A qualitative assessment of the Engima protocol.

Summary

Overview & Investment Thesis

Enigma aims to be a second layer protocol that interfaces with a blockchain, allowing for peers to share and run computations (read: run smart contracts) while keeping those computions “secret” to all parties involved.

Enigma aims to help blockchains solve two fundamenal issues. Scalability and Privacy. By default, most blockchains are public, which causes issues as there are likely times where companies or individuals want to run non-public smart contracts. In addition, blockchains are ill suited for hosting massive stores of data and are not very computationally efficient, due to the requirement that every node on the network host the data and perfom computations.

Enigma allows individuals to run computations on a subset of nodes on the network, improving processing time. Only the results of the computation would then be stored on the underlying blockchain.

The value thesis is that companies are unlikely to adopt blockchain platforms that cannot handle difficult computations in a private manner. Blockchains and smart contracts without privacy are unlikely to see massive adoption, and are useless in industries where privacy is necessary to succeed (healthcare, finance, etc.) Enigma’s properties will stretch the use cases of blockchain platforms.

Technology

Tech Overview

You can imagine Enigma as having three seperate layers. The first layer being the off-chain protocol layer, the second being the platform layer and the third being the application layer.

Protocol layer: The protocol layer is fundamental to the building of the the next two layers, and has a singular focus as opposed to layer two and layer three. The singular focus of the protocol layer is to allow the secret compution and improve innate scalability. Enigma achieves this by designating computing to specific nodes, rather than every node in the system. Developers will write high level code, and the public section of the code will be executed on blockchain, with the private section being executed off chain. Platform Layer: The platform layer has theoretically many forms, such as data marketplaces, voting platforms and identity management solutions. Currently, the first implementation of the platform layer is a curated data marketplace focused on crypto-asset data. Application Layer: The application layer is built on top of potential platforms. The first application of the Enigma protocol is Catalyst, a algorthimic trading development platform built on top of the platform layer. Catalyst is described in more detail below.

Enigma is focused on completing all three layers, and providing support for those who wish to build on top of them. Enigma has funding availaible for projects that are exploring development.

Tech Evaluation

Scalability: Scalability is addressed in a relatively simple way by allowing off-chain computation. Nodes will process computions off chain and will deliver the results back to the chain. The network load is maximized by giving computational responsibility to random subset of running nodes based on load balancing requirements and previously validated actions. The better a node performs over time the more likely they are to get selected.

Privacy: Privacy is secured by taking advantage of solutions to the MPC problem, which Enigma has generalized sufficiently and managed to find a optimized solution that allows it to scale. The MPC problem is a generalized version of the Millionaires problem, which asks the question “How can two millionaires find which one of them is richer, without revealing their actual net worth.”

Risks: Computational efficiency of large scale systems may be affected, as ensuring privacy between all parties is a resource intensive task. While Enigma claims to have solved the optimization issue of secret computations, it is still much more resource intensive than just securing an outer system of where computations are done. The trade off is that Enigma achieves massive scale compared to decentralized solutions, but not against centralized solutions. The way that Enigma selects nodes for processing can lead to centralization due to it’s eruption system, threatening the decentralized nature.

Enigma in it’s current form is also limited by the scalability and usefulness of Ethereum. The roadmap for Engima contains plans for a migration to a stand-alone chain which may improve viability.

Token Economics

The Enigma token ($ENG) has functions similar to the functions of gas in the Ethereum system. There are three main reasons why one would need the Enigma token.

Security Deposits: In order to run a node on the Enigma platform, you need to put up $ENG as collateral. If as a node you are found to be a malicious actor, then your deposit is revoked and distributed to the nodes that found the malicious activity. Computational Fees: In order to actually run computations on the Enigma network, one must pay with the $ENG token. The amount of $ENG paid depends on the cost of computation, and gets rewarded to the nodes who are processing those transactions. Storage Costs: If you want to store data or create smart contracts on the Enigma protocol, it will cost you $ENG to do so.

The value of the Enigma token is intrinsically tied to the value of the Enigma platform, which means that the token construction assigns true value to $ENG. The utility of the $ENG token would theoretically have true value as users are incentized to keep it in the system.

Use Cases

Business Cases

Enigma’s use cases are found within the subset of use cases where blockchain is valuable, but is held back due to privacy and scalability issues. Private computations on data stores are likely to be Enigma’s bread and butter. Healthcare data, genomics data, and identity solutions are likely to be the best applications of the technology. Each one of those industries require stringent privacy and benefit from decentralization due to a combination of sensitivity and widespread need.

Data leakage/reselling is a large problem that can be solved through the use of the Enigma protocol. Open sourced data and data marketplaces can be hugely improved through the introduction of secret computations, as the users of the data will be able to interact and glean insights from data that they will not actually be able duplicate.

