Why is Confidentiality Vital to Smart Contracts

7 min readOct 20, 2023

Do you think confidentiality is needed in smart contracts? In this article, we look at why confidentiality is important and how it would change the existing smart contract system.

Smart contracts are a marvel. They’ve provided the world a chance to digitize agreements, add credibility and immutability to said agreements, as well as opportunities at self-governance. When implemented correctly, smart contracts could potentially solve the problems in supply chain management, record keeping, identity management, copyrights and intellectual property, and transform banking, governance, healthcare, logistics and legal systems for the better.

However, one major challenge that smart contracts face today is confidentiality.

Ensuring Confidentiality: The Role of Confidentiality in Safeguarding Smart Contracts and User Data

Smart contracts are self-executing deals, backed by blockchain technology, that automate the implementation of agreements based on certain conditions without the use of middlemen.

They minimize the need for middlemen, lower the possibility of a scam, and improve the productivity of numerous procedures across sectors. Due to the blockchain’s openness and consistency, smart contracts are reliable and every person involved can independently confirm and monitor payments on the distributed ledger.

While the advantages of smart contracts are clear, they also raise serious confidential and security risks. Smart contracts, mostly contracts that enforce the migration of tokens from one blockchain to another, often face security risks from malicious actors who exploit a vulnerability in the contract’s codebase. Since various smart contracts handle different types of information, the losses could be significant.

This is where confidentiality technologies come into play.

In this blog, we will look at the essential function of confidential tech in smart contracts, how they overcome issues related to confidentiality, and enable safe and confidential smart contracts.

Confidentiality Issues In Smart Contracts

If it were possible to add confidentiality to smart contracts just by uttering a spell or a concealment charm, most blockchain projects wouldn’t be investing hours of their day towards finding a workable solution. These issues can vary depending on the blockchain platform and the specific implementation of the smart contract. Let’s look at some of them.

Public Ledger

Most blockchains, like Ethereum, employ public ledgers, which make all transactions on hand to all users. This transparency is a characteristic of the contract’s security (the contract will execute upon predetermined rules and this cannot be changed), but it might also reveal sensitive contract data which may be exploited.

Data Leaks

Smart contracts may inadvertently expose sensitive data, especially if the contract execution involves confidential information, for example, say, a business merger that involves the transfer of ownership or tokenized stocks from one business to another. This data can be visible on the blockchain, revealing key financial information & may lead to front running in the corresponding traditional market.

The information also becomes permanent and obtainable at any time. This can result in exposure to information and regulatory difficulties, particularly in industries such as healthcare and banking.

Pseudonymity

Although customers’ true identity is concealed by encrypted codes, payments can still be tracked publicly. This might be an issue when both parties want to stay anonymous.

In some cases, it is possible to link blockchain addresses to real-world identities, especially if there are data leaks or when individuals provide information outside the blockchain that can be correlated with their blockchain activity.

Lack of Privacy Coins

While some blockchain networks offer privacy coins like Monero or Beldex, many smart contract platforms do not have built-in confidentiality features. This can expose transaction details and contract data to the public.

Legal Compliance

Privacy laws, such as GDPR, may require businesses and organizations to handle user data with strict privacy measures. The use of smart contracts may require additional consideration to ensure legal compliance.

For example, consider a smart contract employed by a bank and the said smart contract obtains KYC information from its users. The bank should maintain the privacy of the information thus obtained. If the identity of the user isn’t concealed by a layer of privacy that restricts unauthorized access, then the very purpose of the smart contract becomes questionable.

Poorly Audited Contracts

Smart contracts need to be well audited to ensure that they do not contain exploits which can be taken advantage of. Poorly audited smart contracts may contain vulnerabilities that could be exploited by malicious actors, potentially leading to data breaches or privacy violations.

The Way Out for Smart Contracts with Privacy

Privacy technologies overcome the gap between maintaining secrecy and reaping the benefits of smart contracts:

Business Confidentiality

Privacy solutions enable the secure transmission of confidential information within smart contracts, guaranteeing that only those with permission have control over it. This protects financial data, business secrets, and other sensitive data.

