Can Blockchain’s Privacy Issues Be Fixed by Homomorphic Encryption?

FHE offers a possible solution to the privacy issues in blockchain, by enabling computations directly on encrypted data.

Homeless hacker asking for help infont of an unbreakable code wall.
Created by Gabor Kovacs from DailyCoin

Blockchain technology is transforming the data storage and transfer landscape, offering unprecedented transparency and security. However, this ground-breaking innovation has also brought forth critical privacy and confidentiality concerns that cannot be ignored. With its decentralized structure, the inherent nature of blockchain grants every participating node direct access to all the data stored within the chain. 

While this ensures immutability and trust, it poses a significant challenge when reconciling blockchain’s full potential with existing data privacy laws and regulations. This tension creates a complex and ambiguous environment for organizations seeking to align their data privacy requirements with the revolutionary capabilities of blockchain technology and its associated services.


Fully homomorphic encryption (FHE) offers a possible solution to privacy issues in blockchain by enabling computations directly on encrypted data. With FHE, data can be processed while it remains encrypted. This removes barriers, enables new services, and mitigates tension with data privacy laws and regulations.

FHE’s ability to maintain confidentiality in blockchain systems allows for decentralized, permissionless blockchains where everything is auditable yet not actually visible.

FHE’s Ability to Process Data Without Decryption

The way FHE works is simple: users encrypt their data and send it to the blockchain for processing. The blockchain can freely merge and process data from different users but does so blindly without needing access to the decryption key. Nonetheless, the results are the same as if the operations had been conducted on unencrypted data (albeit encrypted).

Of course, sometimes data needs to be encrypted, for instance, when a user wants to check their balance. To do this securely, FHE can be combined with secure multiparty computation (MPC) technology to obtain threshold FHE: the ability to securely distribute the decryption key across the blockchain validators so that no validator on their own can decrypt data, but only if they jointly decide to do so.

Blockchain as a Real-World Use Case for FHE

Blockchain technology is an ideal fit for FHE implementation, with many of its applications benefitting from enhanced privacy.


For example, FHE can help enable blind auctions by keeping bids on items private and only revealing the winner. More generally, FHE can help build more advanced bidding processes that are transparent, auditable, and private.

Digital currency wallets pose a significant privacy concern in blockchain systems. The visibility of wallet contents makes high-value targets more identifiable, increasing the risk of hacks and fraud. For example, if a hacker can identify a high-value target with a large amount of cryptocurrency in their wallet, they may be more likely to target that individual for a hack or fraud attempt. FHE can help by keeping account balances encrypted.

For instance, when ConstitutionDAO pooled the donations of thousands of backers in an attempt to buy a first-edition copy of the US Constitution. The bid ultimately failed, and the project was disbanded shortly after. Its undoing was largely due to blockchains’ transparency- rival bidders could see how much had been raised and, therefore, how much it would cost to outbid. FHE has the potential to facilitate private and secure decentralized autonomous organization (DAO) votes by enabling confidential token voting. This solves the issue of bribing and blackmailing in governance proposals, as only the voting results are revealed at the end of the voting period while the individual votes are kept private. 

FHE Promising for Blockchain Privacy

Despite this wide range of solutions and applications, implementing FHE on blockchain still presents some operational and technical challenges since FHE can be somewhat computationally intensive, leading to slower processing speeds. However, blockchain systems are designed to prioritize security and decentralization over speed, making them more accepting of slightly lower processing speeds in exchange for enhanced privacy and security and a perfect environment for FHE to be developed.

Allowing for encrypted on-chain data, and enabling decentralized, permissionless blockchains that are fully auditable while maintaining data invisibility, the significance of FHE for users, crypto, and the wider industry cannot be overstated.

A key feature that makes FHE an attractive solution for organizations looking to enhance the privacy and security of their blockchain systems is its compatibility and accessibility. FHE can be easily integrated with existing blockchain solutions (such as blockchain platforms such as Ethereum, Hyperledger, Corda, or any other blockchain framework or protocol that an organization has already deployed or is planning to deploy), allowing for seamless adoption without extensive modifications. This means that organizations can readily adopt the technology to enhance the privacy and security of their blockchain systems without having to overhaul their existing infrastructure.

By integrating with existing tools and enabling new services, FHE could unlock new opportunities and revolutionize how we think about privacy and security in blockchain systems. While, on its own, it might not be a silver bullet for all of blockchain’s privacy problems, it does at least begin to address some of its most pressing issues. As the technology further develops, we will start to see privacy inherent in the design and operation of blockchain technology. 

This article is for information purposes only and should not be considered trading or investment advice. Nothing herein shall be construed as financial, legal, or tax advice. Trading forex, cryptocurrencies, and CFDs pose a considerable risk of loss.

Morten Dahl

Morten leads the team at Zama building confidential blockchains using FHE. With a background in secure computation and cryptography, he has spent close to the past decade applying and adapting techniques from these fields to real-world use cases.