Confidential Lending Protocol

Abstract

This LP defines a confidential lending protocol that enables private borrowing and lending with zero-knowledge credit scoring, confidential collateral verification, and privacy-preserving interest rate discovery. The protocol combines secure multi-party computation (MPC), zero-knowledge proofs, and homomorphic encryption to protect user privacy while maintaining system solvency and risk management.

Motivation

Traditional DeFi lending exposes sensitive financial information:

• Collateral amounts and positions
• Borrowing history and creditworthiness
• Liquidation risks and thresholds
• Trading strategies through loan usage

This protocol enables:

• Private collateral deposits
• Confidential credit assessment
• Hidden loan positions
• Anonymous liquidations
• Privacy-preserving yield optimization

Specification

Core Confidential Lending Interface

interface IConfidentialLending {
    // Private loan position
    struct PrivateLoan {
        bytes32 loanId;
        bytes32 borrowerCommitment;  // ZK commitment to borrower identity
        bytes32 collateralCommitment; // Hidden collateral amount
        bytes encryptedTerms;         // Encrypted loan terms
        uint256 publicHealthFactor;  // Obfuscated health indicator
        bytes32 nullifier;           // For repayment
    }

    // Zero-knowledge credit score
    struct ZKCreditScore {
        bytes32 scoreCommitment;
        bytes zkProof;               // Proof of score validity
        uint256 timestamp;
        bytes32 merkleRoot;          // Historical data root
    }

    // Events
    event PrivateBorrowInitiated(
        bytes32 indexed loanId,
        bytes32 borrowerCommitment,
        bytes encryptedData
    );

    event ConfidentialCollateralDeposited(
        bytes32 indexed loanId,
        bytes32 collateralCommitment,
        bytes zkProof
    );

    event PrivateRepayment(
        bytes32 indexed nullifier,
        bytes32 newCommitment
    );

    event AnonymousLiquidation(
        bytes32 indexed loanId,
        bytes32 liquidatorCommitment,
        bytes encryptedData
    );

    // Borrowing functions
    function borrowPrivate(
        bytes32 commitment,
        ZKCreditScore calldata creditProof,
        bytes calldata encryptedRequest
    ) external returns (bytes32 loanId);

    function depositConfidentialCollateral(
        bytes32 loanId,
        bytes32 collateralCommitment,
        bytes calldata zkProof
    ) external;

    function repayPrivate(
        bytes32 loanId,
        bytes32 nullifier,
        bytes calldata repaymentProof
    ) external;

    // Lending functions
    function supplyPrivate(
        bytes32 commitment,
        bytes calldata supplyProof
    ) external returns (bytes32 positionId);

    function withdrawPrivate(
        bytes32 positionId,
        bytes32 nullifier,
        bytes calldata withdrawProof
    ) external;
}

Zero-Knowledge Credit Scoring

interface IZKCreditScoring {
    // Credit factors with privacy
    struct PrivateCreditFactors {
        bytes32 repaymentHistory;    // Commitment to payment history
        bytes32 collateralRatio;     // Hidden collateralization
        bytes32 accountAge;          // Proof of account maturity
        bytes32 volumeCommitment;     // Historical volume proof
        bytes merkleProof;            // Inclusion in good borrowers set
    }

    // Credit assessment
    struct CreditAssessment {
        uint256 minScore;            // Minimum acceptable score
        uint256 maxScore;            // Maximum possible score
        bytes32 proofHash;           // Hash of validity proof
        uint256 validUntil;
    }

    event CreditScoreAttested(
        bytes32 indexed userCommitment,
        bytes32 scoreCommitment,
        uint256 validUntil
    );

    event CreditFactorUpdated(
        bytes32 indexed userCommitment,
        bytes32 factorType,
        bytes32 newCommitment
    );

    function generateCreditProof(
        PrivateCreditFactors calldata factors,
        uint256 requestedAmount
    ) external view returns (bytes memory proof);

    function verifyCreditScore(
        bytes32 userCommitment,
        uint256 minRequired,
        bytes calldata proof
    ) external view returns (bool eligible);

    function updateCreditHistory(
        bytes32 userCommitment,
        bytes32 eventType,
        bytes calldata updateProof
    ) external;

    function attestCreditworthiness(
        bytes32 userCommitment,
        bytes calldata attestationProof
    ) external;
}

