Building Encrypted Smart Contracts with FHE for EVM-Compatible Privacy Protocols

Fully Homomorphic Encryption (FHE) stands at the forefront of blockchain privacy innovation, enabling encrypted smart contracts that process data without ever exposing it. In EVM-compatible environments, this technology addresses a critical vulnerability: public ledgers reveal every transaction detail, undermining confidentiality for enterprises and individuals alike. Projects like Zama’s fhEVM and Fhenix’s CoFHE are pioneering FHE EVM smart contracts, allowing developers to build scalable, private applications on Ethereum and beyond.

Fully Homomorphic Encryption: Foundation for Confidential Blockchain Logic

FHE permits computations on ciphertexts, producing encrypted results that match those from plaintext inputs. Unlike zero-knowledge proofs, which verify without revealing, FHE executes full program logic privately. This unlocks privacy-preserving encrypted contracts for DeFi, voting, and supply chains, where sensitive inputs demand protection. Zama’s confidential blockchain protocol exemplifies this, ensuring end-to-end encryption across transactions and states.

Traditional EVM chains expose balances and logic; FHE coprocessors offload heavy encryption while maintaining compatibility. Scalability hits 20 transactions per second on fhEVM, with hardware upgrades promising more. Fhenix’s CoFHE accelerates decryption 50-fold, slashing on-chain gas costs by handling intensive work off-chain.

Zama’s fhEVM Coprocessor: Seamless Integration for Developers

Zama’s fhEVM Coprocessor empowers Solidity developers to craft confidential smart contracts natively. Encrypt inputs, execute logic encrypted, and decrypt outputs only for authorized parties. EVM compatibility means no rewrites; deploy on Ethereum or L2s effortlessly. OpenZeppelin’s audited libraries accelerate adoption, offering secure primitives and AI-assisted tools.

Zama fhEVM Key Features

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  Confidential Solidity Contracts: Enables developers to write Solidity smart contracts that process encrypted data while maintaining end-to-end privacy.

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  EVM Compatibility: Seamlessly integrates with existing EVM chains, allowing easy deployment of confidential dApps on Ethereum.

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  20 TPS Scalability: Supports up to 20 transactions per second, with potential for higher throughput via additional hardware.

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  GitHub Resources: Open-source FHEVM framework available for integration at github.com/zama-ai/fhevm.

Consider a private auction: bids stay encrypted until reveal. FHE ensures fairness without trusted intermediaries. The GitHub repository provides frameworks for rapid prototyping, democratizing access to these tools.

This snippet illustrates simplicity; real implementations leverage FHE libraries for complex ops like multiplications. For deeper architecture, explore fhEVM’s Ethereum integration guide.

Fhenix CoFHE: Performance-Optimized Privacy Layer

Fhenix advances with CoFHE, prioritizing real-time confidential computation. Developers benefit from low gas via off-chain processing, ideal for high-volume homomorphic encryption blockchain protocols. Fully EVM-compatible, it supports private on-chain apps across Ethereum ecosystems.

CoFHE’s edge lies in efficiency: faster decryption means responsive dApps. Pair it with Inco’s confidential layer for composable privacy, blending FHE and ZK where strengths align. Enterprises gain proprietary logic protection, vital for risk-averse deployments.

These protocols signal maturity; FHE transitions from theory to production, fostering trust in DeFi. Next, we examine practical builds.

Developers can now translate these advancements into tangible applications, starting with straightforward confidential tokens or auctions. Tools from Inco Network and Chainlink Confidential Compute complement FHE by layering composable confidentiality over EVM chains, enabling privacy-preserving encrypted contracts without full protocol overhauls.

Practical Implementation: Step-by-Step Confidential ERC20 Token

Building a confidential ERC20 token exemplifies FHE’s utility. Using Inco Lightning on Base Sepolia, encrypt balances and transfers, shielding amounts from public view while preserving EVM composability. This approach suits DeFi protocols needing private positions amid volatile markets.

Build Confidential ERC20 with Inco Lightning: Encrypt, Deploy, Transfer Privately

Set Up Environment & Inco Lightning

Begin by installing Node.js (v18+), Foundry for EVM development, and the Inco Lightning CLI via `npm install -g @inco-lightning/cli`. Fund a wallet with Base Sepolia ETH from a faucet (e.g., Base Faucet). Configure `foundry.toml` for Base Sepolia RPC (https://sepolia.base.org) and set your private key. This ensures EVM compatibility for FHE-enhanced confidential contracts.

