A Perspective on Private Asset Velocity Using Zero-Knowledge Proofs
Table of Contents:
Abstract
This article examines Panther Protocol, an upcoming decentralized application on the Polygon network that leverages zero-knowledge proof (ZKP) technology within a Multi-Asset Shielded Pool (MASP) to facilitate private asset transactions. Inspired by Muhammad Yusuf's "Diving Into Dark Pools," this article explores Panther Protocol's privacy mechanisms, regulatory considerations involving Virtual Asset Service Providers (VASPs) and the innovative concept of Panther Zones. Additionally, it examines the protocol's compliance strategies in the context of the SEC's regulatory framework and highlights the benefits for licensed entities.
Introduction
In the evolving landscape of decentralized finance (DeFi), Panther Protocol is positioned to preserve privacy and enhance security. Drawing parallels to the traditional dark pools discussed in a recent report on Delphi Digital, "Diving Into Dark Pools," Panther Protocol is set to offer a sophisticated solution for private asset transactions. By integrating cutting-edge privacy-enhancing technologies and robust regulatory compliance enabling mechanisms around KYC/KYB and data management, Panther Protocol ensures that users, particularly licensed entities, can transact with confidence and confidentiality.
Traditional Market Comparison
The traditional market for dark pools in equities and equity options is substantial, with billions of dollars in daily trading volume. These dark pools allow institutional investors to execute large orders without causing significant market impact. However, this structure still relies on centralized operators who may potentially misbehave or leak confidential information outside of the tape print times. In contrast, Panther Protocol's Multi-Asset Shielded Pool (MASP) and its zTrade functionality will elevate this concept by incorporating zero-knowledge proofs and decentralized smart contracts. This approach not only maintains the anonymity of participants but also eliminates the need for trust in a central operator. In comparison, the market for on-chain dark pools in crypto is still nascent but holds tremendous potential.
- Traditional dark pools in equities handle billions in daily trading volume, providing a significant liquidity pool for institutional investors.
- Crypto dark pools are emerging, with protocols like Panther Protocol paving the way for secure, private, and compliant trading environments.
- The potential growth of on-chain dark pools can mirror the success of traditional markets, offering a new value play for institutional and retail investors alike.
Multi-Asset Shielded Pool (MASP / Shielded Pool)
At the heart of Panther Protocol's envisioned privacy capabilities lies the MASP. This innovative pool will allow users to deposit various underlying assets, including WETH, USDC, USDT, WBTC, and other ERC-20 tokens. Upon depositing, users will receive private tokens known as zAssets (e.g., zWETH, zUSDC, zUSDT, zWBTC), offering an additional layer of privacy.
The MASP is more accurately described as a collection of “append-only” Merkle trees, where each leaf represents a commitment to a UTXO, serving as an IOU of the asset deposited. This architecture ensures that the state of the blockchain remains confidential, enhancing both privacy and security. The growing number of deposits within this anonymity set further ensures that individual transactions remain indistinguishable within the pool, akin to the privacy provided by traditional dark pools.
Merkle trees, a key component in blockchain privacy architecture, play a significant role in Panther Protocol's functionality. Within the MASP, Merkle trees are used to store and manage zAsset transactions. Each leaf of the Merkle tree represents a commitment to a specific UTXO transaction, and these commitments are updated as transactions occur. This structure not only enhances privacy but also ensures the integrity and security of the transaction data.
zTrade
The zTrade feature within Panther Protocol will enable private, on-chain, over-the-counter (OTC) transactions within the MASP. This functionality is designed to ensure both confidentiality and security while mitigating the risk of MEV exploitation as swap occurs outside of DEXs.
The process begins when a user, referred to as the maker, locks a specified amount of zAsset (Token A) in a zTrade smart contract. The taker, or counterparty, accepts the order after the protocol verifies the balance of Token B. Once the balance is confirmed, the trade is executed via an atomic swap, ensuring a simultaneous and secure exchange of assets.
