Privasea, the terminator of the FHE track.

Written by: Zuo Ye

The market is neither good nor bad, people's hearts are neither ancient nor modern, memes rise and fall, and FHE has arrived at Privasea.

With the launch of the KOL matrix, a hazy re-education of the FHE track has been completed, rekindling the memory of the differences between FHE and ZK, and the combination of the DID track and NFTs. However, this is not important, as retail investors are concerned about Binance's brand effect, regulating market makers, and optimizing the listing process.

Not to mention, Privasea is a representative project of the FHE+DID+AI track invested by Binance. Today, I do not intend to elaborate on how these elements are combined; it is not important.

Image caption: YZi invests in Privasea, image source: CryptoRank

Crypto + AI is merely wishful thinking, and FHE and DID are certainly not today’s hot topics. When combined, they can summon the MKT magic, but like Nillion and Arcium, they have not found their PMF, aside from the tokens.

The FHE track has entered a state of shock

I am not saying that there is a problem with FHE technology, but rather that the projects on the FHE track in this cycle, including but not limited to Zama and Inco, have not explored an application paradigm in the Crypto field. I must reiterate my previous point:

The combination of ZK and L2/Rollup is not a demand for privacy; rather, ZK is naturally suitable for "simple verification" scenarios. When L2/Rollup transmits information to L1, the mathematically proven ZK encryption can confirm without fully disclosing the original content. This is the so-called characteristic of being hard to compute but easy to verify, and it does not mean that L2 can only use ZK technology, as optimistic verification systems can operate using economic design (challenge period).

This is the true PMF of ZK technology in the Crypto field, which is to help L2/Rollup operate more efficiently and securely. When we re-examine DID/TEE/FHE and Crypto + AI, we find that aside from the tokens, the products themselves do not have many use cases and value. Even in the ZK hardware track, it is hard to say whether it can develop in the future.

Returning to the design of Privasea's solution, everyone certainly has a need to verify their identity while protecting their privacy (DID), and everyone certainly has a need for privacy protection and data encryption when using AI. However, this does not mean that everyone has a need to use FHE.

In fact, since Zama was born and received massive funding, the adoption of FHE in the Crypto field has been concentrated on replicating ZK's L2 application path. Subsequently, many similar products have emerged around Zama's TFHE algorithm library, all of which are merely add-ons to certain services.

Privacy is a Feature/Service, But Not a Product.

Privacy products are on the way—Signal

There are both joys and sorrows; although Privasea is hard to surprise, Signal has truly exploded into the mainstream. At least now, the U.S. Department of Defense and Vice President Vance are using it. Compared to Telegram and WhatsApp, both of which have E2EE (end-to-end encryption), Signal's end-to-end functionality is default, while the latter two require manual settings to enable.

However, now, at least the privacy product that should be a centralized entity has gained favor from centralized departments, precisely because of its absolute security, which proves the feasibility of privacy products.

It is worth mentioning that Signal currently operates entirely on donations, and they do not wish to transform into a new Meta or Google; instead, they focus on maintaining their operations and pushing the power of technology to the extreme.

Currently, it is estimated that by 2025, Signal's annual operating costs will reach $50 million (calculated in 2023). For other types of products, an increase in user data would be synonymous with advertising revenue, but for Signal, it means a surge in server costs.

Image caption: Signal's expenditure composition in 2013, image source: @signalapp

In 2013, the amounts for storage, servers, registration fees, bandwidth, and additional expenses were $1.3 million, $2.9 million, $6 million, $2.8 million, and $700,000, respectively. With user growth and a surge in data volume, even if Signal does not permanently store user data, it still requires substantial server and data storage costs. Whether these costs can be covered by donations is very difficult to predict.

If Signal can truly operate on donations, its significance would be no less than the birth of Bitcoin. Previously, donations for technology were made by large companies to underlying internet protocols or foundational infrastructures like Linux and Rust; never has a global C-end social product been sustained by small donations from ordinary users.

Looking forward to a new history, optimistic about the implementation of privacy economics in Web2.

History will not end

Privasea is just a prologue; it neither delves into the analysis of the profit-making effect nor explains its internal mechanisms. It is still the same statement: it is really not important.

What is truly worth our contemplation is that ZK has successfully landed on the Crypto B-end, and end-to-end encrypted social products can maintain operations on the C-end. They have both gone through their nascent stages and entered the large-scale practical phase. What should FHE do?

FHE may not be the next step for ZK, but it is unlikely that FHE is not the next step for ZK.

Ultimately, the combination of FHE and Crypto is most likely in the field of privacy transactions. Only when the benefits of using privacy services outweigh the losses brought by complexity can FHE find its niche.

For example, yesterday Arcium was pondering dark pools, where large transfers and transactions occur. Whether to avoid triggering fluctuations in the secondary market or to use special channels for hackers, there is a real demand for this.

In the transaction path empowered by FHE, whether it is a transfer of 1 ETH or a transaction of 1000 WBTC/USDT, it cannot be "seen," fundamentally avoiding the MEV problem, which is more scientific than Binance's direct request for BNB Chain nodes to prohibit MEV.

Of course, if it were that simple, Zama would have already ventured in that direction. Who would still bother to work hard on L2/Rollup? The biggest problem with FHE privacy transactions is the inability to guarantee "uniqueness." For instance, if you trade on the FHE L2 chain, you can indeed have privacy end-to-end.

However, once the FHE L2 transaction is sent to the Ethereum mainnet, it faces a dilemma: retaining the encryption characteristics makes it appear as an unsolvable garbled code to the other party, making it impossible to determine the transaction. Removing the encryption characteristics? Congratulations, there was no need to use FHE encryption from the start.

How to solve this? The only way is for Ethereum to natively support FHE opcodes directly from the consensus layer, which means a certain degree of modification to Ethereum, equivalent to the difficulty of transitioning from PoW to PoS, and is basically not operational.

This may not be the ideal transformation path; FHE still needs to explore its own way.

The only exception

If the Ethereum mainnet cannot be modified, then guiding users towards dark pool-type, compliant privacy transactions (RailGun) is the only feasible landing scenario. After the U.S. government lifted sanctions on Tornado Cash, institutional compliant dark pools seem to have seen a glimmer of hope.

After Privasea, FHE has rarely been highlighted as a financing point for project parties. FHE-AI/ML/LLM remains in the academic field. I firmly believe that blockchain, rooted in cryptography, is still the most suitable fertile ground for FHE entrepreneurship.

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