Confidential Collateral Management

interface IConfidentialCollateral {
    // Hidden collateral position
    struct PrivateCollateral {
        bytes32 positionId;
        bytes encryptedAmount;       // Homomorphically encrypted
        bytes32 assetCommitment;     // Asset type commitment
        bytes32 ownerCommitment;
        uint256 publicLTV;           // Obfuscated LTV ratio
    }

    // Liquidation protection
    struct LiquidationShield {
        bytes32 shieldId;
        bytes encryptedThreshold;    // Private liquidation price
        bytes32 triggerCommitment;   // Commitment to trigger conditions
        bytes emergencyKey;           // For emergency revelation
    }

    event PrivateCollateralLocked(
        bytes32 indexed positionId,
        bytes32 ownerCommitment,
        bytes encryptedData
    );

    event ConfidentialLTVUpdated(
        bytes32 indexed positionId,
        uint256 publicLTV,
        bytes zkProof
    );

    event ShieldedLiquidation(
        bytes32 indexed positionId,
        bytes32 liquidatorCommitment,
        bytes encryptedProceeds
    );

    function lockPrivateCollateral(
        bytes calldata encryptedAmount,
        bytes32 assetCommitment,
        bytes calldata lockProof
    ) external returns (bytes32 positionId);

    function verifyCollateralization(
        bytes32 positionId,
        uint256 loanAmount,
        bytes calldata solvencyProof
    ) external view returns (bool sufficient);

    function initiatePrivateLiquidation(
        bytes32 positionId,
        bytes calldata liquidationProof
    ) external returns (bytes encryptedProceeds);

    function redeemCollateral(
        bytes32 positionId,
        bytes32 nullifier,
        bytes calldata redemptionProof
    ) external;
}

Private Interest Rate Discovery

interface IPrivateRateDiscovery {
    // Encrypted rate offer
    struct PrivateRateOffer {
        bytes encryptedRate;         // MPC-encrypted rate
        bytes32 lenderCommitment;
        uint256 minAmount;
        uint256 maxAmount;
        uint256 duration;
    }

    // Rate matching engine
    struct RateMatchResult {
        bytes32 matchId;
        bytes encryptedAgreedRate;   // Final rate (encrypted)
        bytes32 borrowerCommitment;
        bytes32 lenderCommitment;
        bytes mpcProof;              // Proof of fair matching
    }

    event PrivateRateOffered(
        bytes32 indexed offerId,
        bytes32 lenderCommitment,
        bytes encryptedRate
    );

    event RatesMatched(
        bytes32 indexed matchId,
        bytes32 borrowerCommitment,
        bytes32 lenderCommitment
    );

    function submitPrivateRateOffer(
        bytes calldata encryptedRate,
        uint256 minAmount,
        uint256 duration
    ) external returns (bytes32 offerId);

    function requestPrivateRate(
        uint256 amount,
        uint256 duration,
        bytes calldata creditProof
    ) external returns (bytes encryptedRateQuotes);

    function acceptPrivateRate(
        bytes32 offerId,
        bytes calldata acceptanceProof
    ) external returns (bytes32 matchId);

    function computeWeightedRate(
        bytes[] calldata encryptedRates,
        uint256[] calldata weights
    ) external view returns (bytes encryptedWeightedRate);
}

Secure Multi-Party Computation

interface IMPCLending {
    // MPC computation request
    struct MPCRequest {
        bytes32 requestId;
        bytes[] encryptedInputs;     // From multiple parties
        string computation;          // Type of computation
        uint256 threshold;           // Required participants
    }

    // MPC result
    struct MPCResult {
        bytes32 requestId;
        bytes encryptedOutput;
        bytes[] partialSignatures;   // From MPC nodes
        uint256 timestamp;
    }

    event MPCComputationRequested(
        bytes32 indexed requestId,
        string computation,
        uint256 participants
    );

    event MPCResultReady(
        bytes32 indexed requestId,
        bytes encryptedResult
    );

    function requestMPCComputation(
        string calldata computationType,
        bytes[] calldata encryptedInputs
    ) external returns (bytes32 requestId);

    function submitMPCShare(
        bytes32 requestId,
        bytes calldata encryptedShare,
        bytes calldata proof
    ) external;

    function retrieveMPCResult(
        bytes32 requestId
    ) external view returns (bytes memory encryptedResult);

    function verifyMPCComputation(
        bytes32 requestId,
        bytes calldata result,
        bytes calldata proof
    ) external view returns (bool valid);
}

