Paper 2021/1249

Flexible Anonymous Transactions (FLAX): Towards Privacy-Preserving and Composable Decentralized Finance

Wei Dai

Abstract

Decentralized finance (DeFi) refers to interoperable smart contracts running on distributed ledgers offering financial services beyond payments. Recently, there has been an explosion of DeFi applications centered on Ethereum, with close to a hundred billion USD in total assets deposited as of September 2021. These applications provide financial services such as asset management, trading, and lending. The wide adoption of DeFi has raised important concerns, and among them is the key issue of privacy---DeFi applications store account balances in the clear, exposing financial positions to public scrutiny. In this work, we propose a framework of privacy-preserving and composable DeFi on public-state smart contract platforms. First, we define a cryptographic primitive called a flexible anonymous transaction (FLAX) system with two distinctive features: (1) transactions authenticate additional information known as ``associated data'' and (2) transactions can be applied flexibly via a parameter that is determined at processing time, e.g. during the execution time of smart contracts. Second, we design a privacy-preserving token standard (extending ERC20), which requires read access to the inter-contract call stack and admits composable} usage by other contracts. Third, we demonstrate how the FLAX token standard can realize privacy-preserving variants of the Ethereum DeFi ecosystem of today---we show contract designs for asset pools, decentralized exchanges, and lending, covering the largest DeFi projects to date including Curve, Uniswap, Dai stablecoin, Aave, Compound, and Yearn. Lastly, we provide formal security definitions for FLAX and describe instantiations from existing designs of anonymous payments such as Zerocash, RingCT, Quisquis, and Zether.