ERC-7984: The Confidential Token Standard Explained

ERC-7984 is a new token standard that aims to combine the programmability and auditability of blockchain with the financial privacy typical of traditional banking. Unlike standard ERC-20 tokens, ERC-7984 keeps token balances and transaction details encrypted, ensuring privacy even during computation on the blockchain. This innovation is powered by Fully Homomorphic Encryption (FHE), allowing mathematical operations on encrypted data without decryption, and is implemented in Zama's protocol. The Zama Protocol, which includes a network of off-chain coprocessors and a threshold key management system, supports this by performing encrypted computations without revealing actual balances. This approach ensures privacy by default while allowing selective transparency for compliance purposes. ERC-7984 is envisioned to become as common as regular tokens, facilitating confidential transactions across various applications like private DeFi, corporate payroll, and institutional settlement, without requiring changes to existing blockchains. Despite the challenges of higher computational costs, ongoing improvements aim to make confidential tokens more efficient and accessible, with support from industry leaders like OpenZeppelin and the Confidential Token Association.