Private Yield Strategies

interface IPrivateYield {
    // Hidden yield position
    struct PrivateYieldPosition {
        bytes32 positionId;
        bytes32 strategyCommitment;  // Hidden strategy
        bytes encryptedBalance;      // Current balance (encrypted)
        bytes32 earningsCommitment;  // Hidden earnings
        uint256 publicAPY;           // Obfuscated APY
    }

    // Strategy rebalancing
    struct PrivateRebalance {
        bytes32 rebalanceId;
        bytes[] encryptedAllocations; // New allocations
        bytes zkProof;               // Proof of optimality
        uint256 executionTime;
    }

    event PrivateStrategyDeployed(
        bytes32 indexed positionId,
        bytes32 strategyCommitment
    );

    event ConfidentialYieldClaimed(
        bytes32 indexed positionId,
        bytes32 nullifier,
        bytes encryptedAmount
    );

    function deployPrivateStrategy(
        bytes32 strategyCommitment,
        bytes calldata deploymentProof
    ) external returns (bytes32 positionId);

    function rebalancePrivate(
        bytes32 positionId,
        bytes[] calldata encryptedAllocations,
        bytes calldata rebalanceProof
    ) external;

    function claimPrivateYield(
        bytes32 positionId,
        bytes32 nullifier,
        bytes calldata claimProof
    ) external returns (bytes encryptedYield);

    function computePrivateAPY(
        bytes32 positionId,
        bytes calldata apyProof
    ) external view returns (uint256 obfuscatedAPY);
}

Regulatory Compliance

interface ICompliantPrivateLending {
    // Audit access
    struct AuditAccess {
        address auditor;
        bytes32[] loanIds;           // Specific loans to audit
        uint256 accessLevel;
        uint256 expiry;
        bytes decryptionKey;         // Partial key for audit
    }

    event AuditAccessGranted(
        address indexed auditor,
        uint256 accessLevel,
        uint256 expiry
    );

    event ComplianceReportGenerated(
        bytes32 indexed reportId,
        address auditor,
        bytes encryptedReport
    );

    function grantAuditAccess(
        address auditor,
        bytes32[] calldata loanIds,
        uint256 accessLevel
    ) external;

    function generateComplianceReport(
        uint256 startTime,
        uint256 endTime,
        bytes calldata auditKey
    ) external returns (bytes memory encryptedReport);

    function revealForCompliance(
        bytes32 loanId,
        bytes calldata courtOrder
    ) external returns (
        uint256 amount,
        address borrower,
        uint256 collateral
    );
}

Rationale

Zero-Knowledge Credit Scoring

Enables:

• Privacy-preserving creditworthiness assessment
• Historical reputation without exposing transactions
• Cross-protocol credit portability
• Sybil-resistant credit building

Homomorphic Encryption

Allows:

• Computations on encrypted collateral values
• Private interest rate calculations
• Encrypted balance updates
• Confidential liquidation checks

MPC for Rate Discovery

Provides:

• Fair market rates without revealing offers
• Private negotiation between parties
• Distributed trust model
• Manipulation resistance

Test Cases

Private Borrowing Test

function testPrivateBorrow() public {
    IConfidentialLending lending = IConfidentialLending(lendingAddress);

    // Generate credit proof
    ZKCreditScore memory creditScore = generateCreditProof(
        750,  // Hidden credit score
        address(this),
        nonce
    );

    // Create borrow commitment
    bytes32 commitment = keccak256(abi.encode(
        1000 * 10**18,  // Borrow amount
        address(this),
        nonce
    ));

    // Initiate private borrow
    bytes32 loanId = lending.borrowPrivate(
        commitment,
        creditScore,
        encryptedLoanRequest
    );

    // Verify loan created
    assertTrue(loanId != bytes32(0));
}

Confidential Collateral Test

function testConfidentialCollateral() public {
    IConfidentialCollateral collateral = IConfidentialCollateral(collateralAddress);

    // Encrypt collateral amount
    bytes memory encryptedAmount = homomorphicEncrypt(
        2000 * 10**18,
        publicKey
    );

    // Create asset commitment
    bytes32 assetCommitment = keccak256(abi.encode(
        address(weth),
        nonce
    ));

    // Lock collateral
    bytes32 positionId = collateral.lockPrivateCollateral(
        encryptedAmount,
        assetCommitment,
        lockProof
    );

    // Verify collateralization
    bool sufficient = collateral.verifyCollateralization(
        positionId,
        1000 * 10**18,  // Loan amount
        solvencyProof
    );

    assertTrue(sufficient);
}

Backwards Compatibility

This LP introduces a new lending protocol that operates independently from existing lending markets:

