The following article is a guest post and opinion of Prabal Banerjee (Co-founder of Avail) and Shailey Singh (Marketing Manager and Researcher at Avail)

Imagine a world where you walk into a bank and apply for a $1 million loan. Instead of handing over your full income history and credit report, you generate a cryptographic proof confirming you meet every loan criterion without exposing actual numbers or documents. The bank verifies the proof instantly. No raw data changes hands. No paper trail for hackers to follow.

Today, for a financial institution to verify a fact—whether it’s a customer’s loan eligibility or proof of compliance—it must reveal every underlying piece of data, including sensitive personal information. That data lives in centralized systems, secured by or shared with third parties, creating an ever-expanding attack surface.

This is the paradox at the heart of modern finance: compliance demands disclosure, but disclosure erodes privacy and security. Zero-knowledge technology flips that script.

In a world of mounting cyber threats, regulatory scrutiny, and customer fatigue, zero-knowledge proofs (ZKPs) offer a better model for trust: verifiable, privacy-preserving, and future-ready. ZKPs let one party (the prover) convince another (the verifier) that a statement is true, without revealing why or exposing the underlying data.

Integrating ZK technology into traditional finance may seem futuristic, but the truth is, we need it now.

A Surge in Cyber Risk

Data privacy and security go hand in hand. The financial sector is under siege. In 2024, the average cost of a data breach for banks and insurers skyrocketed to $6.08 million—about 22% higher than the $4.88 million cross-industry average. Companies take an average of 168 days to detect and 51 more to contain these breaches, prolonging operational chaos and reputational damage.

In 2023, the financial industry accounted for 27% of all data breaches handled by Kroll—more than any other sector. These aren’t outliers; they’re bleeding-edge trends that cut into profits and erode public trust. Consider Equifax, which lost over $5 billion in market cap and 13% stock value after its 2017 breach; or Bank of America’s vendor-related breach that exposed the records of 7.6 million customers, prompting forensic investigations and intensified regulatory scrutiny.

Compliance Overload

Regulatory demands have outpaced legacy infrastructure. In the United States, Dodd‑Frank and SOX require firms to disclose detailed or near-real-time compliance data.

Europe’s MiCA adds granular reporting for crypto companies. Firms face nonstop exposure, rising complexity, and compliance fatigue. The result: bloated tech stacks, siloed data, and mounting vulnerability under constant internal and external scrutiny.

Banks Demand More Personal Data

Banks and fintechs are asking users to surrender increasing amounts of personal data: documents, income history, even biometric data, just to get started. Customer acquisition has become a leak-prone liability.

A 2023 Fenergo study found 67% of banks have lost potential clients due to clunky KYC and onboarding. Banks contact new customers an average of 10 times during onboarding, requesting countless documents, costing around $128 per customer and seeing an average 18% abandonment rate, per a 2024 report. These data-hungry paths are alienating users while making institutions data-rich and danger-rich.

Zero-Knowledge Tech: Proof Without Exposure

Zero-knowledge proofs change this calculus. ZKPs are built on decades of cryptographic research. Foundational work by researchers like Shafi Goldwasser, Silvio Micali, Oded Goldreich, Amit Sahai, and others laid the groundwork for modern zero-knowledge systems, defining both their theoretical limits and practical designs. Today, ZKPs have moved from mathematical concepts to real-world tools.

Under the hood, zero-knowledge systems rely on advanced cryptography to generate compact, verifiable proofs. No raw data ever needs to be revealed. Rules and inputs are programmatically smart-contract encoded, the proof is generated without exposing the underlying data, and the verifier receives a tamper-proof cryptographic assurance that all conditions were satisfied.

Recent breakthroughs have made these proofs fast enough for real-time use and efficient enough to scale across high-volume financial systems.

After the collapse of crypto giants like FTX, proving reserves became a top priority for crypto firms, especially exchanges. Centralized exchanges like Kraken, Gate.io, and OKX have already proven reserves without exposing sensitive details.

Traditional banks can adopt similar mechanisms to prove Basel III compliance or liquidity thresholds without ever leaking proprietary risk models.

