The EVM's (Lack of) Confidentiality

Description of the EVM and its lack of privacy

One of the most controversial properties of the EVM is that everything is public, meaning that the sub-state of smart contracts, which may include financial and social (and practically any kind of) information, is completely visible to all. As we argue below, this property of the EVM is a double-edged sword, which, for a long time, formed a dichotomy between decentralization and adoption.

On the one hand, this fact played a key role in contributing to the decentralization of Ethereum, as it allows anyone with a computer to run it and take part in the execution of agreed upon lists of transactions (with an adequate financial incentive mechanism); thereby increasing the validity/truthfulness of the system's state, or in other words, increasing the trust that the information laying in the state is the product of correct execution of the past transactions.

On the other hand, the fact that everything is visible to all, poses a significant setback to the usability and adoption of the EVM. To date, the EVM's prominent use-case is DeFi, which paved the way to collaborative liquidity pools and automatic movement of funds. In many cases however, DeFi is used by bad actors for scam (e.g., rug pools), fraud (e.g., money laundering), and many times is considered as funds streaming in a loop with no real impact (economic contribution). One of the reasons for this is the lack of confidentiality, leaving honest actors (smart contracts, DAOs and users) unable to prove and verify each other's identity, thereby being more vulnerable to exploits and manipulations. Furthermore, the lack of confidentiality sets an obstacle to real social impact, as most of real world social activities deal with private information that must be treated adequately. For example, an election requires the independence of votes and the freedom to vote one's opinion without fearing any consequences. Sealed bid auction, as another example, requires an independence of bids as well as their confidentiality, since public bids exposes the bidder's sensitive financial state. Many other use cases benefit from confidentiality, like lending & borrowing, deposit management, OTC market, and many more.