Design and implementation of solvency proof system based on zero knowledge proofs

Abstract

The aim of this study is to design and implement a system that allows centralized blockchain institutions to prove their solvency. This system ensures that institutions do not misappropriate user assets and enhances trust between users and institutions. The article introduces the Groth-16 zero-knowledge proof algorithm from ZK-SNARK (zero-knowledge succinct non-interactive argument of knowledge). The R1CS arithmetic circuit in the Groth-16 algorithm effectively guarantees the authenticity and tamper-resistance of the system's raw data sources. Additionally, it combines the use of Merkle Sum Trees and Sparse Merkle trees. The former enables users to perform distributed verification of solvency proofs, while the latter effectively hides the overall number of users. Finally, users verify the balances and the private key signatures of addresses in the institution's bulletin board. Together, these components form a comprehensive and distributed solvency proof solution. This solution is a pioneering solution in the field of blockchain solvency proofs and provides a secure, efficient, and privacy-preserving method for centralized cryptocurrency service providers or Web3 enterprise custodians. It effectively addresses the challenge of proving an institution's possession of sufficient reserves to cover user assets without compromising user privacy or disclosing the institution's scale.