Siphon Protocol

The Siphon Protocol introduces a cryptographic privacy framework for decentralized finance (DeFi), combining Fully Homomorphic Encryption (FHE) and Zero-Knowledge (ZK) proofs to enable confidential execution and unlinkable transactions while preserving verifiable integrity. Its design addresses one of the most persistent challenges in DeFi: the inherent transparency of public blockchains, which exposes user behavior and transaction flows to adversarial analysis. This transparency enables a range of exploitative behaviors, including front-running and sandwich attacks. Existing privacy solutions, such as shielded pools or mixers, have struggled to overcome these issues due to limited liquidity, poor composability, and weak integration with broader DeFi ecosystems. As a result, users have historically faced a trade-off between financial privacy and access to deep, efficient liquidity.

Siphon Protocol resolves these limitations through a structured three-phase privacy mechanism that separates public and private financial domains while maintaining provable correctness. In the shielding phase, public assets such as ETH or USDC are converted into private commitments via ZK-SNARKs. Each user generates a random secret and a nullifier, forming a cryptographically unlinkable commitment stored in a Merkle tree whose root is maintained on-chain. This process ensures that deposits cannot be traced to their corresponding withdrawals. During the execution phase, encrypted trades and operations are processed using FHE, allowing computations such as order matching and slippage evaluation to occur entirely on encrypted data. The system’s execution node perform these homomorphic computations without ever decrypting the underlying inputs, preserving absolute confidentiality even at the infrastructure level. In the unshielding phase, users can withdraw assets back into the public domain through a ZK proof that validates ownership and prevents double-spending, while maintaining complete unlinkability between deposit and withdrawal addresses.

Beyond privacy, the protocol is designed with a compliance framework in mind. This system includes a Risk Screening Gate that validates each transaction through zero-knowledge proofs of compliance. Users can demonstrate conformance with anti-money laundering (AML) and know-your-customer (KYC) requirements without disclosing personal information or transaction details. The proofs verify that participants have passed identity checks, that funds originate from legitimate sources, and that trades fall within acceptable risk thresholds. All encrypted transactions could be processed through the FHE engine are screened against these compliance proofs, ensuring that only lawful and compliant activities are executed.

By combining cryptographic privacy with provable regulatory compliance, Siphon Protocol achieves a balance that has eluded previous privacy-focused systems. It enables fully private, verifiably correct financial transactions on decentralized infrastructure while preventing misuse for illicit purposes. Through this architecture, Siphon establishes a foundation for a new generation of confidential DeFi systems—ones that protect users from surveillance, manipulation, and exploitation without compromising liquidity, efficiency, or compliance.

When we began Siphon Protocol, we saw that most privacy solutions treated confidentiality as an afterthought. We built privacy as the foundation. After exploring methods like ring signatures and confidential transactions, we combined Fully Homomorphic Encryption (FHE) with Zero-Knowledge proofs.

FHE was powerful but slow, so we optimized its schemes with modulus switching and custom circuits designed for financial operations (still over 1 min for double band strategies). For ZK, we used Groth16 proofs with a multi-party trusted setup, ensuring no single party could compromise the system.

Our design evolved from a basic mixer into a five-layer architecture. The vault contract manages escrow, while the shielded pool uses incremental Merkle trees and Poseidon hashing for efficient ZK operations. The FHE engine handles encrypted order matching, slippage, and settlement. Deposits create commitments, withdrawals verify ZK proofs, and nullifiers prevent double-spending. Cross-chain movement is enabled through AVAIL’s Nexus Protocol, with Pyth providing price feeds for blind computation.

The trading interface now offers two modes—Simple for swaps and Pro for advanced trading—refined through user testing. As we continue, we’re optimizing FHE circuits, improving UX, and expanding cross-chain compatibility to build a fully private DeFi infrastructure.