Inco x Circle Research: Confidential ERC20 Framework Workshop Recap

Last week, Circle Research and Inco published a paper that explored a framework for achieving confidentiality for ERC20 token transfers. The approach uses Fully Homomorphic Encryption (FHE), and enables users to transact onchain without revealing their balance or transfer amount. It also provides the option to offer third parties access to specific details associated with transfers—opening the door to transfer rules to be programmed at the smart contract level to enforce compliance rules such as AML, blacklisting, transaction limits, or jurisdiction-based regulation.

The workshop was run by the coauthors of the paper: Remi Gai, Darren Kong, and Deep Gandhi from Inco and Kaili Wang and Jacob Hirshman from Circle Research. 

Exploring Use Cases

The first thing to note was the excitement around the variety of use cases that could be unlocked on top of the confidential ERC20 framework. Confidential token transfers are an obvious game changer for onchain payments, but onchain apps can also be built around them as a result of FHE’s composability. Workshop participants came up with potential use cases including confidential B2B payroll, investment DAOs, token vesting, and many more, also taking into account the potential that programmable transfer rules and permissioned third-party access offer in expanding the design space further.

Comparing Solutions: Encryption vs. Commitment

This composability was also a point of discussion when it came to other potential solutions to achieving confidentiality onchain. Participants discussed the use cases that an FHE approach would unlock that are not possible with other approaches to achieving confidentiality, such as commitment models that leverage zero-knowledge proofs. 

While commitment-based approaches are useful when privacy and verification are all that’s required, they have an inherent lack of flexibility, as every key must be set at the start. FHE enables data to be stored onchain and remain encrypted while being computed upon—an encryption-based approach that’s a great option for unlocking a variety of use cases in a flexible and composable manner, as they can be built around onchain transactions as normal. 

Encryption-based approaches also offer decryption rules to be programmed flexibly, a further unlock when it comes to granting access to specific parties, such as auditors, without sacrificing onchain utility. 

Confidentiality vs. Anonymity

One key point raised was the importance of distinguishing between confidentiality and anonymity, with participants asked to consider when they would require one or the other (or both). 

The confidential ERC20 framework explored by Inco and Circle Research focuses on achieving confidentiality rather than anonymity: transaction amounts and balances are hidden, but addresses stay public. This is the status quo in many established Web2 payments use cases, and would be a huge unlock for onchain payments adoption. 

It was noted that a confidentiality-first approach could also lead to benefits in certain use cases, such as being able to associate your identity with a specific charity cause without revealing the specific amount of your donation. It could even be useful at Edge Lanna: confidential governance frameworks could keep voters’ onchain decisions confidential while still verifying they had cast their vote.

Thank you to everyone who attended the workshop! It was great to see so many people passionate and excited about how confidentiality can be a gamechanger for crypto adoption.

We’re looking forward to seeing everyone in Bangkok for FHE Summit at Devcon next week!

‍