Some already have. In 2023, Société Générale Forge explored zero-knowledge technology to enhance confidentiality in digital bond issuance (fully subscribed by AXA Investments and Generali Investments) on Ethereum L1. In March 2024, the European Banking Authority began exploring ZKPs as part of its digital compliance toolkit. Singapore’s MAS has also funded ZK-based pilots for cross-border data privacy.

The other important aspect is scale. Interbank markets process trillions daily, but most require full disclosure for settlement—from counterparties to trade details. ZK-rollups can batch thousands of trades into a single proof, offering near-instant finality without revealing anything other than what needs to be proved.

Why Now? Tech + Timing

Zero-knowledge proofs aren’t new. But what is new is that they’re finally fast, scalable, and accessible.

Proof generation speed has improved dramatically in the past two years alone. With zk-SNARKs and zk-STARKs, proofs can now be generated in seconds and verified in milliseconds—even for complex financial computations. Developers are advancing ZK tech in the context of rollup architecture acceleration, with Ethereum’s rollup-centric vision.

Tooling has matured as well. Today, developers can plug into open-source libraries like Halo2, PLONK, or zkVMs with real-world use cases. Platforms like Polygon, zkSync, StarkWare, and Scroll are already deploying ZK-powered financial apps.

Legacy institutions may face challenges in upgrading entrenched infrastructure, aligning with regulatory frameworks, building internal cryptography domain expertise, and educating teams. But these limitations are shrinking fast.

Today, the pieces are in place. The time to act is now.

Those who move early will set new standards. The new model of trust is “verify, never reveal.” Early adopters will set the standard and win the clients.

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HodlX Guest Post  Submit Your Post

Blockchain technology has transformed the financial landscape – but as it continues to evolve, the need for enhanced privacy, scalability and security has become more apparent.

While blockchain networks like Ethereum (ETH) have made significant strides in their adoption, they still face challenges surrounding these core aspects.

Enter ZKPs (zero-knowledge proofs) – a cryptographic breakthrough that is quickly becoming a game-changer in the blockchain world.

In this article, we will explore how ZKPs are improving blockchain ecosystems by offering privacy-preserving features, enhancing scalability and enabling new use cases across industries.

Understanding ZKPs

At its core, a ZKP is a cryptographic protocol that allows one party to prove to another that a statement is true without revealing any additional information about the statement itself.

In the context of blockchain, ZKPs can be used to verify transactions or other data on a network while keeping sensitive information private.

For instance, a user could prove that they have enough funds to complete a transaction on a blockchain without disclosing the actual amount in their wallet or the details of the transaction.

This concept of privacy – coupled with the ability to verify data without exposing it – is what makes ZKPs such a powerful tool for blockchain scalability and security.

There are two primary types of ZKPs in the blockchain space.

• ZK-SNARKs (zero-knowledge succinct non-interactive argument of knowledge) – A powerful cryptographic technique that enables fast, non-interactive proofs. They are particularly useful for applications requiring scalability, such as Ethereum’s ZK-rollups.
• ZK-STARKs (zero-knowledge scalable transparent argument of knowledge) – These offer stronger security guarantees and are designed to be more scalable, as they don’t require a trusted setup, unlike ZK-SNARKs.

ZKPs in action – blockchain privacy and security

As blockchain adoption grows, privacy concerns have become one of the most pressing issues for users and regulators alike. ZKPs offer an elegant solution to this problem.

By allowing users to prove the validity of transactions without revealing any sensitive data, ZKPs help maintain privacy while still ensuring that the transaction is valid.

A good example of ZKPs in action is Zcash (ZEC), a privacy-focused cryptocurrency that leverages ZK-SNARKs to allow private transactions.

Zcash users can send funds without revealing the transaction amounts or addresses involved, making it one of the most secure and privacy-preserving blockchains in the crypto space.

In addition to privacy, ZKPs provide an extra layer of security. By ensuring that data is only validated through cryptographic proofs, they significantly reduce the risk of fraudulent or malicious activity on the network.

For enterprises and individuals looking to use blockchain technology for confidential applications, this is a huge advantage.

