Paper 2025/527

SoK: Fully-homomorphic encryption in smart contracts

Abstract

Blockchain technology and smart contracts have revolutionized digital transactions by enabling trustless and decentralized exchanges of value. However, the inherent transparency and immutability of blockchains pose significant privacy challenges. On-chain data, while pseudonymous, is publicly visible and permanently recorded, potentially leading to the inadvertent disclosure of sensitive information. This issue is particularly pronounced in smart contract applications, where contract details are accessible to all network participants, risking the exposure of identities and transactional details. To address these privacy concerns, there is a pressing need for privacy-preserving mechanisms in smart contracts. To showcase this need even further, in our paper we bring forward advanced use-cases in economics which only smart contracts equipped with privacy mechanisms can realize, and show how fully-homomorphic encryption (FHE) as a privacy enhancing technology (PET) in smart contracts, operating on a public blockchain, can make possible the implementation of these use-cases. Furthermore, we perform a comprehensive systematization of FHE-based approaches in smart contracts, examining their potential to maintain the confidentiality of sensitive information while retaining the benefits of smart contracts, such as automation, decentralization, and security. After we evaluate these existing FHE solutions in the context of the use-cases we consider, we identify open problems, and suggest future research directions to enhance privacy in blockchain smart contracts.