Safeguarding the Unseen: a Study on Data Privacy in DeFi Protocols

Abstract: The financial sector's adoption of technology-driven data analysis has enhanced operational efficiency and revenue generation by leveraging personal sensitive data. However, the inherent characteristics of blockchain hinder decentralized finance (DeFi) from accessing necessary sensitive user data. To address this challenge, we introduce a protocol that both safeguards user privacy and ensures data availability through the incorporation of homomorphic encryption and zero-knowledge-proof techniques in blockchain technology. This novel protocol helps mitigate privacy risks caused by sensitive data leaks while improving the capital efficiency of the DeFi market. Furthermore, we explore the applicability of these privacy-preserving methods in on-chain ecosystems and cross-border financial applications. Our solution contributes to secure, user-centric solutions for DeFi while upholding principles of decentralization and privacy protection.