Scalability – how ZKPs are enhancing blockchain networks

While privacy and security are crucial, scalability remains a critical bottleneck for blockchain networks.

As DApps (decentralized applications) and transactions grow in volume, traditional blockchain networks – especially those using PoW (Proof-of-Work) – struggle to keep up with demand due to network congestion and high fees.

This is where ZK-rollups – a layer-two scaling solution based on ZKPs – come into play.

ZK-rollups aggregate large numbers of transactions into a single proof, allowing the main chain to process them more efficiently.

Since only a single proof needs to be posted on-chain, the scalability of the entire network improves dramatically, resulting in lower fees and faster transaction speeds.

Ethereum, for example, has integrated ZK-rollups as part of its broader scalability solutions through the Ethereum 2.0 upgrade.

Platforms like Loopring and zkSync have already begun utilizing ZK-rollups, significantly improving transaction throughput while maintaining the security of the Ethereum network.

The real-world adoption of ZKPs

The potential of ZKPs extends beyond just privacy and scalability. Several industry leaders and blockchain projects are already integrating ZKPs to solve real-world problems.

• Polygon – One of the most prominent layer-two solutions for Ethereum, Polygon is working on integrating ZK-rollups into its ecosystem to further improve scalability and reduce costs for DeFi users.
• StarkWare – By utilizing ZK-STARKs, StarkWare is enhancing scalability solutions for DApps and enterprise solutions.
• Optimism – While Optimism focuses on optimistic rollups, there is increasing exploration of how ZKPs can work in conjunction with optimistic rollups to improve overall system efficiency.

As these examples show, ZKPs are not just theoretical – they are actively being used to address blockchain’s most pressing challenges.

ZKPs – The future of blockchain privacy, scalability and innovation

The continued development and adoption of ZKPs will play a pivotal role in shaping the future of blockchain technology.

As more blockchain networks adopt ZKPs, we can expect to see increased privacy protections, reduced network congestion and greater scalability.

This will unlock new opportunities for DeFi (decentralized finance), gaming and enterprise applications.

Moreover, the ability to preserve privacy while maintaining full transparency will likely become a standard expectation in blockchain protocols.

ZKPs are not only advancing the usability of blockchain networks but also paving the way for a future where blockchain is used for a wide range of applications – from secure voting systems and confidential data sharing to scalable financial services.

Conclusion

ZKPs are fast becoming a cornerstone of blockchain innovation. With their ability to enhance privacy, security and scalability, ZKPs will enable the next wave of growth and adoption for blockchain technology.

As ZKPs continue to evolve, we are likely to see a transformation in the way blockchain networks operate – ushering in a more private, efficient and secure decentralized future.

For developers, investors and blockchain enthusiasts, understanding ZKPs and their applications will be key to staying ahead in the rapidly advancing world of crypto innovation.

Diksha Chawla is the founder of FinLecture, an insightful platform dedicated to making finance more accessible and understandable. With a strong academic background in business administration, Diksha is passionate about empowering individuals with the knowledge and tools they need to make informed financial decisions.

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Ethereum co-founder Vitalik Buterin is advocating for deeper research into the Poseidon hash function as the network explores ways to improve zero-knowledge (ZK) proof efficiency.

In a Feb. 26 post on X, Buterin encouraged cryptographers to participate in a security analysis program for Poseidon while quoting a message that extended the funding application deadline to March 15.

He stated:

“We are seriously considering migrating Ethereum to the Poseidon hash to optimize zk-prover friendliness, so having more information about its security properties is extremely high value.”

What is Poseidon?

Poseidon is a cryptographic hash function designed specifically for zero-knowledge applications.

Unlike traditional hash functions such as SHA-256, Poseidon is optimized for zero-knowledge (ZK) proofs, a cryptographic technique that allows transactions to be verified without revealing sensitive details.

ZK proofs are becoming increasingly crucial in Ethereum’s scaling efforts, particularly for rollups that process transactions off-chain before finalizing them on the main blockchain. Poseidon’s efficiency could reduce computational costs, making these solutions faster and more accessible.

