Proposal for a Fully On-Chain Dark Pool DEX

Introduction

In traditional financial markets, institutions and sophisticated traders frequently use centralized exchanges (CEXs), to execute large orders discreetly. However, CEX, despite their convenience, exposes users to significant counterparty risks, custody vulnerabilities, and lack of transparency, fundamentally contradicting the decentralized ideals of blockchain technology.

Public decentralized exchanges (DEXs), while transparent and secure, expose orders openly on-chain, making traders vulnerable to market manipulation, front-running, and unfavorable pricing; it also leaks trader’s strategy, portfolio and other secrets.

Polyhedra, a pioneering company specializing in zero-knowledge (ZK) proof technologies, is uniquely positioned to develop a groundbreaking fully on-chain decentralized exchange. Leveraging its deep expertise in ZK cryptography, Polyhedra aims to build a platform that provides the privacy advantages traditionally associated with centralized exchanges, while retaining the transparency, security, and decentralization intrinsic to blockchain technology.

Impact and Benefits

• Enhanced Trader Privacy: Protects large and small traders alike from market manipulation, ensuring fairer and more efficient trading outcomes.
• Market Stability and Confidence: Reduces market volatility caused by front-running and manipulation, increasing overall market confidence.
• Institutional Adoption: Provides institutional investors a familiar CEX trading experience on blockchain infrastructure, significantly expanding DeFi’s adoption and liquidity.
• Compliance, Auditable and Transparency: Balances privacy with the ability to selectively disclose transaction details for compliance and audit purposes, meeting regulatory standards while preserving confidentiality.

Endgame Vision

Polyhedra aims to develop a fully private, fully on-chain decentralized exchange (DEX) capable of supporting both spot and perpetual trading. The final system will deliver complete confidentiality for orders, execution details, trader identities, positions, liquidation thresholds, and asset holdings. Leveraging Polyhedra’s proprietary zero-knowledge (ZK) proof technology, particularly the Expander framework, this solution ensures prevention of front-running, MEV attacks, liquidation targeting, and identity linkage, while preserving cryptographic verification and transparency of all operations.

Milestone-Based Development Roadmap

Milestone 1 (MVP): Transparent Trades with Identity Concealment (4-6 months)

This milestone will implement the main product with minimal privacy, we can start service from this milestone.

• Fully On-Chain Operations: All transactions, including orders and trade executions, are transparently recorded on-chain.
• Identity Privacy: Trader identities are concealed using ephemeral, one-time addresses combined with zero-knowledge identity proofs. Each trade remains pseudonymous, effectively unlinkable to the persistent identities of traders.
• Initial Functionality: Support for spot markets and basic perpetual contracts with publicly visible trade details (price, size, liquidation points), but concealed trader identities.

Milestone 2: ZK-Enhanced Order Privacy and Matching Verification (3 months)

This milestone introduces a ZK based order matching system, where it sees everything but restricted by the ZK proof, it cannot alter the order or do anything malicious. DEX users will have full privacy if the order matching system does not leak any details.

• Encrypted On-Chain Orders: Traders encrypt orders (price, size, direction) using public-key cryptography, storing them fully encrypted on-chain.
• ZK-Proof Verified Matching: The order matching engine temporarily sees plaintext orders but is cryptographically constrained by zero-knowledge proofs to ensure fairness and correctness without the possibility of manipulation.
• Transparent Settlement: Post-execution, matched trades are transparently settled on-chain, making trade details public at the settlement step while maintaining order details encrypted and private beforehand.

Milestone 3: Shielded Execution and Confidential Settlement (3 months)

This milestone focuses on performance improvement, improving the TPS and reducing the cost.

• Encrypted Trade Settlements: All trade execution details—prices, quantities, and liquidation thresholds—are encrypted and remain hidden on-chain, permanently.
• Technical Advancement: Employ recursive zero-knowledge proofs (using Polyhedra’s Expander framework) for efficient batched verification of encrypted settlements and liquidations, substantially enhancing scalability and performance.
• Clarification of Privacy: Milestone 3 primarily upgrades technical capability, offering encrypted trade settlements. The matching engine, however, still has temporary plaintext visibility for order matching purposes.

Milestone 4: Fully Private Matching and Execution (4-6 months)

This milestone leverages more technology so the order matching engine will not see any order details, it now becomes a worker for ZKP generation and match order in ciphertext.

• Complete Encryption of Order Flow: Matching engine processes order matching entirely under encryption, never viewing plaintext order details, achieved through threshold encryption and secure multi-party computation (MPC).
• Zero-Knowledge Proven Matching: Expander-based zero-knowledge proofs fully verify matching fairness and correctness without disclosing any plaintext data.
• Fully Shielded Deposits and Withdrawals: User transactions, deposits, withdrawals, and margin positions are fully encrypted and hidden on-chain.
• Conditional Auditability: While maintaining full privacy, cryptographic techniques allow selective disclosure to authorized parties (such as regulatory audits) without compromising general confidentiality.

Technical Feasibility and Innovation

• Expander ZK-Prover Efficiency: Polyhedra’s proprietary Expander prover ensures rapid generation and verification of proofs, enabling practical, high-performance private trading.
• Encryption and Computation Strategies: Efficient cryptographic solutions, including threshold encryption, MPC, and recursive ZK proofs, enable robust encrypted matching and execution without performance bottlenecks.
• Parallelized Infrastructure: Matching and proving infrastructure leverages parallel processing to scale effectively with increasing trade volumes, ensuring sustainable high throughput.