Special Disclosure

Smart contracts can confirm particular details without releasing real data using approaches such as zero-knowledge proofs. This enables regulated transmission while safeguarding sensitive information.

Advantage of Scaling

Adding privacy technologies can increase the capacity of smart contracts. The operational pressure on the blockchain network is lowered by keeping important information off-chain and pointing it on-chain only when needed.

Legal Contracts

Sectors that have rigorous privacy requirements that must be followed will benefit from privacy technologies that can assist smart contracts in navigating these constraints while enhancing blockchain’s speed as well as safety.

What are some of the privacy techniques employed to add privacy to smart contracts?

Privacy in smart contracts is a crucial concern, especially in blockchain networks known for their transparency. Various privacy techniques are employed to add privacy to smart contracts, allowing for secure, confidential transactions and data handling. Some of the privacy techniques used to add a layer of privacy to smart contracts include the zk-Proofs, Ring Signatures, Confidential Transactions, Multi-party Computations etc. Let’s take a look at some of them.

Zero-Knowledge Proofs (zk-Proofs): Zero-knowledge proofs, such as zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Argument of Knowledge) and zk-STARKs (Zero-Knowledge Scalable Transparent Argument of Knowledge), are cryptographic techniques that allow one party to prove knowledge of a secret without revealing the secret itself. These are used in smart contracts to enable private transactions and computations. For example, a ZKP can verify and prove that a smart contract has performed a certain action or transaction without exposing the inputs or the outputs of the said contract.
Ring Signatures: Ring signatures are digital signatures that obscure the identity of the signer within a group of potential signers. In smart contracts, ring signatures can be used to provide transaction privacy by hiding the sender’s identity among multiple possible senders. The smart contract might obtain the public key of all the participants to hide the signer that signs the transactions, however, the downside to this is the size of the transaction becomes larger.
Confidential Transactions: Confidential transactions use cryptographic techniques to hide the transaction amount while still allowing for validation. Mimblewimble-based blockchains like to employ confidential transactions to add privacy to their smart contracts.
Homomorphic Encryption: Homomorphic encryption allows computations to be performed on encrypted data without revealing the original data. It can be used in smart contracts to enable privacy-preserving computations over sensitive data. This can be used to provide conditional transparency, that is, only to specific users.
Secure Multi-Party Computation (MPC): MPC allows multiple parties to jointly compute a function over their inputs while keeping those inputs private. This technique can be used in smart contracts for privacy-preserving computations, especially in cases where multiple parties need to collaborate without revealing their data.
State Channels and Sidechains: State channels and sidechains are techniques that allow off-chain transactions while ensuring on-chain security. They can be used to enable private, high-speed transactions without compromising privacy. However, this introduces a trust factor in those who run and maintain the sidechains, since to ensure privacy and transaction speed, decentralization is sacrificed.
Privacy Coins: Some blockchain networks and cryptocurrencies, such as Monero, Dash, Beldex and Grin, are designed with privacy as a core feature. Smart contracts on these networks will inherently inherit the privacy features. Beldex, for example, has introduced a proof of concept Ethereum Virtual Machine for cryptonote-based privacy chains for the purpose of implementing private smart contracts.
Stateless Smart Contracts: Stateless smart contracts do not store the entire history of past transactions and states, improving privacy by reducing the information exposed on the blockchain.

These privacy techniques can be combined or customized to meet the specific requirements of smart contract applications. The choice of technique depends on factors like the desired level of privacy, scalability, and the blockchain platform in use. Privacy-enhancing technologies are evolving, and ongoing research and development continue to enhance the privacy capabilities of smart contracts in blockchain networks.

Closing Thoughts

Privacy technologies are essential for smart contracts being an appropriate choice for a wide variety of applications. Beldex makes use of EVM compatibility in its cryptonote based privacy blockchain. This will aid in the construction of obscure smart contracts for the Beldex chain.

Many previously unimaginable use cases can now be deployed on the Beldex network with privacy. As smart contract use grows, so does the significance of solid privacy solutions, making them an essential tool in the future of blockchain technology.

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