According to Poseidon Cryptanalysis:

“Poseidon hash function has been used in numerous Ethereum applications that deal with verifiable computation. It is among the top performers at recent STARK benchmarks by StarkNet, which makes it a promising candidate for the use at Ethereum L1 for various protocols that employ ZK proofs.”

Community reactions

While some in the crypto space view Poseidon’s potential adoption as a positive step for Ethereum’s efficiency, others have raised concerns.

Ye Zhang, a co-founder of the Ethereum Layer 2 project Scroll, questioned whether Poseidon’s advantages outweigh its trade-offs.

Zhang pointed out that Poseidon’s various configurations could limit SNARK choices, making it less flexible. He also noted that Poseidon is significantly slower than alternatives like Blake and Keccak, which could create bottlenecks unless Layer 2 solutions adjust for compatibility.

Zhang added that Scroll initially used Poseidon but would revert to the Merkle Patricia Tree (MPT) with Keccak in a future upgrade due to performance considerations.

Mentioned in this article

The following is a guest post by Rob Viglione, CEO of Horizen Labs.

Standards are the unsung heroes of technological innovation. They pave the way for true interoperability and establish a solid foundation for businesses to operate. A solid foundation of standards and guidelines makes it possible for builders to take a longer view and design more reliable technology.  

From HTTP for web browsing to SMTP for email, standards have catalyzed paradigm shifts that shaped the modern world. As privacy technology matures, the emergence of standards for zero-knowledge proofs (ZKPs) promises to usher in a new era for web3 and beyond.

An effort to standardize ZK is underway

The National Institute of Standards and Technology (NIST) is a U.S. government agency that focuses on developing and maintaining standards across a variety of industries, including cybersecurity, AI, healthcare, and cryptography. Operating under the Department of Commerce, NIST sets benchmarks for technical standards and measurements within the country. 

Now, as part of its Privacy-Enhancing Cryptography (PEC) initiative, NIST has set an anticipated 2025 deadline to standardize zero-knowledge proofs (ZKPs), which could be impactful for the blockchain world and beyond. 

To do this, they’ve opened a “Threshold Call” — which is an ongoing open call for researchers to submit their proposals for advanced cryptographic techniques. By doing this, the agency gathers a comprehensive set of reference material that they can use to base their analysis and standardization efforts. Essentially, it’s a way for the research community to weigh in on how these specifications and standards should be crafted, and why. 

For this open call, experts have been asked to submit and refine ZKP schemes to ensure consistency, security, and usability across applications. Without these standards, ZKPs risk becoming a fragmented patchwork of solutions as adoption skyrockets. 

Standards unlock new eras of technological growth

With formal standards in place, we can build trust and interoperability in fields like blockchain, finance, and identity verification, much like HTTP did for web browsing. 

HTTP established the internet as we know it, by creating a standardized way for computers to communicate and transfer data and multimedia. With HTTP, users could now visit different websites using any browser, operating system, or device. It also unlocked the ability to use hyperlinks, making the internet interactive and easy for anyone to navigate. 

Before HTTP, the internet was largely text-based and centered around a command-line interface. Used by academics and researchers, users could navigate to files and information by entering commands, but there wasn’t a graphical interface or hyperlinks to jump between pages. It was basically just a limited network of computers sharing information between each other. Once we had standards in place to make the internet accessible for all, the entire world started to wrap their minds around the World Wide Web, kicking off the dotcom era that fostered Amazon and Google.

This is the level of standardization that we need for ZK cryptography, as we move fully into the web3 era. 

NIST has collaborated with the ZKProof initiative since 2019, as a way of supporting the development of open reference material on zero-knowledge proofs. The agency’s research team is also setting guidelines around what ZKPs can and cannot be used for. For instance, ZKPs are ideal for proving the identity of a person without revealing anything else about them, but they aren’t suitable for opinions. They can only be used for verifiable statements. 

The team is also maintaining a community reference with relevant terms, examples, and recommendations, to help bring ZK down to earth for anyone who wants to study this transformative technology. 

Looking forward to 2025 and beyond

Formal standards will accelerate enterprise adoption of ZK technology by reducing risk and fostering interoperability. Early adopters like Horizen Labs are laying the groundwork for this transition, creating a foundation for larger companies to build on.

