A method for photon-efficient quantum key distribution (QKD) is proposed and analyzed theoretically. The technique is based on nested encoding of multiple logical qubits into the discretized temporal degree of freedom of a single photon. The states of individual logical qubits are measured using a cascade of interferometric stages followed by time-resolved photon counting. The method may be useful in implementations of entanglement-based QKD protocols whose performance is limited by the brightness of onboard sources of nonclassical light, based e.g. on spontaneous parametric down-conversion. Numerical optimization taking into account the presence of background noise indicates the potential of multiqubit encoding for a nearly tenfold increase of the attainable key rate for entanglement-based LEO satellite QKD systems.
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