Comparison of Encryption Methods

Previously, confidentiality on the blockchain was almost “impossible” on the difficulty spectrum.

Almost all previous attempts to achieve confidentiality on the blockchain used zero-knowledge proofs (ZKP). However, despite the name “zero-knowledge,” ZKPs are not inherently designed to support confidentiality in on-chain DeFi. To explain why, let’s start with the simplest on-chain ZKP application, Zcash.

When a user sends a shielded transaction in Zcash, it constructs a proof that roughly states the following:

1. The entire transaction history is encrypted on the chain.

2. There are some unspent transaction outputs (UTXOs) sent to shielded addresses.

3. The total value of these UTXOs is greater than 0, even after adding up the values of all UTXOs sent out, including the current transaction.

Or in short: prove that the balance remains greater than 0 after this transaction.

A fundamental limitation of this approach is the inability to execute any logic on the system state from top to bottom; by definition, it is impossible to see the current state of the system (because the system’s state is a function of a series of ZKPs), so no one – including the system itself – can apply any logic to the current system state. Therefore, even simple questions like “How many tokens are in the private pool?” cannot be answered, let alone more complex questions.

Put more simply: zk-based on-chain confidentiality methods can never support shared, encrypted states. Almost all DeFi is built on the basis of shared states.

Some excellent cryptographic teams have been trying to solve these problems using advanced ZK techniques and have made some progress in the past few years. But fundamentally, no matter how much ZK magic there is, logic’s basic limitations cannot be overcome.

The beauty of FHE is that it allows for the preservation of the overall logic of a transparent financial system. Therefore, developers can write programs based on the assumption that they can compute the entire system state as if it were transparent, even though no one can actually see the current state of the system.

This is an incredible breakthrough in cryptography that will reshape how the ecosystem handles on-chain confidentiality.

Confidentiality and Privacy

After understanding what FHE is and what it is not, especially in the context of Tornado Cash, it is important to note that FHE is not about privacy or the identity of participants in mixed transactions. It is about the confidentiality of transaction content. There is a subtle yet important distinction.

Tornado Cash is a coin mixing service that can hide the identity of users. There are legitimate concerns about the use of these technologies and their impact, but these concerns do not apply to FHE or Fhenix.

Fhenix encrypts the content of transactions but does not hide the fact that a specific user initiated a certain on-chain transaction. Unlike privacy, it allows users to transparently indicate the existence of an operation without revealing the content of the transaction.

This paradigm also exists in encrypted Web2 systems. HTTPS does not hide the fact that computer A is sending a message to server B. HTTPS simply encrypts the content of the message. In the case of on-chain payments and DeFi, FHE operates similarly.

Team and Timeline

Fhenix is tackling some very challenging technical problems. Considering this, we believe it is especially important to support a team dedicated to unlocking on-chain confidentiality. It is hard to imagine a team more deeply committed to this problem space.

Fhenix is led by two individuals named Guy, both named Guy. Yes, that’s a fact.

Guy Itzhaki and Guy Zyskind.

Guy Zyskind has been building on-chain confidentiality systems in the crypto space since 2017 when Tushar and I founded Multicoin. He initially founded Enigma, which pioneered the use of MPC technology for on-chain confidentiality. He then went on to build Secret Network, which leverages Intel’s SGX technology. He will continue to advance this mission with Fhenix.

Guy Itzhaki has decades of experience in secure computing and network security. He has been leading Intel’s FHE business development team in recent years.

Fhenix launched a privacy development network in July 2023. This development network provides an easy-to-use FHE testing environment for interested developers. To apply for early access, the link is here: https://www.fhenix.io/.

Fhenix’s public test network “Renaissance” is expected to open to developers in the first half of 2024. Renaissance will serve as a playground for FHE blockchain developers, including multiple testing and building incentive activities.

Confidential Encryption Goes Mainstream

I have spent the past six years in the crypto space because I believe it will change the way human economic activities are coordinated. Achieving confidentiality is crucial to realizing this vision, while allowing individuals and institutions to comply with the law.

The Fhenix team is building the future of on-chain confidentiality using FHE, making the greatest impact of cryptocurrencies on humanity.

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