With standards paving the way, zero-knowledge proofs could become the backbone of a more private, secure, and interoperable digital future. By participating in NIST’s standardization efforts, the cryptographic community can ensure ZKP technology is ready to meet the demands of a rapidly evolving, AI-driven world. This is our chance to define not just the future of web3, but the future of trust itself.

If you have a ZKP scheme or research to contribute, or you’d like to support NIST’s public analysis, you can participate in the standardization effort here. 

Opinion from Dr. Andreas Freund. 21 August 2024

TL/DR

There are platform solutions for DeFi protocols to integrate regulatory compliance without compromising decentralization. Using blockchain technology and cryptographic protocols, DeFi protocols can ensure secure and transparent transactions that meet regulatory standards while maintaining user privacy. Such protocols enforce compliance rules on digital assets and their holders. Therefore, they can provide a robust and flexible system to help DeFi protocols navigate the complex regulatory landscape, contributing to a safer and more reliable decentralized financial ecosystem.

Introduction

Decentralized Finance (DeFi) has taken the financial world by storm (at least in the OpEd pages of Bloomberg and Fortune), offering a permissionless and transparent alternative to traditional financial institutions with a total locked value (TVL), as of this writing, of nearly $100Bn. However, this very decentralization creates a major hurdle: compliance. Unlike conventional institutions with central control, DeFi protocols are often governed by self-executing code and lack a single entity responsible for enforcing regulations. This raises a critical question: how can these innovative protocols integrate compliance rules into their DNA without compromising their core principles of decentralization and autonomy? This challenge lies at the heart of DeFi’s future, as regulators grapple with finding the right balance between fostering innovation and protecting consumers since nearly all the ~ $100Bn in TVL and billions of dollars daily trades on Decentralized Exchanges (DEXs) according to DeFi Lama have not undergone any proper compliance checks. Sadly, and very recently, regulators have resorted to legal action against the likes of Uniswap, Tornado Cash, and other DeFi protocols.

After thumbing their noses at regulators for many years, the organizations building DeFi protocols are now realizing two things:

1. The words decentralization and No-Control do not protect against expensive legal actions.
2. DeFi mass adoption requires better UX and compliance enforcement — both financial and data privacy, and at the same time.

Even if DeFi protocols wanted to implement compliance checks immediately, it would not only upset their best client’s apple carts but would require protocol rewrites. In other words, completely new versions of the protocol with older versions still operating without any compliance checks. That is not a tenable situation, since, very likely, the foundations or DAOs governing DeFi protocols would still be held to account for non-compliant versions of their protocol since “smart contracts are forever” — yes, Marilyn Monroe pun quote intended.

Luckily there is a way forward for these protocols. Leveraging blockchain-native compliance mechanisms – a combination of smart contracts, and blockchain-verifiable zero-knowledge proofs, representing assertions that a user and submitted asset transaction are compliant with the applicable law in a jurisdiction, yields a comprehensive framework to ensure regulatory compliance, risk management, and transaction reporting for any digital asset. The suggested framework extends the work originally done by Azgad-Tromer et. al (2023) that combines robust regulatory compliance actions with privacy protection, enabling, for example, the creation of compliant versions of digital assets that enforce jurisdictional policies while being privacy-preserving. The original framework by Azgad-Tromer et al. preserves digital assets’ economic value and technological capabilities while ensuring that sensitive information is selectively visible only to authorized law enforcement authorities – Fincen, SEC, OFAC, etc. This enhances the security and integrity of digital asset transactions while maintaining privacy for legitimate users. Moreover, the framework’s compatibility with different types of digital assets such as fungible and non-fungible digital assets makes it a versatile solution.

