Zero-Knowledge Privacy Protocol for DeFi Lending and Borrowing on Cardano (open source)

[GENERAL] Name and surname of main applicant

[GENERAL] Are you delivering this project as an individual or as an entity (whether formally incorporated or not)

[GENERAL] Please specify how many months you expect your project to last (from 2-12 months)

[GENERAL] Please indicate if your proposal has been auto-translated into English from another language

[GENERAL] Summarize your solution to the problem (200-character limit including spaces)

Develop an open source ZK Proof-based protocol that ensures private, secure lending and borrowing, allowing users to verify collateral and execute transactions without revealing sensitive data.

[GENERAL] Does your project have any dependencies on other organizations, technical or otherwise?

[GENERAL] If YES, please describe what the dependency is and why you believe it is essential for your project’s delivery. If NO, please write “No dependencies.”

No dependencies.

[GENERAL] Will your project’s output/s be fully open source?

[GENERAL] Please provide here more information on the open source status of your project outputs

All code is fully open source under Apache License 2.0.

[METADATA] Horizons

[SOLUTION] Please describe your proposed solution

=> Overview:

Our protocol uses zk-SNARKs (Zero-Knowledge Succinct Non-Interactive Arguments of Knowledge) as the core privacy technology for securing DeFi lending and borrowing transactions. zk-SNARKs are cryptographic proofs that allow one party (the prover) to demonstrate to another party (the verifier) that they possess certain information, such as sufficient collateral, without revealing the actual details of that information.

Our technical approach:

1. Zero-Knowledge Proofs (ZKPs) for Collateral Verification

In typical DeFi protocols, borrowers must disclose the value and type of collateral to lenders. In our protocol, zk-SNARKs will be used to prove that a borrower has sufficient collateral without revealing the actual asset or its amount. The zero-knowledge proof will verify that the borrower meets the collateral requirement based on predefined parameters set by the lender or the protocol.

Steps in collateral verification using zk-SNARKs:

• The borrower creates a zk-proof that demonstrates ownership of the necessary collateral.
• The zk-proof is sent to the lender (or smart contract).
• The lender (or smart contract) verifies the proof using a public verification key without learning any sensitive information about the borrower’s holdings.

This ensures that the borrower’s privacy is maintained, while the lender can trust that the borrower is eligible for the loan.

2. Private Transactions for Borrowing, Lending, and Repayment

The protocol will utilize zk-SNARKs to anonymize transactions involved in lending and borrowing. This includes:

• Loan initiation: The borrower proves they have collateral without exposing their wallet balance.
• Repayment: The borrower repays the loan using zk-proofs that verify the repayment occurred without revealing the exact amounts or wallet involved.
• Interest payments: Interest can also be handled with zk-SNARKs to ensure that no transaction details are exposed, while ensuring that the loan’s terms are met.

These private transactions ensure that users can engage in DeFi without leaving a public trace of their activity, thus protecting their financial privacy.

3. Secure Smart Contract Architecture

We will design the smart contracts for this protocol with zk-SNARK integration, allowing them to handle the following:

• Collateral locking and unlocking based on zk-proof verification.
• Loan issuance when a zk-proof is verified.
• Automatic repayments using zk-proofs to trigger repayment actions without needing to reveal any transaction details.

By implementing zk-SNARKs directly into the smart contract logic, we ensure that the privacy features are a core part of the protocol.

4. Non-Interactive Nature

zk-SNARKs are particularly useful because they are non-interactive, meaning the proof can be generated and verified without back-and-forth communication between the parties. This is critical for decentralized protocols, as it minimizes the need for continuous interaction, reducing complexity and increasing scalability.

=> Why this proposal is unique:

• Full Privacy for Collateral Verification: Borrowers’ exact assets remain hidden, ensuring complete privacy during the lending process, making it ideal for privacy-conscious users and institutions.
• Minimized Trust Assumptions: zk-SNARKs eliminate the need to trust third parties with sensitive data, while maintaining transparency and verifiability on-chain.
• Seamless Integration:
• The protocol can be easily added to existing DeFi platforms as a privacy layer, making it scalable and adaptable.
• Institutional Adoption: By keeping sensitive financial data private, the protocol encourages institutional participation in DeFi, addressing traditional privacy concerns.

[IMPACT] Please define the positive impact your project will have on the wider Cardano community

=> How the ecosystem benefits:

Our goal of this proposal is to enhance privacy, security, and trust in DeFi lending and borrowing by using zk-SNARKs to ensure that users can prove collateral and make transactions without revealing sensitive information. This open source protocol will help protect user financial data while enabling secure, decentralized financial interactions on Cardano. This protocol will expand DeFi capabilities on the Cardano network, attract more users who value privacy, and ensure confidentiality in financial transactions, which can boost adoption in institutional and individual users alike.

