Sealed-Bid Batch Auctions

ZSwap’s sealed-bid batch auctions conceptually decompose into two parts: the market-making function itself, whose design is inspired by Uniswap v3, and the batching procedure, which allows multiple users’ swaps to be batched into a single trade executed against the trading function. This section focuses on the batching procedure, leaving the mechanics of the trading function for later.

A key challenge in the design of any private swap mechanism is that zero-knowledge proofs only allow privacy for user-specific state, not for global state, because [they don’t let you prove statements about things that you don’t know][barrywhitehat-private-uniswap]. While users can prove that their user-specific state was updated correctly without revealing it, they cannot do so for other users’ state.

Instead of solving this problem, ZSwap sidesteps the need for users to do so. Rather than have users transact with each other, the chain permits them to transmute one asset type to another, provably updating their private state without interacting with any other users’ private state. This works as follows.

  1. Users create transactions with SwapDescriptions that privately burn their input assets and encrypt the amounts to the validators. This description identifies the trading pair , consumes of types from the transaction balance, and contains an encryption of the trade inputs and a swap commitment (analogous to a note commitment) that binds to and a nullifier. Rational traders will choose either or , i.e., trade one asset type for the other type, but the description provides two inputs so that different swap directions cannot be distinguished.

  2. Validators sum the encrypted amounts of all swaps in the batch to obtain an encryption of the combined inputs , then decrypt to obtain the batch input without revealing any individual transaction’s input . Then they execute against the trading pool, updating the pool state and obtaining the effective (inclusive of fees) clearing prices and .

  3. In a future block, users who created SwapDescriptions obtain assets of the new types by creating a SweepDescription. This description reveals the block height containing the swap description, the trading pair , and the nullifier of a swap commitment. Then, it proves inclusion of a swap commitment with nullifier and trade inputs in the note commitment tree for that block, and proves that and . Finally, it adds of types to the transaction’s balance (e.g., to be consumed by an OutputDescription that creates a new note).

Although sweep descriptions do not reveal the amounts, or which swap’s outputs they claim, they do reveal the block and trading pair, so their anonymity set is considerably smaller than an ordinary shielded value transfer. For this reason, client software should create and submit a transaction with a sweep description immediately after observing that its transaction with a swap description was included in a block, rather than waiting for some future use of the new assets. This ensures that future shielded transactions involving the new assets are not trivially linkable to the swap.

This design reveals only the net flow across a trading pair in each batch, not the amounts of any individual swap. However, this provides no protection if the batch contains a single swap, and limited protection when there are only a few other swaps. This is likely to be an especially severe problem until the protocol has a significant base of active users, so it is worth examining the impact of amount disclosure and potential mitigations.

Assuming that all amounts are disclosed, an attacker could attempt to deanonymize parts of the transaction graph by tracing amounts, using strategies similar to those in An Empirical Analysis of Anonymity in Zcash. That research attempted to deanonymize transactions by analysing movement between Zcash’s transparent and shielded pools, with some notable successes (e.g., identifying transactions associated to the sale of stolen NSA documents). Unlike Zcash, where opt-in privacy means the bulk of the transaction graph is exposed, Penumbra does not have a transparent pool, and the bulk of the transaction graph is hidden, but there are several potential places to try to correlate amounts:

  • IBC transfers into Penumbra are analogous to t2z transactions and disclose types and amounts and accounts on the source chain;
  • IBC transfers out of Penumbra are analogous to z2t transactions and disclose types and amounts and accounts on the destination chain;
  • Each unbonding discloses the precise amount of newly unbonded stake and the validator;
  • Each epoch discloses the net amount of newly bonded stake for each validator;
  • Liquidity pool deposits disclose the precise type and amount of newly deposited reserves;
  • Liquidity pool deposits disclose the precise type and amount of newly withdrawn reserves;

The existence of the swap mechanism potentially makes correlation by amount more difficult, by expanding the search space from all amounts of one type to all combinations of all amounts of any tradeable type and all historic clearing prices. However, assuming rational trades may cut this search space considerably.1


  • consider the effect of multi-asset support on correlations more deeply.

Thanks to Guillermo Angeris for this observation.