In short, the framework augments blockchains with additional information about actors’ identities and asset provenance in a privacy-preserving manner and was first implemented by Sealance. This innovative approach enables the framework to address the challenges posed by the decentralized nature of digital assets. Attaching Compliance-Relevant Auxiliary Information (CRAI) to transactions involving digital assets in encrypted form ensures that critical compliance data, such as user identities, credentials, transaction history, and fund provenance, remains secure and tamper-proof – see FinCen guidance on Anit-Money-Laundering as an example. The framework incorporates cryptographic protocols that can automatically enforce compliance policies assigned to digital assets — what holders can and cannot do with such a digital asset — and digital asset holders — what assets individuals can and cannot hold and/or trade. It can also update CRAI during the recording of transactions on the blockchain. This integration allows real-time compliance monitoring and reporting, enhancing transparency and accountability in the digital asset ecosystem.

Note, that earlier work in this area was conducted by Kaira et al. in 2021 for the case of a centrally managed Hedge Fund. While complementary to this discussion, it does not touch on KYC/AML compliance, which is the central question we are discussing in this paper.

How to make DeFi Protocols Regulatory Compliant

So how does such a framework operate in the context of DeFi protocols, given that most assets on these platforms are not natively regulatory compliant?

Fig. 1: High-Level DeFi (ZKP) Compliance Architecture as an extension of Azgad-Tromer et al.

The key insight in the extension of the Azgad-Tromer et al. framework is that a smart contract wallet used, for example, in Account Abstraction (see EIP-4337) as a representative of one or more Entity Owned Accounts (EOA) has significantly more flexibility due to its programmability than an EOA. If a smart contract wallet is combined with other smart contracts that enforce compliance rules and interact with a DeFi protocol we have all the ingredients we need. Think of a smart contract wallet as functionally equivalent to a traditional Broker-Dealer, a regulated and registered entity, that places trades for their clients, and a DeFi protocol with one or more compliance enforcing smart contracts as a registered stock or commodity exchange with its trading and compliance functions. Note that a Broker-Dealer is a *registered entity* that is a *legal delegate* of a regular investor to place trades on the investor’s behalf and enforce trade compliance rules. The stock exchange is another *registered entity* – registered with regulatory authorities such as the SEC or Fincen – and its compliance and trading functions are separate by design — separation of concerns is a significant compliance rule.   

With this analogy in mind, we can now construct a regulatory-compliant DeFi protocol stack integrated with a compliance framework such as the one pioneered by Sealance through policy manager contracts with associated compliance policies, and a compliance policy and compliant account registry. The most straightforward implementation is through “smart contract hooks” in DeFi protocols as they allow custom compliance enforcement extensions to the protocol, for example, Uniswap V4 or Seaport. However, this does not solve the issue for DeFi protocols that do not have such capabilities; currently still the majority.

There is a general safe pattern to interact with DeFi protocols that do not have contract hooks for compliance checks when a user receives a yield-bearing instrument such as the Compound yield token (YT) e.g. cDai. In our description below, we implicitly assume that DeFi protocol contracts such as the Uniswap Router or Position Manager are registered contracts such that the compliance policy enforcement mechanism embedded in “compliant” assets can identify them as compliant and not require an additional zkp compliance assertion to be embedded with, for example, a transfer function. 

Fig. 2: Example zkp-Compliance Stack application with Unsiwap and compliant smart contract wallet

A compliance-safe DeFi interaction pattern is described below using the example of adding liquidity to a Uniswap Liquidity Pool for specificity:

1. A user (EOA) calls a DeFi Protocol compliance (wrapper, also known as a logical abstraction) contract directly or through the user’s Smart Contract Wallet in an account abstraction scenario.
   Note: the smart contract wallet has already been given a Power-Of-Attorney certificate through an approved KYC/AML provider, such as a bank or an exchange. This certificate is utilized in the same manner as a real-world Power-Of-Attorney works; it marks the smart contract wallet as able to use the zero-knowledge proof (zkp) assertions of compliance that the zk-based compliance platform creates for a user’s asset transactions.
2. The DeFi (wrapper) contract verifies the submitted zkp compliance assertions using the zk-based compliance stack – a smart contract system see Fig 1 – routing compliance assertions in the form of zk-proofs to (compliance) policy enforcement points (PEP) – smart contracts as part of the zk compliance stack) where proofs are verified and actions aka transactions are either allowed or denied. If the compliance checks are successful, liquidity is added to a pool — either a pool of compliant or uncompliant assets — on behalf of the user by the DeFi (wrapper) contract. Let’s assume for the following a compliant asset pool
3. The DeFi compliance (wrapper) contract receives the YT and creates a compliant YT asset utilizing one of the zkp assertions provided by the user.
4. The DeFi compliance (wrapper) contract then transfers the now compliant YT to the EOA or the smart contract wallet — this also requires a zkp compliance assertion. 