Additionally, the implementation of zk-SNARKs in smart contract logic will contribute to Cardano’s scalability, as zk-SNARKs allow for non-interactive verification, reducing on-chain interactions and increasing transaction efficiency. This will create more scalable and efficient DeFi platforms within the Cardano ecosystem.

=> How We Measure Success:

Quantitative Metrics:

• User Adoption:
• Metric: Number of users engaging in lending and borrowing using the protocol.
• Goal: Reach 100 unique users within the first year.
• Transaction Volume:
• Metric: Number of lending and borrowing transactions processed through the protocol.
• Goal: Process 1,000 transactions within the first year.
• Collateral Locking:
• Metric: Measure how many loans are issued using this protocol.
• Goal: At least 100 collateralized loans within the first year.
• dApp Integrations:
• Metric: Number of DeFi dApps adopt and integrate the lending protocol.
• Goal: Integrate the protocol with at least 3 DeFi dApps within the first year.

Qualitative Metrics:

• Community Feedback:
• Metric: Feedback from borrowers, lenders and developers on the protocol.
• Goal: Achieve 80% satisfaction rate from users based on surveys.
• Privacy Satisfaction:
• Metric: Survey users to assess how well the protocol meets their privacy expectations in DeFi lending and borrowing.
• Goal: 90% of users feel their privacy is protected effectively during transactions.

=> Sharing Outputs:

• Open-Source: All code, smart contracts, and zk-SNARK implementations will be open-sourced and available on GitHub with full documentation.
• Reporting: Regular progress updates will be shared through Project Catalyst and including blog posts.

[CAPABILITY & FEASIBILITY] What is your capability to deliver your project with high levels of trust and accountability? How do you intend to validate if your approach is feasible?

=> Previous Funding and Experience:

TrustLevel and Dominik Tilman have a proven track record of delivering successful Catalyst-funded projects since Fund 3. Over several Catalyst rounds, we’ve be awarded with complex blockchain project such as Aiken Smart Contract Library in F11 (will be implemented here: https://MeshJS.dev/) and zero-knowledge protocols in F12 (link: https://projectcatalyst.io/funds/12/f12-cardano-open-developers/zero-knowledge-zksnark-voting-protocol-on-cardano-for-dao-governance-open-source

=> Team Capabilities:

• Technical expertise: We are experts in Cardano's blockchain, Aiken smart contracts and zk protocols.
• Catalyst Experience: Our experience in implementing funded projects with strong community engagement demonstrates our ability to manage resources and meet deadlines.
• Community engagement: We have strong connections within the Cardano ecosystem and work will continue to work with relevant teams to ensure adoption and value creation of our projects

=> Active Ecosystem Collaborations:

We are currently engaged in several collaborations across the Cardano ecosystem:

• SidanLab and MeshJS: We are collaborating on smart contract development, particularly within the open-source Aiken Smart Contract Library, a project funded in Fund 11.
• LidoNation: Working on reputation scores for Catalyst reviewers, where we focus on analyzing user behavior and building models to assess reputation and trustworthiness in the Cardano Catalyst ecosystem.
• Photrek: Involved in the development of a community tool for voting calculations and community engagement in SingularityNet, building and testing decentralized voting mechanisms (https://proposals.deepfunding.ai/graduated/accepted/ed600af3-885c-45bc-a874-56d2dde371ce)

[PROJECT MILESTONES] What are the key milestones you need to achieve in order to complete your project successfully?

Architecture and System Design

Goal: Define the framework for a zk-SNARK-based DeFi lending and borrowing protocol that ensures privacy for collateral verification and transactions.

Deliverable:

• System architecture document outlining the zk-SNARK integration for collateral verification, loan issuance, and repayment.
• Smart contract design for locking/unlocking collateral, verifying zk-proofs, and automating loan repayment.
• Technical flow diagrams for collateral verification, loan transactions, and repayments using zk-SNARKs.

Acceptance Criteria:

• Architecture must outline how zk-SNARKs will protect sensitive financial data and ensure private transactions.
• Smart contract design must include zk-SNARK-based verification mechanisms for collateral and loan management.

Evidence:

• Published system design and architecture document on Github.

Smart Contract Development for Private Lending and Borrowing

Goal: Develop the core smart contracts for handling collateral verification, loan issuance, and repayments using zk-SNARKs.

Deliverable:

• Smart contracts that manage collateral locking/unlocking and loan issuance based on zk-proof verification.
• Implementation of smart contracts that allow for loan repayments using zk-proofs, ensuring private transactions.
• Integration of interest payments with zk-SNARKs to protect transaction details.

Acceptance Criteria:

• Smart contracts must allow for collateral verification and loan issuance without revealing sensitive details.
• Loan repayments must occur using zk-proofs, ensuring the transaction remains private.

Evidence:

• Published smart contract code on Github with accompanying documentation.
• Demonstration video showing basic loan issuance and repayment through zk-SNARKs.

zk-SNARK Integration for Private Transactions

Goal: Implement zk-SNARKs for collateral verification, borrowing, lending, and repayments, ensuring that all transactions remain private and secure.

