This is the first of many deep dives I have planned for 2023, where I’m going to focus on projects with deep moats that blend amazing technology with much needed real-world applications.
Despite the countless memes that question the “earliness” of crypto, I think it’s safe to say it’s still very early. Sure, we had the 2021 hype where everyone’s aunts and uncles that haven’t talked to them in years asked if Dogecoin was a good investment, but that’s a blip on the radar in terms of the actual growth within the industry. We are still early indeed.
One argument that solidifies how early we are is the narrative-driven price action that’s still very much a part of crypto markets. You see this to an extent in stocks, commodities, etc., but nowhere is it as pervasive as crypto (except maybe some penny stocks here and there)
As such, knowing the new, shiny narrative is part of the game that we all have to play. But another part is knowing the potential narratives that haven’t yet reached the surface. And if there’s any narrative in crypto that’s underhyped, it’s privacy.
I realize that governments around the world have been harsh on privacy features such as mixing services, with the recent attack by the USGOV on Tornado Cash and the subsequent arrest of one of the core developers of the project scaring a lot of people away from this space.
However, encryption is one of the core tenets of cryptography, and therefore it should have a large role in cryptocurrency – it’s literally in the name.
When it comes to personal finances, you can’t have a durable, viable system without privacy for the user. For example, it wouldn’t make sense if you broadcasted your entire financial history to the world whenever you made a purchase or sent money to someone – nobody would use that service.
However, that’s how a lot of major blockchains currently function. If you pay for anything with crypto, chances are it’s pretty easy to trace that payment back to your bank account and a lot more. Full transparency has its place, but we also need an option for privacy. There are a few projects working on bringing privacy to the mainstream in crypto, but Secret Network is the most unique and robust in the game.
How Secret Network Came To Be
As the name suggests, the Secret Network team is building a scalable, privacy-focused blockchain that allows people the option to disclose certain information to certain parties. You know, like how the real world works.
First, let’s go over a brief overview of their history.
What we know as Secret Network today was born out of a project called Enigma, which was started all the way back in 2015 by Guy Zyskind. Enigma actually held an ICO back in 2017 (one of the rare legitimate ICO’s of its time), and raised an impressive $45 million right off the bat.
Blockchain networks in general are typically made up of a collection of nodes, whose core responsibilities include executing, verifying, and storing data. The plan for Enigma was to build a blockchain where every node at any given time can only hold/process a seemingly random part of the data, such that influence over the network would never become centralized.
This type of system is known as “multi-party computation” (MPC), and Enigma planned on optimizing it for all sorts of use cases. However, in January 2020, the decision was made to rebrand the project as “Secret Network” and deploy it as a layer-1 network in the Cosmos ecosystem. Just 8 months later, Secret was successfully launched on mainnet, making it the first live blockchain with fully encrypted smart contracts
As it turns out, creating a private blockchain is no easy task! I guess that’s why nobody had achieved it before at scale. The strength of blockchains is their ability to store data and verify its accuracy, but making that data private is a whole different game.
In order to create true privacy on a blockchain, the validators need to be able to validate data without knowing exactly what it is. We’ll get into the details in a bit, but this is an ongoing process for Secret as they continue to chart new territory.
You may be familiar with other “privacy chains” like Zcash and Monero, which are great for transactional privacy, but the infrastructure used by these chains becomes less secure as you use it for more things (like smart contracts). However, Secret is taking this to the next level: programmable privacy.
This method takes “transactional privacy” offered by privacy blockchains like Monero and ZCash a step further. Not only are all your transactions private by default, but you can program (customize) your privacy depending on the circumstance.
Bringing Privacy to Cosmos:
Secret Network is built using the Tendermint software development kit (SDK), which is core infrastructure of the Cosmos multi-blockchain universe. Tendermint is a deep rabbit hole of technical information, but the most important thing to know about it is that Secret uses the Inter-Blockchain Communication (IBC) protocol, which allows it to communicate with other IBC-compatible blockchains in the Cosmos network. So, Secret Network uses Tendermint, which includes IBC, which lets Secret share information with other important Cosmos blockchains.
The ability to share information with other Cosmos chains is crucial because of the network effect: as more people realize the benefits Cosmos has to offer, they’ll most likely first use some of the bigger chains like Osmosis, Juno, Evmos, etc. But as privacy becomes a bigger use case (not just narrative) and Secret continues to build amazing products, it’ll be easy for Cosmos users to bring money into the Secret ecosystem.
Not only that, but the privacy aspect is a huge milestone for attracting institutional money. If big organizations use a big L1 chain like Ethereum, Solana, or even Bitcoin to transfer money, it won’t be long before some online sleuth doxxes them.
