Use Case
Banks need to run ERC-6123 interest-rate swaps on public chains without leaking margin balances, settlement amounts, and trade terms. The solution requires all economic values and trade details to be confidential while retaining automation and auditability for institutional scale adoption.Business Context
Actors: Party A · Party B (swap counterparties) · Smart Derivatives Contract (SDC; ERC-6123) · Payment Token (ERC-20, to become confidential) · Valuation Oracle · Registrar/Compliance Operator · Regulator/Auditor · Keeper/SchedulerAdditional confidential business context is available in the private IPTF repository.
Problems
Problem 1: Confidential Derivatives Trading with Daily Settlement
Visible daily cashflows and buffer levels expose risk appetites and strategies, creating opportunities for adversarial pricing and front-running. Institutions need confidential margin, deltas, and trade parameters while maintaining automation and regulatory auditability.Requirements
Requirements
- Must hide: internal SDC balances (margin), margin requirements, settlement amounts, payment amounts, daily valuation updates, optional ICMA XML trade data
- Public OK: counterparty identities, contract existence
- Regulator access: keyed per-deal view or threshold decryption for full audit trail
- Settlement: daily cadence; atomic, single-tx margin transfers; unwind on default
- Ops: chain finality in minutes acceptable; sustainable L2 cost; integrate with existing tech stacks
Constraints
Constraints
- Must fit existing regulatory/KYC frameworks
- Preserve ERC-6123 semantics (capped-deal behavior)
- Production timeline: 1–2 years
- Prevent side-channel leaks (gas, calldata, mempool)
Recommended Approaches
See detailed solution architecture and trade-offs in Approach: Private Derivatives.Key Differences from Private Bonds
Private Bonds
- Static instruments
- Slower settlement cadence
- Predictable cashflows
Private Derivatives
- Dynamic instruments
- Daily settlement cadence
- Oracle-driven valuations
Open Questions
Trust model for valuation oracle under privacy
Trust model for valuation oracle under privacy
How should the oracle provide valuations without learning position details? Options include TEE-based oracles, MPC-based oracles, or cryptographic commitments.
Proving minimum margin privately
Proving minimum margin privately
How can counterparties prove they maintain sufficient margin without revealing the exact amount? This requires range proofs or similar ZK primitives.
Default handling and information leakage
Default handling and information leakage
What information leaks when margin is exhausted or a party fails liveness requirements? This affects the privacy guarantees during failure scenarios.
Selective disclosure primitive selection
Selective disclosure primitive selection
Which approach fits best: viewing keys, threshold decryption, or designated verifier proofs? Each has different trust assumptions and operational characteristics.
ICMA XML storage strategy
ICMA XML storage strategy
Should ICMA XML trade data be stored off-chain with hash anchors, or as encrypted blobs on-chain? Trade-offs around cost, availability, and auditability.
Standards & References
- ERC-6123 - Smart derivatives contract standard
- ERC-7573 - Atomic settlement (optional)
- Confidential token patterns - See Patterns
Related Resources
- Private Bonds - Similar patterns but static instruments with slower cadence
- Private Stablecoins - Settlement infrastructure for derivative payments
- Approach: Private Derivatives - Detailed technical architecture