Encrypted home directories on file server

I'm looking for a way to setup a file server where only the authenticated user has access to their home direcotry on the server. Each user gets their own /home/[username] directory. Of course each home directory will be protected with ACL, where only the user has permission. But in case the server gets compromised, the ACL will not be much protection. Either by physical access to the server or the unauthorized user gets root access. A sneaky sysadmin can also be a problem.

So to fix this problem there is only one good solution, encryption of the home directory. The biggest problem is how to handle the encryption keys in a secure way? Each user should have a unique encryption key. And when the user signs in, the home directory should be decrypted on-the-fly.

I drew a flowchart how I think it should work.

Question is, does a solution exist for it? Can someone point me in the correct direction?