Zero-Knowledge-Proof-Based Protocol Connecting Traditional Finance to Decentralized Finance

The rapid growth of the cryptocurrency market presents a compelling opportunity for traditional financial institutions to expand their customer base and services. To this end, they must collect the decentralized finance (DeFi) positions of their customers, but the customers are not willing to disclose their wallet addresses. To address this issue and connect the traditional financial market to the cryptocurrency market, this paper introduces an additional role for blockchain data analysis systems to avoid the direct connection between blockchain users and traditional financial institutions. There arise three challenges: (1) the user wallet addresses should not be disclosed to the institutions; (2) the institution must have confidence in the user DeFi positions provided by the blockchain data analysis system; and (3) the protocol must be flexible enough to be applied to a range of scenarios. To address these challenges, this paper proposes a tripartite protocol based on Zero-knowledge Proof and Merkle tree data structure. Leaf nodes in the Merkle tree store information on users’ DeFi positions. Zero-knowledge Proof helps users prove the accuracy and origin of their DeFi positions in the leaf nodes without revealing their wallet addresses. This paper discusses the strengths and limitations of the protocol, as well as the feasibility of applying the protocol in practice.