Generate Keys & Encrypt Inputs

Run `inco-lightning keys gen` to create FHE encryption keys. Encrypt inputs like initial supply (e.g., 1e6 tokens as ciphertext) and deployer address using `inco-lightning encrypt –input supply.json`. Inco Lightning leverages FHE for homomorphic operations, keeping data encrypted end-to-end without decryption during computation.

Craft Confidential ERC20 Contract

Clone Inco’s ERC20 template from INCO.org GitHub. Modify `ConfidentialERC20.sol` to integrate Inco’s FHE primitives for private balanceOf, transfer, and approve functions. Use Solidity ^0.8.20 with OpenZeppelin imports for security. The contract processes encrypted inputs via fhEVM-like coprocessor calls.

Compile & Deploy on Base Sepolia

Compile with `forge build –via-ir` incorporating Inco plugins. Deploy using `forge script DeployConfidentialERC20.s.sol –rpc-url https://sepolia.base.org –private-key $PK –broadcast`, passing encrypted inputs. Verify deployment on Base Sepolia explorer; gas costs remain low due to off-chain FHE computation.

Mint Confidential Tokens

Call `mint` with encrypted amount and recipient ciphertext via Etherscan or script: `inco-lightning call –contract $ADDRESS –method mint –args [encryptedAmount, encryptedTo]`. Balances update homomorphically, visible only to key holders, upholding EVM privacy protocols.

Test Private Transfers

Encrypt transfer details: `inco-lightning encrypt –input transfer.json` (amount: 1000, to: recipient pubkey). Execute `transfer(encryptedTo, encryptedAmount)` from your wallet. Confirm via events/logs (amounts masked) and decrypt locally to verify—privacy intact across transfers.

Verify End-to-End Confidentiality

Query `balanceOf(encryptedAccount)`; response is ciphertext. Decrypt with private key: `inco-lightning decrypt –input balance.json`. Inspect tx on explorer—no plaintext leaks. This validates Inco Lightning’s FHE for composable, EVM-compatible privacy in ERC20 operations.

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Such tokens integrate seamlessly with existing DEXs, where trades execute on encrypted values. FHELA extends this to full encrypted on-chain data, ensuring states like reserves remain hidden. For confidential smart contracts developers, these primitives reduce boilerplate, focusing efforts on business logic.

Chainlink Confidential Compute adds off-chain oracles for private inputs, encrypting data under threshold keys before on-chain submission. Applications process ciphertexts directly, ideal for proprietary DeFi strategies. Unlike pure ZK, FHE handles arbitrary computations, from risk models to auctions.

Overcoming Challenges in Homomorphic Encryption Blockchain Protocols

FHE’s computational intensity poses hurdles, yet optimizations abound. Zama’s fhEVM Coprocessor achieves 20 TPS via hardware acceleration, while Fhenix CoFHE cuts decryption latency dramatically. Gas optimization offloads to coprocessors, keeping EVM costs predictable.

Interoperability shines: cross-chain encrypted transactions via Zama’s protocol bridge Ethereum L2s and beyond. OpenZeppelin’s libraries mitigate smart contract risks, audited for FHEVM specifics. Developers avoid common pitfalls like key management by leveraging these tools.

Security demands diligence; threshold encryption distributes keys, preventing single points of failure. Legal frameworks, as in Chainlink’s whitepaper, clarify compliance for enterprises handling sensitive data.

Real-world use cases proliferate. Private voting dApps tally encrypted ballots verifiably. Supply chain contracts track goods confidentially, revealing proofs only on demand. DeFi vaults compute yields on hidden positions, attracting institutional capital wary of transparency.

FHE matures alongside EVM ecosystems. GitHub repos from Zama invite contributions, accelerating innovation. As hardware evolves, throughput scales, positioning FHE as the backbone for encrypted smart contracts FHE.

Enterprises deploying today gain first-mover advantage in confidential DeFi. Pair fhEVM with OpenZeppelin for robust stacks, or Fhenix for speed-critical apps. Detailed blueprints await in Ethereum encrypted contract guides and EVM FHE resources.

Inco’s layer atop blockchains unifies these, fostering a privacy-first stack. Logan Jastremski’s foresight rings true: FHE poised to dominate, rendering public ledgers obsolete for sensitive logic.

About the Author

Evelyn Foster

Author

Evelyn Foster is a CFA charterholder with over 14 years of experience in portfolio management and risk assessment, specializing in privacy-focused blockchain investments. Her analytical approach blends rigorous fundamental research with a keen eye on emerging privacy technologies. Evelyn is passionate about enhancing trust in decentralized finance by advocating for encrypted smart contracts. Her motto: 'Secure growth starts with informed diligence.'

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