Potential Market

The potential market for Enigma is constrainted to the potential market of blockchain technology, and this should be taken into account when trying to assign valuation (both relative to peers & absolute). Generally, industry shies away from immutable and permission less ledgers, due to the high possbilitiy for mistakes. We see a proliferation of private & permissioned blockchains in this space, and we are confident that those types of blockchains will continue to hold market share, and that it will be difficult for Enigma to capture that market.

Enigma has opportunity to thrive in situations where decentralization and private computing is truly important, such as data marketplaces, voting systems, identity management and healthcare.

Ecosystem

Team

Guy Zyskind, CEO and Co-founder. MIT Sloan MBA. Guy has extensive experience in software devleopment and blockchain technology, writing his thesis on decentralizing privacy.

Can Kisagun, Co-Founder. MIT Sloan MBA. Can was a former McKinsey consultant and also has experience running multiple businesses.

The team is comprised of relatively impressive individuals from both the engineering and business end. The Enigma team does not have a shortage of qualified developers, and are currently hiring more.

Partnerships

Enigma has partnered with Intel to research and develop efforts to advance development of privacy preserving computation technologies. Enigma is also closely affiliated with MIT media lab.

Community

Telegram: 14696 Members

Reddit: 1,945 Readers

Twitter: 61.7k Followers

Unique Eth Addresses: 18542

Roadmap

Enigma has been very effective at meeting roadmap deadlines, often meeting goals before the scheduled date. They have deployed a preliminary testnet and already have built two products on their platform.

Products

Catalyst: The Enigma team has already released a product called Catalyst, which is analogous to Quantopian but for the cryptoworld. It is a algorithmic trading tool that allows for easy backtesting and piloting of strategies. They allow quants to test and publish algorithms which investors can then chose to allocate capital to depending on performance. Catalyst is build on top of the data marketplace created by the Enigma team, and draws upon the data that is being hosted by the marketplace. (One thing to note is that most data is currently being provided by third parties and not through the Enigma data marketplace. They state they will be building this out soon.)

Data Marketplace: The data marketplace itself sits on top of the Enigma protocol. Data is stored and hosted off-chain, with the Blockchain merely acting as a controller for the network (who can host data/who can subscribe to the data).

Upcoming goals

Enigma has three main goals over the next three years.

For 2018, Enigma is focusing on rolling out secret smart contracts to the Ethereum network. They have already deployed a testnet for this purpose, and will be rolling out a mainnet in Q3.

2019 will see a second major release focusing on secret contracts 2.0, improving scalability. Enigma will launch it’s own (simplified) chain moving all dApps to it’s own network, while still using Ethereum as a parent chain for security. The main scalability and decentralization efforts will take place during 2019.

2020 will bring Enigma complete chain-independence. The Enigma network will operate its inner Enigma Chain independently of other networks, and move the current ERC-20 coin to native solution. This would complete the process of Enigma becoming completely non-reliant on any other solutions.

Strategic Analysis

Strength & opportunities

Enigma is solving a problem in the crypto space that desperately needs an answer. There are currently no direct competitors to Enigma, and they have received quite a bit of support from the Ethereum community. They generally fly under the radar compared to most other smart contract platforms because it is not a widely known fact that they intend to become a self-contained chain in their own right.

The markets that Enigma is a capable of tackling are relatively large and due for disruption. The privacy issues of today provide Enigma an opportunity to captalize on distrust of current system by introducing trusted alternatives. Blockchain has introduced new methods of monetizing data and giving power back to the consumer. If Enigma delivers, they will be tapping into a large market.

The token mechanics of Enigma are well thought out, and strong. They incentivize the user the keep the token in the system, increasing intrinsic value.

Weaknesses & Risks

A public and permissionless blockchain will always be slower than less efficient than a private, permissioned chain. If Enigma tries to tackle the B2B model, it will likely have less luck than the likes of Hyperledger, Hashgraph or Quorum.

Enigma’s technology is also unproven as of right now, and they have lofty goals floated in their whitepaper. It is possible these goals are not met. In order for Enigma to succeed, they would need to prove out that they are capable of tackling these technology advanced issues.

On the business side, there is an assumption that companies and people would be willing to use a less efficient system in the name of decentralizion. It’s likely that is a far off assumption, as it would require entrenched players to give up marketshare. Data brokers can deliver at a lower cost than Enigma due to the efficiency of centralization, and will likely prove to be a big obstacle in Enigmas adoption among corporations.

Competitive Analysis

There are no direct decentralized competitors to Enigma, although there are a few in-direct risks in addition to the risk of centralized data brokers mentioned above. It is possible that scalability will no longer be an issue with generation 3.0 blockchains and that Enigma will no longer have use as a off chain application layer. If another project succeeds at creating on-chain scale and privacy, Enigma will become much less valuable.

Conclusion

Enigma is at the forefront of secure and scalable smart contracts. Their thesis that smart contracts are likely unuable at scale without privacy is sound, and if they can deliver on the tech side they are offering a solution to a problem that is seriously needed. At a valuation of $133M, they are likely undervalued compared to competition and with the continued announcement of advances they are likely to to perform well in these markets.