This prevents users from trading non-compliant YTs unless the user manually unwraps the asset. Note that all the yield now accumulates to the compliant YT. A variant of this approach is using DeFi compliance library contracts with the same functionality as a compliance wrapper contract while not requiring trust in the initial wrapper contract deployment.

For DeFi protocol transactions of compliant assets (e.g. lending, swaps) or compliant assets with non–compliant assets (e.g. swaps), there is an additional pattern:

1. A User (EOA) can utilize an authority delegation policy expressed as a PEP for its smart contract wallet such that the smart contract wallet can interact with a compliant asset without being required to produce a zkp compliance assertion. This can be achieved by the user creating a delegating zkp compliance assertion (delegation to smart contract wallet) and submitting it to the zk-based compliance stack to be validated and then registered with a specific Power-Of-Attorney policy within a PEP. Power-of-attorney-type policies can exist at a jurisdictional level, by asset category, or even at the level of individual assets.
   Key Point: An authority delegation policy to be utilized in a transaction is at the asset level, not the level of a payee, a payer, or an authorizer level. This allows an asset to identify if a payer or payee is permitted to interact with it, without being required to produce a zkp compliance assertion.
2. Known DeFi protocol smart contracts e.g. Uniswap Router, or an Aave Lending Pool manager can, therefore, also utilize a Proof Delegation policy as described above. The primary difference is that in this context the entity creating the delegation zkp compliance assertion (regulatory whitelisting of a Defi protocol smart contract), and the registration is done by an authorized policy creator or registrar such as a KYC provider within the zk-based compliance ecosystem.
   Key Point: As in the case of an EOA, this registrar-proof-delegation policy is at the level of the asset, and can differentiate jurisdiction, asset category, and even individual asset. However, it is of a different authority delegation policy type because the requester has another ecosystem role. Therefore, the compliant asset must have both types of authorization delegation policies attached to it because both a smart contract wallet, a Defi protocol compliance wrapper, and a Defi Protocol smart contract will interact with the compliant asset.

Conclusion

In summary, to ensure the longevity and acceptance of DeFi protocols by mainstream users, these protocols must move towards regulatory compliance. The described compliance platform, an extension of the framework proposed by Azgad-Tromer et al. and implemented by Sealance, offers a practical solution allowing DeFi protocols to incorporate compliance measures while maintaining decentralization. It uses blockchain technology and advanced cryptographic protocols for transparent, secure transactions that meet regulatory requirements, all while preserving user privacy. It enforces compliance rules on digital assets and their owners, providing a solid and flexible system. The key benefits of the described compliance framework for DeFi protocols are:

• Regulatory Compliance: The framework enables DeFi protocols to adhere to regulatory standards without compromising their decentralized nature (though KYC is necessarily still done by centralized entities).
• Risk Management: The framework enables mechanisms for effective risk management and transaction reporting for various digital assets.
• Privacy Protection: The framework incorporates cryptographic privacy-preserving features such as zkps ensuring that sensitive user information used in compliance credentials and in creating zkp compliance policy assertions remains confidential, with personal information stored and accessible only by KYC/AML or other compliance credential providers such as banks or exchanges
• Security: Leveraging safe cryptographic protocols, the framework can enhance the security and integrity of digital asset transactions by enforcing complex business rules.
• Versatility: It is compatible with different types of digital assets, including fungible and non-fungible tokens, making it a versatile solution for the DeFi ecosystem.
• Transparency and Accountability: The framework promotes transparency and accountability in the DeFi space through real-time compliance monitoring and reporting (through onchain submitted, fully encrypted reports).

Such a framework can assist DeFi protocols in navigating the intricate regulatory environment, contributing to a safer and more trustworthy decentralized financial ecosystem.

Dr Freund can be contacted via email at [email protected]