With Secret, they have privacy by default, which is the only viable option for a lot of these companies.
Think about it – would a pension fund want all of its holdings fully visible all the time? Would a hedge fund want everyone to be able to see every trade in real time? This would be a disadvantage for pretty much all financial companies.
This gives Secret a massive edge; they’re far and away the leader in terms of offering financial products shielded by a layer of privacy.
A Look At The Tech Of Secret Network
In this section, we’re going to take a look at some of the amazing tech that Secret Network uses to retain privacy for its assets. Going over all the tech would take days and is a bit above my pay grade, but I’ve broken it down into four main components:
Nodes
Secret Contracts
Trusted Execution Environments (TEE)
Access Control
Nodes:
Secret Network is run by a set of nodes that process and verify transactions. These transactions are bundled into a “block” every 6 seconds, and added to the blockchain which contains all previous blocks since the network began.
As a reward for securing the network, validator nodes are paid SCRT tokens every time they create a new block (we’ll go over the SCRT tokens in more detail later). Currently, there can only be a total of 80 validator nodes, but this number will continue to increase to make the network more decentralized.
Secret Contracts:
While many blockchains use smart contracts to run applications, Secret Network uses their privacy-focused version: Secret Contracts.
Essentially, Secret Contracts can do everything smart contracts do, plus they have some additional features. This gets very technical, but the summed-up version is that they allow encrypted transactions to be made, meaning that nobody can actually see the details of said transactions.
This allows all sorts of interesting services to exist on blockchains that previously couldn’t, like a lending protocol where nobody can see what your collateral is, NFTs with private content/ownership, and a lot more that we’ll go over a little later. They also prevent MEV, which has been a huge issue for blockchain users over the past couple years.
The details of MEV go beyond the scope of this article, but most of it has to do with users’ orders being front-run by bots. Overall, MEV has resulted in the extraction of nearly $700 million of user funds since 1/1/20. For more information on MEV, here’s a great resource.
Trusted Execution Environments (TEE):
As a non-technical person, this is part of the Secret Network technology that blew my mind when I first read about it. Essentially, a trusted execution environment refers to a certain area within a CPU processor where data is stored, and no other part of the system can access it.
There are different types of TEEs, but for uniformity’s sake, Secret uses the Software Guard Extensions (SGX) version, which is a feature of certain Intel processors. Think of the TEE as the only holder of a master key that can read anyone’s private data.
The TEE unlocks data, reads it, and locks it again before sending it back out into the viewable network. To ensure maximum security and privacy, this is the only place where the contents of Secret Contracts are seen (decrypted).
This is also where the “consensus seed” lives. All public and private keys are derived from the consensus seed – it’s essentially a string of random numbers that acts as the ultimate password for the entire network. Each validator holds it in their TEE, but nobody can see what it is.
Now, you may be thinking “if all computations are done in an area that nobody can see, how do people see their own account information?” The answer is that you can see it because you own your private key, which is specific to your account and not the same thing as the consensus seed.
Every time you sign a transaction, you’re signing with your private key, which proves that you own your private key, which the network recognizes and therefore it allows you to see your account information.
Access Control:
Taking that a step further, another thing that puts Secret in a league of its own is access control; that is, telling the network exactly who can see your account data, and exactly which parts they can see. Within access control, there are two key parts: permits and viewing keys.
Viewing Keys:
Viewing keys are a custom solution built into Secret Contracts that allows the network to cryptographically authenticate its users. In other words, anyone holding an account’s viewing key can see the contents of that account.
Note that this is different from a private key. Private keys allow the owner to not only see the account data, but also to make transactions. This is where Secret improves on public blockchain infrastructure, where anyone can go look up anyone else’s address and see everything they’ve ever done.
When you create a Secret Network account, you’re the only one that owns the viewing key. However, you can share your viewing key within the network, which allows other entities to view your account without having any control over it – this fulfills the idea of programmable privacy.
Permits:
Permits were developed as an alternative to viewing keys to offload some strain from the network.
They basically do the same thing as viewing keys: they let another party view your account information, but they grant that permission for different time frames. Viewing keys are a one-time deal, where you allow another party to view your account, and they maintain that permission until you change they key. Permits, however, only grant access for a single session, so it’s much more temporary
The main advantage that permits offer is that they don’t generate transactions, which means that the network doesn’t have to store any additional data when permits are granted. Permits also don’t require the one-time fee that you need to pay when you share your viewing key since there’s no transaction occurring.
