When it comes to DeFi, your first reaction may be "freedom", "no middleman", "transactions at any time" - it is indeed very cool. But there are also many problems, such as: once your wallet address is public, others can check what you have done; transaction records are completely transparent, hackers can also analyze what you are doing; if you engage in lending, mortgage, and asset management, your information will be exposed if you are not careful.
At this time, FHE (fully homomorphic encryption) is like putting on a set of invisible armor for DeFi, which not only protects you, but also allows the platform to complete various operations without "seeing" your data. Does it sound sci-fi? Don't worry, we will explain it slowly.
1. What is FHE? A simple understanding
Fully homomorphic encryption, in layman's terms, means: "I have encrypted the data, but I can still complete calculations in an encrypted state."
It's like you put a piece of meat into a sealed bag, and the chef can cook it without opening the bag, and even cut it into pieces, season it, and finally give you a "encrypted steak". You take it home and open it with a key, and you still get well-cooked good meat.
That’s the magic of FHE — it performs operations without decrypting the data, and you (or the platform) decrypts the data to get the result. So what’s the use of this? Let’s talk about it.
2. What are the problems with DeFi? What can FHE do to make up for it?
1. You are “transparent” in everything, which is actually dangerous
In DeFi, as long as others know your wallet address, they can:
It depends on what coin you bought;
Guess whether you have gained or lost money;
Track your trading habits;
They can even "ambush" you in advance (such as sniping, running ahead).
But if transactions, lending, and asset management all take place in an encrypted state, no one will know what you are doing.
FHE allows these financial operations to "hide in an encrypted shield", so that others cannot see what you did, but the contract can still work normally.
2. Loans are no longer a “naked” operation
Traditional DeFi lending platforms (such as Aave and Compound) work like this:
You pledge assets;
Smart contracts assess the value of collateral;
Give you a loan.
But here comes the problem - these processes are all public, which means:
Others know how much you have mortgaged;
How much money you borrowed;
Even when you are about to repay the loan, people will “short you” or do something bad.
What about using FHE?
You “encrypt” your collateral assets;
Smart contracts perform calculations on encrypted assets (e.g. confirming whether a target has been met);
The loan process is also fully encrypted;
Only you and the system know what you did, outsiders cannot see it.
The result: safety, quietness, and no targeting.
3. Trading can also be done “silently”
Many DeFi transactions (such as Uniswap and currency exchange on Curve) have a problem: everyone can see that you have placed an order, and someone will grab your position or even front-run your transaction.
The role of FHE here is to make the transaction a black box operation:
You encrypt the order (for example, I want to exchange 100 USDC for ETH);
The system uses encryption algorithms to match your transactions;
After the transaction is completed, you decrypt and get the result back;
People outside can’t see anything - they can’t see what order you placed, how much money you placed, or the transaction price.
This means that the entire DeFi system has become a dark web-level secure trading platform. Everyone has privacy and no one can cheat.
4. Compliance can also be targeted
To put it bluntly, DeFi is often targeted by regulators because it is "too transparent." Although everything seems to be public, no one uses real names, which makes it easy for "bad guys" to launder money, arbitrage, and cause trouble.
FHE offers a middle path:
User data is encrypted to protect privacy;
The platform can verify whether the behavior is compliant through encryption rules;
The “partially verifiable” or “partially revealing” mechanism is only triggered when certain conditions are met.
For example, if you participate in a KYC pool, only verified agents can see that you are a compliant user, and others cannot see who you are.
3. What are the actual application scenarios of FHE+DeFi?
Crypto Collateralized Lending
For example, Mind Network allows you to borrow encrypted USDC using encrypted BTC as collateral.
The contract will not "see" the specific amount, but it can determine whether the mortgage ratio has been reached.
Anonymous transaction pool
Build a “privacy transaction pool” (similar to Tornado Cash but compliant);
All transactions are performed via FHE;
Trackers cannot get any on-chain traces.
Privacy asset management
Build an intelligent financial management system with fully encrypted investment portfolio;
The system automatically performs position adjustment and allocation according to the strategy;
No one knows the user's funds and allocation logic.
Insurance and liquidation
The risk control model is also encrypted with FHE, and the system performs risk control calculations;
If liquidation is required, the process is encrypted so that outsiders cannot take advantage of the situation.
4. Future Imagination Space: Which underlying logic of DeFi will FHE change?
All on-chain operations will be "encrypted by default", and you no longer have to worry about data exposure;
Exchanges, wallets, and contract platforms will embed the FHE kernel, making it as natural as using HTTPS;
DAO and cross-chain protocols will also use FHE to establish a "privacy collaboration mechanism" to protect the identities of participants;
$FHE tokens may become the fundamental privacy computing fuel for DeFi, just like ETH is Gas.
5. Conclusion: FHE is not icing on the cake, but a timely help
If DeFi wants to truly become mainstream, it cannot rely solely on "freedom" and "profit", but also on "security" and "trust".
FHE is not an "add-on feature" but an infrastructure that allows DeFi to be used with confidence and develop in compliance. It not only protects user privacy but also makes the platform compliant and legal; it makes it difficult for hackers to start and prevents data leakage.