Deliverable:

• Integration of zk-SNARK-based proof generation for collateral verification, loan initiation, and repayments.
• Testing and validation of zk-SNARK proofs to ensure they are verifiable on-chain without revealing the underlying details.
• Functional zk-SNARK proof generation library for use in private lending and borrowing transactions.

Acceptance Criteria:

• zk-SNARK proofs must allow for private verification of collateral and loan transactions.
• All transactions must be secure and verifiable without exposing any sensitive data on-chain.

Evidence:

• Published zk-SNARK integration code and library on Github.
• Test cases demonstrating zk-SNARK-based private transactions and collateral verification.

User Interface (UI) for Private DeFi Transactions

Goal: Develop a simple user interface (UI) that enables users to engage in lending, borrowing, and repayments with full privacy using zk-SNARKs.

Deliverable:

• A web-based UI that allows users to request loans, verify collateral, and manage repayments using zk-SNARK proofs.
• UI integration with smart contracts to facilitate private loan issuance and repayment processes.
• User flow for generating zk-proofs for loan requests, repayments, and collateral verification.

Acceptance Criteria:

• The UI must allow users to interact with the lending protocol privately, without revealing transaction or collateral details.
• Users must be able to generate and submit zk-SNARK proofs through the interface.

Evidence:

• Deployed web interface or demo available for user testing.
• Video walkthrough of the UI demonstrating the loan and repayment process with zk-SNARKs.
• Published UI code on Github.

Project Close-Out Report

Goal: Summarize the project’s progress, technical achievements, and future potential.

Deliverable:

• A comprehensive close-out report summarizing each milestone, technical challenges, and future development opportunities.
• Final documentation and guides for developers and users to understand the system’s architecture and how to interact with the protocol.

Acceptance Criteria:

• The report must include an overview of each milestone, along with a summary of any feedback or improvements implemented.
• The final version of all code, documentation, and deliverables must be publicly accessible.

Evidence:

• Final project close-out report published online.
• All code, documentation, and deliverables available on Github.

[RESOURCES] Who is in the project team and what are their roles?

TrustLevel, founded by Dominik Tilman in 2023, develops tools and protocols to measure the reliability of data, information and reputation in decentralized ecosystems. Supported by grants from Cardano, SingularityNet and Arbitrum, our main focus is on creating a Decentralized Reputation Layer (DRL). Our tools, including the Voting Calculation for DeepFunding and a ZK Voting Protocol, enable privacy-preserving reputation management across governance, DeFi, and cross-chain applications. All outputs are open-source.

=> TrustLevel Core Team: 

• Dominik Tilman: Project and Technical Lead, Dominik has been actively engaged since Fund 3 in Project Catalyst and involved in multiple funded projects. All proposals are either successfully delivered or on track. He is founder of TrustLevel.io & Conu21.com and has 15+ years experience in innovation management and company building.
• Roman Preuss: Full-Stack Developer
• Josch Rossa: Full-stack developer and LLMs
• Alex Ramalho: Full Stack AI Developer
• Sergey K: Blockchain Developer

[BUDGET & COSTS] Please provide a cost breakdown of the proposed work and resources

Budget Breakdown (185,000 ADA Total)

We have calculated with an hourly rate of 75 USD (at 1 ADA = 0,4 USD).

Milestone 1: Architecture and System Design – 60,000 ADA

• Architecture and system design for zk-SNARK-based collateral verification and private transactions.
• Flow diagrams for smart contract integration.

Milestone 2: Smart Contract Development for Private Lending and Borrowing – 60,000 ADA

• Development of smart contracts for collateral management, loan issuance, and repayments using zk-SNARKs.
• Testing and validation of smart contract functions.

Milestone 3: zk-SNARK Integration – 40,000 ADA

• zk-SNARK integration for collateral verification, loan requests, and repayments.
• Testing zk-SNARK proof generation and validation.

Milestone 4: User Interface (UI) for Private DeFi Transactions – 15,000 ADA

• Development of a user interface for managing private lending and borrowing transactions.
• Integration with smart contracts for zk-SNARK-based transactions.

Milestone 5: Project Close-Out Report – 10,000 ADA

• Final project report and documentation.
• Publication of all code and deliverables on Github.

[VALUE FOR MONEY] How does the cost of the project represent value for money for the Cardano ecosystem?

Strategic Investment:

This protocol will help to develop the DeFi market on Cardano and help to increase adaption and growth of our ecosystem.

Expertise and Complexity:

Our budget covers fair pay for experts in blockchain and data analysis. These roles need a strong understanding of Cardano and financial markets to ensure we build a high-quality protocol.

Risk Mitigation:

We accept the risk of changes in ADA’s price during the project. If ADA’s value drops, we’ll handle the loss. If its value rises, we’ll use the extra funds to add more to the project without asking for more money.