The Ecosystem And Use Cases Of Secret Network
In this section, we’ll look at the uses/functions of the SCRT token, the SNIP-20 standard, and some examples of how Secret Network’s privacy enhances things like communication, DeFi, and NFTs.
SCRT:
SCRT is the native token of the Secret Network blockchain, and it has 3 primary use cases
1.) It’s used to pay transaction fees
2.) Validators need it to secure the network
3.) It’s needed to be able to conduct governance
Each transaction made by users of the network pay transaction fees with SCRT, which are then paid to validators. Validators also earn SCRT as a reward for keeping the network secure. Anyone can stake SCRT to earn part of these rewards by delegating their SCRT tokens to individual validators.
Because it’s constantly being paid out to validators, there’s no supply cap on SCRT; it’s constantly inflating. However, the inflation rate depends on how much SCRT is being staked.
If the ratio of staked SCRT to non-staked SCRT is under 66%, the inflation is 15%, which means that stakers and validators get paid more tokens. That incentivizes more people to stake, and as the ratio goes higher, the inflation rate gradually drops to a minimum of 7%.
Right now, there are about 192 million SCRT tokens outstanding. If 76 million are staked and 116 million are unstaked, that makes a ratio of slightly less than 66%. So, the inflation rate would be 15%. Then, as people stake more to get the higher rewards, as well as to avoid being diluted at 15%/year, the rate drops.
Between inflation and block rewards, Secret stakers consistently make over 20% APY, which is more than most blockchains; however, that comes at the cost of non-stakers being diluted, which isn’t great incentive to hold the token.
Finally, SCRT is the only Secret Network-native token that’s public by default, but there’s a way to convert it to a private version, thanks to the SNIP-20 token standard.
The SNIP-20 standard:
Just like Ethereum-compatible tokens are made using the ERC-20 standard, tokens that can interact with Secret Network use the SNIP-20 standard. If you want to convert your SCRT tokens into private tokens, you’ll need to convert them into the SNIP-20 equivalent: sSCRT (secret SCRT).
SNIP-20 also enables non-private tokens from other blockchains (like Ethereum’s ERC-20 tokens) to be integrated into Secret’s blockchain and made private. For example, if you want to use ETH on the Secret Network, you’ll need to convert it into “sETH,” and then it’ll be compatible to work with Secret Contracts.
Aside from SCRT, all tokens created on Secret Network have all the privacy features built in. As I mentioned earlier, this creates the potential for tons of use cases that aren’t possible on any other blockchain.
Apps/Use Cases
Back in January 2022, Secret Network revealed that they had raised $400 million in investments from all sorts of major players around crypto. This gives them massive clearance to create all sorts of exciting projects. While 2022 was a year of funding/prepping the network for adoption, I believe 2023 will be a year of some major app launches and adoption on Secret.
As I mentioned, the three use cases I’ll highlight are communication, DeFi, and NFTs.
First, Alter Network is enabling private communication via Secret Contracts, including encrypted messaging, data sharing, file storage, and more.
A while back, it was made known that social media giants like Twitter and Instagram had access to all of their users’ DMs, and at times they were actively censoring them. While not that surprising, this caused a brief moment of panic for lots of people, and many started using encrypted apps like Signal instead. Unfortunately, a lot of the “privacy apps” out there still have some form of KYC, which to anyone who values comprehensive privacy, sort of defeats the point.
Taking this idea a step further is Alter, which aims to be the killer app that merges privacy with communication. Whether you’re texting, calling, video chatting, or file sharing, Alter uses Secret Contracts to allow you to manage your own privacy.
Something that stands out to me with Alter is the fact that they will soon be compatible with mobile use; they plan on listing on iOS in the next few months. If web3 is going to make a push towards mass adoption this year, you need to be where the users are – and that’s mobile, without a doubt.
Alter’s roadmap is scheduled to come out within the next week, and I’ll update this article once that’s released.
Next, Shade Protocol aims to be Secret’s all-in-one privacy DeFi app.
Shade is the frontrunner to revolutionize the DeFi landscape and has the potential to bring major attention to Secret Network. DeFi is still the most popular facet of crypto, and Shade is cutting no corners as they plan on featuring a DEX, lending platform, liquid staking for SCRT, and a native stablecoin, SILK.
The added privacy inherent in Secret Network means that people will actually have control over who sees their crypto holdings. On other blockchains, if your address gets doxxed (and there’s really good software out there optimized to do just that), everyone will know your entire account balance and transaction history – that’s just not practical!
Liquid staking is also a huge deal, as it makes capital flows in DeFi way more efficient by allowing you to stake your SCRT while holding an IOU that you can move around and trade as if it were actual SCRT.
