Proof of Fund v1

Published: July 1, 2024 by Ege Tekiner, Özcan Oğuz, Evrim Taştan

Abstract

The promise of blockchain to democratize finance by bringing transparency is the main pillar of technology 3. However, as these technologies mature and their adoption widens, they also face significant challenges that must be addressed to ensure their sustainable growth and integration into mainstream financial systems 5. The Proof of Fund (PoF) project aims to address a critical trust and privacy gap within the crypto ecosystem by providing a reliable solution to verify fund availability. In traditional finance, proving income or assets is essential for obtaining loans, and institutions must demonstrate sufficient reserves to operate. However, the crypto world lacks robust mechanisms for such verification, leading to significant trust issues, as exemplified by incidents like the FTX collapse 9. PoF offers a secure and private web application where users can create profiles and submit their wallet addresses. Our system generates digitally signed and timestamped reports that validate the availability of funds without exposing sensitive information. Profiles can be public or private, giving users control over the information they share. This solution ensures transparency and trust

1 Introduction

The fundamental idea introduced by blockchain technology is that anyone should have the option of validating transactions without relying on centralized third parties, thereby enhancing trust and reducing dependency. However, as cryptocurrencies become more integrated into our lives and more streamlined, the real world struggles of the transperancy foundation become more visible 7.

Achieving transparency without compromising privacy remains a significant challenge 8 for individuals, businesses, and organizations within the crypto ecosystem. This issue is widely discussed in various communities, emphasizing the need for solutions that balance these two critical aspects. This creates the dilemma between transparency and privacy that we need to address. The dilemma of transparency arises from the inherent traceability of blockchain transactions 8.

On one hand, the transparency provided by blockchain technology ensures that transactions are publicly verifiable, which is a cornerstone of trust in decentralized system logic created by Satoshi Nakamoto. This transparency allows for greater accountability and can help prevent fraudulent activities.

On the other hand, the ability to trace transactions back to specific wallet addresses can expose sensitive financial information in the real worl usecases. This exposure can reveal financial strategies, holdings, and personal data, making privacy a significant concern for users. Institutions face challenges as they often use thousands of wallets in parallel for operational purposes. These measures, however, do not fully address the privacy concerns and can complicate operational transparency.

As we have learned from incidents like the FTX collapse, the lack of a robust proof of funds mechanism can lead to a loss of trust within the crypto community. The need for a valid proof of funds mechanism that acts as a bridge between centralized crypto asset holders and their customers is evident. This mechanism must ensure transparency and accountability without compromising the privacy of financial information.

This paper presents the Proof Of Fund foundation. Our goal is to keep the balance between the privacy and auditability between peers while respecting the both sides of the madelleon. In the rest of this paper, we will provide a detailed overview and use case scenarios of the Proof of Fund foundation, followed by the technical details of how we will provide the needed privacy and verifiability settings to users while delivering real-time and reliable data to the communities.

2 The Proof Of Fund Project

In response to the challenges of achieving transparency without compromising privacy, Proof Of Fund proposes a hybrid solution that addresses these needs. Proof of Fund is designed to be a centralized yet verifiable trust bridge between any two parties willing to share financial information without compromising privacy and wallet details. Our platform offers a secure, privacy-preserving web application where users can create profiles and submit their financial information related to their crypto assets. The system generates reports that confirm fund availability, digitally signed and timestamped for accuracy, ensuring their reliability.

Users can choose to make their profiles public or private, sharing information selectively as per their needs. The customizable profiles allow users to show and align the information they wish to share. By doing so, we aim to build a more trustworthy and resilient crypto ecosystem, addressing the crucial balance between transparency and privacy.

Any individual, group, community, or corporation can create personalized profiles, which can be either public or private, depending on their preferences. This flexibility allows users to selectively share information, giving them control over what they disclose.

Once a profile is created, users can submit their wallet addresses to the platform. The system then verifies the fund availability and other metrics in these wallets without exposing sensitive details to any third party. Users may also choose to generate digitally signed4 and timestamped reports that confirm any data related to their profile. These reports are designed to be tamper- proof and reliable, ensuring their authenticity and integrity.

The customizable profiles allow users to show and align the information they wish to share. For instance, financial institutions can use Proof of Fund to verify the fund availability of crypto assets for loan approvals or regulatory compliance. This helps streamline processes and build trust with customers. Centralized exchanges (CEXs) can reassure customers about their financial solvency by providing verified proof of funds, thus preventing trust issues and attracting more users. Or the platform can even provide services to individual users to provide them a platform to establish financial services such as personal loan applications or peer-to-peer transactions, building trust without compromising privacy.

2.2 Verified Organizations and Wallets

The original purpose of Proof of Fund is to create a platform where centralized exchanges and newly crypto-introduced financial institutions can communicate with the public and establish trust. To achieve this, creating verified accounts for various types of users and verifying wallet ownership is our primary goal. Our platform will adopt a verification system similar to Twitter (currently X), providing different badges for various types of users. These badges will indicate that the profiles belong to the entities they claim to represent, thereby preventing scam-like activities.

The types of users and their verification badges include:

Corporations and Financial Institutions: Verified badges for these entities will signal their legitimacy and compliance, fostering trust with the public and their clients.
Government Entities: Government organizations will have distinct badges, ensuring that communications from these profiles are trustworthy and official.
Individual Users: Personal accounts can also be verified, giving individuals the opportunity to establish credibility within the crypto community.