• Existing Protocols: Aave, Compound-style lending continues unchanged
• Token Compatibility: Works with existing LRC-20 tokens wrapped in privacy layer
• Liquidation Bots: Can integrate with existing liquidation infrastructure via privacy-preserving interfaces
• Oracle Integration: Compatible with Chainlink and other price oracles via secure enclave

Migration Path:

1. Deploy confidential lending contracts on C-Chain
2. Create wrapped token pools for major assets
3. Existing lending positions remain in traditional protocols
4. Users opt-in to privacy-preserving lending as desired

Security Considerations

Cryptographic Security

• Use bulletproofs for range proofs
• Implement secure MPC protocols (SPDZ, BGW)
• Regular rotation of encryption keys
• Threshold signatures for critical operations

Privacy Leakage

• Add noise to public indicators
• Implement mixing for transactions
• Use stealth addresses
• Time-delayed revelations

Solvency Guarantees

• Zero-knowledge proof of reserves
• Encrypted collateral summation
• Probabilistic liquidation checks
• Emergency revelation mechanisms

Oracle Attacks

• Use commit-reveal for price feeds
• Multiple oracle aggregation
• Time-weighted average prices
• Manipulation detection

Implementation

Reference Implementation

Primary Locations:

• Lending core: standard/src/lending/
• MPC protocols: mpc/pkg/
• Threshold cryptography: threshold/protocols/

Implementation Components:

1. Confidential Lending Core (standard/src/lending/)

   • IConfidentialLending.sol - Primary interface implementation
   • PrivateLoan.sol - Hidden loan position tracking
   • ConfidentialCollateral.sol - Encrypted collateral management
   • LiquidationEngine.sol - Private liquidation mechanics

2. Zero-Knowledge Credit Scoring (standard/src/lending/credit/)

   • IZKCreditScoring.sol - Credit assessment interface
   • CreditProof.sol - Credit score commitment generation
   • HistoricalTracking.sol - Merkle tree-based history proofs
   • Attestation.sol - Credit attestation by trusted parties

3. MPC-Based Rate Discovery (mpc/pkg/protocols/ratediscovery/)

   • Encrypted rate offer matching
   • Fair rate computation via secure MPC
   • Weighted average rate calculation
   • Price feed integration without disclosure

4. Homomorphic Encryption Module (standard/src/lending/encryption/)

   • Paillier homomorphic encryption for balance tracking
   • Encrypted collateral summation
   • Homomorphic interest accrual
   • Encrypted liquidation checks

5. Threshold Signature Integration (threshold/protocols/cmp/)

   • Multi-signature loan approval (CGGMP21 protocol at 0x020000000000000000000000000000000000000D)
   • Distributed treasury operations
   • Institutional custody support
   • Identifiable abort for malicious party detection

6. Regulatory Compliance Module (standard/src/lending/compliance/)

   • ICompliantPrivateLending.sol - Viewing key generation
   • Selective disclosure for audit purposes
   • Court order revelation mechanisms
   • AML/KYC integration hooks

Related Specifications:

• LP-400: Privacy AMM (complementary privacy protocols)
• LP-322: CGGMP21 Threshold ECDSA (multi-sig governance)
• LP-321: FROST Threshold Signatures (alternative scheme)
• LP-200: Post-Quantum Cryptography (future migration path)

Testing:

• Unit tests: standard/src/lending/test/*.spec.ts
• MPC integration tests: mpc/protocols/*/test/
• Threshold scheme tests: threshold/protocols/cmp/*_test.go
• End-to-end lending flow tests

Performance Characteristics:

• Loan creation: ~50ms (MPC + ZK proofs)
• Rate matching: ~150ms (3-5 party MPC)
• Liquidation check: ~80ms (homomorphic computation)
• Gas cost: 200k-300k per operation (on-chain verification)

GitHub Repository: https://github.com/luxfi/standard/tree/main/src/lending

References

1. Bünz, B., et al. "Bulletproofs: Short Proofs for Confidential Transactions." 2018.
2. Aave Protocol. "Decentralized Lending Pools." 2020.
3. Compound Finance. "Compound Protocol Specification." 2019.
4. zkLend. "Privacy-Preserving Lending on StarkNet." 2022.
5. Goldreich, O. "Secure Multi-Party Computation." 2002.
6. Gentry, C. "Fully Homomorphic Encryption." 2009.

Copyright

Copyright and related rights waived via CC0.```