Avoidance of MEV is a critical component of zTrade. By utilizing zero-knowledge proofs and executing trades directly between makers and takers, zTrade mitigates the risk of MEV exploitation, ensuring that trades are conducted fairly and privately. This approach will mirror the confidentiality of traditional dark pools, where large financial moves are shielded from public view to prevent market manipulation.
zSwap
For transactions that extend beyond the MASP, Panther Protocol will employ zSwap. This feature will use DeFi adaptors to extend private asset velocity through on-chain decentralized exchanges (DEXs) such as Uniswap, Quickswap, and Curve. The process begins when the user selects the swap action and chooses the currencies for conversion. The DeFi aggregator smart contract would then generates a quote, valid for a short duration, reflecting the exchange value and transaction details. Upon user approval, the transaction would be initiated through the DeFi aggregator, which utilizes stealth addresses to maintain privacy. Once the transaction is approved and finalized, the new balance would be updated in the user's wallet.
Panther Protocol is designed to offer more than just dark pool functionality; it will enable a wide range of DeFi activities to be performed privately. By depositing assets into the MASP, users will be able to engage in various DeFi activities through plugins called DeFi Adaptors, which will connect the MASP with existing DeFi protocols in a private manner. This approach will ensure that transaction details remain confidential throughout the process, preserving user privacy even when interacting with external DeFi protocols.
SEC's Regulatory Framework and Compliance
Muhammad Yusuf's discussion in "Diving Into Dark Pools" highlights the importance of regulatory compliance, particularly in the context of the SEC's oversight. Panther Protocol addresses these concerns through the integration of compliance providers for KYB procedures and Zone management. By allowing regulated entities to manage Zones and enforce compliance, users can maintain compliance at their discretion, with zero-knowledge proofs validating KYC statements without revealing user data.
Regulatory Compliance and Panther Zones
In alignment with regulatory frameworks, Panther Protocol aims to integrate VASP-regulated entities to create an environment that enables and supports internal compliance and policies. Users can utilize an Ethereum wallet, but must verify their personal identification to obtain a credential for interacting with the protocol. Business entities undergo KYB verification, sharing their business details with a registered compliance provider via Panther Protocol integration. This verification process is conducted off-chain, and credentials must be periodically renewed through re-verification on the KYB/KYC provider side.
Panther Zones are designed to introduce a novel approach to regulatory compliance within the space of decentralised protocols solving on-chain privacy. These specialized trading areas will be managed by regulated entities known as Zone Managers, who will be responsible for whitelisting traders and assets to ensure compliance with regulatory standards. Each Zone is intended to operate under its own regulatory framework, providing a flexible and compliant trading environment.
Benefits for Licensed Entities
Licensed entities such as institutional investors, hedge funds, and family offices can benefit from Panther Protocol's compliance infrastructure. For instance, an institutional investor aiming to execute substantial trades without disclosing their strategies will be able to leverage Panther Protocol to conduct these transactions privately. The use of zAssets as a mechanism of private transactions ensures that their trades do not affect market prices, safeguarding their strategies from being front-run by competitors.
Similarly, hedge funds can leverage the MASP and Panther Zones to conduct large-scale transactions while adhering to regulatory requirements. By utilizing VASP-regulated entities, these funds can ensure that all transactions are KYC/AML compliant, reducing the risk of regulatory scrutiny and enhancing the security of their trades.
Family offices, managing substantial private wealth, can use Panther Protocol to diversify their investments in a secure and private manner. The ability to operate within Panther Zones ensures that these entities can maintain compliance with varying regulatory requirements while benefiting from the privacy and security offered by the protocol.
Conclusion
Panther Protocol's innovative use of zero-knowledge proofs and Multi-Asset Shielded Pool technology positions it as a leader in private asset transactions within decentralized finance. By incorporating regulatory compliance through VASP-regulated entities, Panther Zones, and protection against MEV, Panther Protocol ensures that privacy, security, and legality coexist harmoniously.