The thought behind SILK is quite interesting as well. Consistent with the ethos of Secret, the goal was to create an actual decentralized stablecoin. Most stablecoins out there are pegged to one single fiat currency; however, that’s really the opposite of decentralization and really goes against the point of cryptocurrency. So, instead of pegging SILK to USD, it’s pegged to a basket of currencies and commodities: Bitcoin, gold, USD, JPY, EUR, and CAD. As more assets become available on the blockchain, SILK will look to further decentralize the basket.
Right now, Shade offers wrapping (converting non SNIP-20s to SNIP-20s), bonding (buying discounted tokens for a set period of time), liquid staking, and bridging to other IBC-compatible chains. However, big things are on the way, as Shade Protocol’s DEX, ShadeSwap, is expected to launch on mainnet on February 7th, and SILK soon after that. As more information comes out, I’ll update this post as well.
Last but not least, I’m convinced that privacy is going to revolutionize media/NFTs on web3.
Last year, Secret NFTs generated more hype than anything else on their chain for a couple reasons.
First, there were a couple massive partnerships with movie directors Quentin Tarantino and Kevin Smith. And second, the integration of Secret’s privacy with NFTs created a whole new dynamic for asset ownership.
Programmable privacy gives NFTs an added form of value – when you buy an NFT on Secret Network, you’re the only one who can view the contents by default. Of course, you can choose who else can see them by sharing your viewing key, but never before had this been possible. This is ideal for movies or similar media – when you pay to see a movie, it wouldn’t make sense if everyone else could see it for free. This allowed Kevin Smith to create the first ever NFT film: “Killroy was Here.”
Currently, Stashh is the biggest NFT marketplace on Secret, but activity has been extremely quiet during the bear market.
Another app unleashing the power of privacy-enabled NFTs is Eqoty, which is aiming to be a solution for the musicians who are being constantly ripped off by record labels and streaming services. With Eqoty, artists will be able to list their work directly while getting the benefits that Secret Network has to offer.
Just like the movie example, the buyers have exclusive access to the music via the encrypted NFT. This also allows artists to communicate in other ways and have tiered fan bases where superfans receive exclusive content like personalized messages, tracks, etc.
Other blockchains don’t yet have a good solution for this – you have to do some form of KYC or trust someone else with your data in some way in order to get “premium” content. But on Secret, the artist can just choose which products to make visible and price them accordingly.
Currently, NFTs are mostly associated with various forms of art, but at their core they’re the future of asset ownership. Secret takes it to the next level by incorporating privacy into that ownership via encryption, which is extremely valuable, especially with big-ticket items – imagine if everyone could see all assets owned by billionaires!
Going forward, I could see Secret Network being a perfect solution for asset distribution, storage, and sharing via NFTs.
How Secret Laid The Groundwork For Mass Adoption In 2022
If you’ve been paying attention, you’re (hopefully) coming around to the idea of a privacy chain being a fundamental part of web3. If that’s accurate, it turns out that Secret Network shares your enthusiasm, and they understand that mass adoption required a network that can withstand, well, the masses. In order to prep the network for potentially millions of users, they took a series of actions in 2022 known as the Shockwave Upgrades.
The first part, Shockwave Alpha, took place last May. This had 3 huge impacts on the network, and was a great first step to secure their spot in an interchain future.
The first impact was a 500-600x improvement in performance for certain types of actions, such as permits, NFT mints, and cross-chain airdrops. The NFT mints are the one that stands out to me; highly-anticipated NFT releases have been known to clog other blockchains like Ethereum. Considering the benefits of Secret NFTs, I think they’re very overlooked when it comes to future NFT releases, and Alpha was a big step in making them even more attractive. Airdrops are also a huge part of the Cosmos appchain culture, so it’s great to see the improved performance there as well. As SCRT becomes a more prominent part of DeFi and privacy in general, I believe the airdrops we’ll see in the future will grow in terms of both quantity and quality.
The second impact was enabling interchain accounts, which Cosmos enabled via IBC just weeks prior. The benefits of this are clear as well; easier access to other Cosmos chains via IBC makes for a much easier onboarding process and will attract more liquidity as the privacy hub of Cosmos.
The third impact was automatic updating of Secret’s state (the blockchain’s transaction history) whenever a network sync goes through. Prior to Alpha, each node runner had to manually do this, so Alpha was a huge help with handling Secret’s most critical infrastructure in more efficient manner.
In September, Secret performed part 2: Shockwave Delta, which upgraded Secret Contracts to the CosmWasm v1 contract standard. This has 3 huge benefits.
