Fully Homomorphic Encryption (FHE) has the potential to unlock trillions of dollars from traditional finance into decentralized finance (DeFi) by facilitating private lending, encrypted credit assessments, and confidential transactions.
The Current State of DeFi
Despite its recent rebound, much of the capital in traditional finance remains uninvested in DeFi, primarily due to scalability issues, regulatory concerns, and poor user experiences. The fundamental challenge, however, is the lack of confidentiality.
At its peak in December 2021, DeFi showcased a total value locked (TVL) of around $260 billion. Yet, when placed against the backdrop of the global financial market, which handles trillions daily, this number seems trivial. On average, the foreign exchange market accounts for over $7.5 trillion traded every day, while the global bond market exceeds $130 trillion in value.
Breaking Transparency Barriers
For institutional players and high-net-worth individuals, confidentiality is paramount. Transactions on public blockchains are transparent, which is a deterrent for significant investment from these groups. This challenge makes the promise of a seamless and open DeFi system feel unattainable.
Recent advancements in FHE technology highlight a potential shift towards more privacy-centric finance. With FHE, data can be processed while remaining encrypted, allowing institutions to engage with DeFi without exposing their trading data.
The Promise of Uncollateralized Lending
Uncollateralized lending is one area where FHE can bring real change, aligning closer with practices in traditional finance. Conventional financial systems rarely require overcollateralization, while DeFi faces this limitation. FHE can transform this by allowing users to share encrypted credit scores securely. If a protocol using FHE validates these scores, users can borrow without collateral, balancing confidentiality with accountability.
Future Prospects and Challenges
While the advancements seem promising, further challenges exist before DeFi can fully integrate with traditional finance. The creation of reliable private credit systems, secure liquidity management, and optimal user experience through simplified decryption tools are essential steps. Additionally, challenges surrounding price oracles and encrypted transaction value disclosure need to be addressed.
The current trajectory of FHE development may soon bring together the desirable aspects of confidentiality prevalent in traditional finance and the revolutionary potential of decentralized platforms.
