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Breakpoint 2023: Decoding Zero Knowledge - Building the Future of Privacy and Compliance

Exploring the intersection of zero-knowledge proofs, privacy, and regulatory compliance in blockchain technology.

The notes below are AI generated and may not be 100% accurate. Watch the video to be sure!


The talk by Yannick Schrade, co-founder of the ROT∆ project, delves into the critical role of on-chain privacy for blockchain and the innovative solutions they are developing to address the inherent challenges. The focus is on the unique integration of zero-knowledge proofs to both ensure transactional privacy and adhere to compliance requirements. Yannick provides a compelling analysis of the limitations of existing privacy mechanisms, such as shielded pools, and highlights the ways in which ROT∆'s new project, Source, aims to redefine on-chain privacy without sacrificing regulatory oversight.

Key Points:

The Need for On-Chain Privacy

Yannick begins by emphasizing the stark contrast between the transparency of blockchains like Solana and the private ledgers of traditional finance. He argues that this lack of privacy on blockchains poses a significant risk for entities wanting to move their financial activities on-chain, as sensitive information could be exposed. He explains that on-chain privacy would ideally protect both the details of transactions (confidentiality) and the identities of those involved (anonymity).

The Innovation of Zero-Knowledge Proofs

The solution, Yannick explains, involves using zero-knowledge proofs, a type of cryptographic method that allows one party to verify the truth of a statement without revealing the content itself. In the context of blockchain, this could enable users to engage in fully private transactions within a shielded pool. Despite these advantages, he acknowledges the challenge of maintaining compliance and preventing the use of such privacy mechanisms for illicit finance.

Challenges of Current Privacy Solutions

Yannick critiques existing privacy approaches, including discretionary compliance, where users can grant access to their data, and deposit/withdrawal screening, which attempts to block or unmask illicit actors. However, he outlines how these methods fall short due to blacklists' inability to keep up with those actors and their centralization tendency.

Source: A Decentralized Privacy and Compliance Framework

ROT∆'s project, Source (Zero-knowledge Encrypted User Safeguarding), presents an advanced approach. It acknowledges the impracticality of barring all illicit actors preemptively and instead focuses on retroactively dissociating them from honest transactions. Source employs a distributed network for encrypted transaction verification, employing multi-party computations and epoch-based key management to safeguard the integrity and privacy of the network operations.

Facts + Figures

  • Blockchains like Solana offer almost no privacy besides pseudonymity, which is increasingly being compromised.
  • In 2022, $23.8 billion of illicit funds were identified, denoting a 68% increase from 2021.
  • Existing measures like discretionary compliance and deposit/withdrawal screenings are insufficient for tackling illicit finance.
  • Project Source intends to implement privacy through encrypted transactions verified on-chain using zero-knowledge proofs.
  • Source uses a distributed network and multi-party computation to enable privacy preservation in compliance with regulatory requirements.
  • The Source network adopts epoch-based key destruction to prevent reconstruction of private keys.

Top quotes

  • "Privacy would be the union of confidentiality and anonymity."
  • "Zero-knowledge proofs... a cryptographic primitive in which one party is able to convince another about the truth of some statement without revealing the statement itself."
  • "Having full privacy guarantees using zero-knowledge proofs and no regard for compliance risks escalating illicit finance issues."
  • "It's impossible to keep all illicit actors out of such a shielded pool."
  • "Our protocol additionally comes with cheater and non-participation detection."
  • "We can implement staking and slashing mechanisms if any node would not participate correctly."

Questions Answered

Why is on-chain privacy important?

On-chain privacy is essential because public blockchain transactions can reveal sensitive financial details, putting individual and organizational assets at risk. Privacy mechanisms, like zero-knowledge proofs, help ensure transactions cannot be publicly traced, protecting users against the exposure of confidential information.

What are zero-knowledge proofs and how do they relate to blockchain?

Zero-knowledge proofs are cryptographic methods that allow a party to prove the validity of a claim without revealing the underlying data. In blockchain technology, they can provide transaction privacy by enabling confidential transfers while verifying the transactions' compliance with certain requirements, such as not being involved in illicit activities.

What are the limitations of current blockchain privacy methods?

Current privacy methods on blockchain, such as discretionary compliance and deposit/withdrawal screenings, cannot effectively combat illicit finance. They rely on blacklists, which illicit actors quickly outpace, and they introduce centralization, which contradicts the decentralized ethos of blockchain.

What is ROT∆'s project Source, and how does it address these limitations?

Project Source (Zero-knowledge Encrypted User Safeguarding) is an innovative framework designed by ROT∆ to address the limitations of existing privacy solutions. By utilizing a decentralized network and multi-party computations, Source can retroactively dissociate illicit transactions from honest ones, ensuring privacy without sacrificing compliance or risking centralization.

How does Source ensure privacy while maintaining compliance?

Source uses encrypted transactions verified through zero-knowledge proofs and a distributed network to process and write the encrypted state back to the blockchain. Its multi-party computation model allows for the detection of illicit transactions without compromising the privacy of compliant users. It implements staking and slashing mechanisms to incentivize correct participation in the network, ensuring both privacy and compliance are maintained.