First, it makes it a lot easier for Cosmos developers to create Secret Contracts, since the format is aligned with other IBC chains.
Second, it enables Secret’s private contracts to communicate with smart contracts on other IBC chains.
Third, it makes SNIP-20 tokens transferable, which means they can be listed on other DEXs in the Cosmos universe, and tokens from other chains can be made private on Secret.
To summarize, Alpha set the stage for this interoperability by implementing IBC, and Delta drove it home. The new possibilities for Secret following this upgrade are endless; for example, a DEX aggregator on Secret could include swap routes from DEXs on multiple blockchains in its results . That means the user gets the best possible trade outcome across the Cosmos ecosystem while maintaining total privacy
Last but not least, Secret’s Shockwave Omega upgrade came in November, bringing the biggest improvement yet to the network: the upgrade to Wasm3.
Think of this as switching from a horse and buggy (clunky, slow, smelly?) to that nice shiny Lambo people keep talking about (fast, smooth, the envy of its peers). Both get you from A to B, but one does it much more efficiently.
Before Omega, Secret had been using the horse and buggy equivalent of bytecode interpreters called wasmi.
Before Secret’s mainnet launch, the launch was the top priority, and using wasmi back then made it much easier and faster to launch. Wasmi was also made for SGX, the core tech that enables privacy on Secret, so back then it made sense.
However, now that the time has come to prepare for mass adoption, Wasm3 is obviously the better choice. Overall, Wasm3 brings a 3.5x increase in transactions per second (TPS), and it also lowers gas fees. The apps on Secret will need to upgrade their frontends for this change to become noticeable, and any app that wants to have staying power will surely do that
The Future: Secret 2.0
Secret Network had its share of setbacks in 2022, but that’s bound to happen when you’re breaking ground in one of the most complex tech fields on the planet. As someone who strongly values data privacy, I’m very excited to watch Secret continue to grow and persevere, even when mistakes are involved.
First, Cosmos chain TVLs across the board were decimated with the implosion of LUNA last May, and Secret was no exception. Like many chains, user activity on Secret has slowed down considerably since the end of the bull market. However, developer activity is still surprisingly strong, and the optimism and motivation of the Secret team is one of the reasons I’m extremely bullish on the project.
It’s also clear that investors want in on what Secret has to offer; as I mentioned before, the $400 million in funding speaks for itself – Secret is just getting started! With the inevitable arrival of the next bull market, I expect Secret to get a lot of attention from people inside the crypto community as well as outside. There’s no question that privacy is top-of-mind for a growing number of people and institutions as authorities around the world continue to abuse their power.
Second, on October 3rd, a vulnerability was discovered within the TEE of certain Intel SGX CPUs. Thankfully, it was discovered by a white hat team and the damage was minimized, but it’s still something Secret needs to fix if they want to maintain a position in the privacy blockchain arena.
Fortifying their privacy is Secret’s top goal going forward, which they’ve outlined in their Secret 2.0 plan.
While a whitepaper for Secret 2.0 hasn’t yet been released, the ultimate goal will be to integrate more than one form of privacy into the network. As I mentioned, the only form of privacy in use right now is TEE, but we’ve seen that even this piece of sophisticated security still has vulnerabilities.
However, there are several more possibilities that can be used in addition to that, namely multi-party computations (MPCs), fully homomorphic encryption (FHE), and zero-knowledge proofs (ZKP). I won’t get too into the weeds here, but each one of these has some form of trust assumption:
For TEE, you need to trust that the hardware (e.g. SGX) is secure.
For MPC and FHE, you need to trust that the validators won’t collude.
For ZKP, you need to trust that the prover (which proves validation of transactions) is accurate.
With TEEs, it’s very hard to get the consensus key from the secure part of the CPU.
If you add MPC and FHE in addition to that that, it means that not only do all the validators only have a tiny piece of the consensus key, but it’s stored in a TEE on each validator. So, you’d have to break through the TEE on each validator to get each part of the key, and then on top of that, a majority of the nodes would have to collude. This would make security exponentially more robust, and further distance Secret from the rest of the pack. For more details on each type of network, you can read this amazing rundown by Guy Zyskind.
To wrap it all up, Secret Network has an extremely promising future. They’re far and away the leader when it comes to privacy-focused blockchains, and I believe their adoption will boom in the next bull market as more people are once again onboarded into crypto. Additionally, as institutions look into integrating with blockchains, Secret will stand out, as it’s the only one with a track record of success and a wide variety of applications that use programmable privacy. As Secret 2.0 transitions from idea to reality, it will exponentially widen the lead that Secret has on their competition, making its future something I’m excited about and feel privileged to be able to witness.