Verified wallets are the second cornerstone for the trustable platform. Users can list any wallet address in their profile, as long as they are not claimed and verified by another verified customer. Additionally, unverified wallets will be clearly marked to ensure transparency. Users may verify their wallets by proving their ownership with one of the following methods:

Users can connect their Web3 wallets directly to our platform to verify ownership.
Users can create random transactions to addresses provided by us to prove control over the wallet.
Users can sign a message with their private key to prove ownership of the wallet. This method ensures that users control the wallet without revealing their private key.

3 Security, Privacy, and Integrity

All data submitted to the Proof of Fund platform is encrypted using advanced encryption standards6, 1. This includes user profiles, wallet addresses, and any financial data related to crypto assets. Additionally, our data handling process is open and strictly consent-oriented.

3.1 No Data Retention

We do not keep or process any user data beyond what is necessary for the immediate service. Once the data has been used for its intended purpose, it is deleted.

3.2 Data Deletion Requests

Users can request the deletion of their data at any time. We comply with these requests promptly and ensure that the data is completely removed from our systems.

We do not share user data with any third parties under any circumstances. Our commitment to privacy means that user information remains strictly confidential. Canary Page: Like all organi- zations that hold personal data, we also have a canary page. Please be sure to check our canary page often. For more information about the canary, please visit the Wikipedia page.

To top off our security layer, we built our privacy layer. We utilize digital signatures and times- tamps on profile pages and generated reports to ensure data integrity. These measures provide cryptographic proof that the data has not been tampered with and verify the authenticity and timeliness of the information. Our current deliverability regarding privacy is built around the privacy of the users’ wallets. However, as part of our commitment to continuous improvement, we are actively exploring the integration of more advanced privacy and cryptographic concepts as well as hosting our own blockchain nodes to provide an additional layer of privacy to our users.

4 Future Work

As we continue to develop the Proof of Fund platform, we plan to integrate more advanced cryp- tographic processes and offer additional features to enhance privacy, security, and usability. Here are some key areas of focus for future development:

4.1 Zero-Knowledge Proofs (ZKPs)

ZKPs2 allow users to prove the validity of their statements (such as fund availability) without revealing the underlying details. This enhances privacy and security by ensuring that sensitive information remains confidential. We aim to integrate ZKPs into our verification process, allowing users to provide proofs that their wallets contain certain funds without exposing wallet addresses or exact amounts. This will further balance transparency and privacy on our platform.

4.2 API Access for Dynamic Wallet List Updates

Providing API access to our users will enable them to update their wallet lists dynamically. This is particularly useful for institutions and users with multiple wallets that require regular verification. Users can automate the process of adding or removing wallets from their profiles, ensuring that their verified data is always current and accurate.

We will offer more granular privacy settings, allowing users to control who can view their profiles and what specific information is shared. Users can choose from various levels of privacy, from fully public profiles to highly restricted, invite-only access. Users can customize the information they share with different parties, ensuring that only the necessary data is disclosed. This flexibility helps users maintain privacy while providing the required information for specific purposes, such as loan applications or regulatory compliance.

4.4 Integration of More Blockchains and Assets

To cater to a broader user base and accommodate a variety of crypto assets, we will integrate support for more blockchains. Users will be able to verify funds and share information from a wider range of crypto assets, enhancing the platform’s utility and reach. Support for a diverse range of crypto assets will ensure that users can verify funds across multiple types of cryptocurrencies, making the platform more versatile and appealing to users with diversified crypto portfolios.

5 Conclusion

In this paper, we have presented the Proof of Fund project, which creates a two-way verifiable asset verification system. We have started by introducing the main issues regarding public blockchain privacy concerns and their negative effects on the integration of these technologies into the financial world. Then, we have proposed our solution to this issue and explained how we provide a two-way verifiable yet privacy-preserving service to users.

We detailed the features of our platform, including creating profiles to share fund data, the impor- tance of verified organizations and wallets, and our robust security, privacy, and integrity measures. Finally, we outlined our future work, including the integration of more advanced cryptographic processes, providing API access, enhancing privacy options, and expanding support for additional blockchains and assets.

As we continue to develop Proof of Fund, we will adhere to the following core principles:

Transparency and Trust: Our platform will remain as a reliable source of verifiable in- formation without compromising user privacy.
Privacy and Security: Maintaining the highest standards of data privacy and security through by following the developments in the industry and academia and strict data handling policies.
User-Centric Design: Prioritizing the needs and preferences of our users by offering cus- tomizable privacy settings and easy-to-use interfaces.
Open Source and Collaboration: Developing Proof of Fund as an open-source project to foster collaboration with developers, academics, and security experts. We believe in the strength of community-driven innovation and continuous peer review.

With these principles in mind, we look forward to extending the reach and impact of blockchain technologies by making asset verification a secure and integral part of the financial ecosystem.

References

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3 Satoshi Nakamoto. “Bitcoin whitepaper”. In: URL: https://bitcoin. org/bitcoin. pdf-(: 17.07. 2019) 9 (2008), p. 15.

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6 Ako Muhamad Abdullah et al. “Advanced encryption standard (AES) algorithm to encrypt and decrypt data”. In: Cryptography and Network Security 16.1 (2017), p. 11.

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9 Imran Yousaf and John W Goodell. “Reputational contagion and the fall of FTX: Examining the response of tokens to the delegitimization of FTT”. In: Finance Research Letters 54 (2023), p. 103704.