Staking and hTokens

Shielded pools are privacy-enhancing technologies used in blockchain systems to enable users to conduct transactions without revealing their details. However, a significant issue arises with the incentive structure within these pools: users who contribute to the anonymity set are not adequately compensated for the public good they provide.

The Public Good Nature of Anonymity

In a shielded pool, each participant contributes to the overall anonymity set by adding their assets to the pool. The anonymity set refers to the collection of users whose transactions are indistinguishable from one another. The larger the anonymity set, the harder it is to trace any individual transaction, thus enhancing privacy for all participants. When a user deposits assets into the pool, they are effectively increasing the size of this anonymity set, providing a benefit to all other users.

Anonymity in this context functions as a public good. Public goods are characterized by their non-excludability and non-rivalrous consumption. This means that one person’s use of the good does not diminish its availability to others, and individuals cannot be excluded from benefiting from the good once it is provided.

• Non-excludability: Once anonymity is provided by the shielded pool, all users benefit from it, and no one can be excluded from this benefit.

• Non-rivalrous consumption: One user’s anonymity does not reduce the level of anonymity available to others; in fact, it enhances it.

Since users can benefit from the increased anonymity without having to contribute themselves, there is little motivation to deposit assets into the pool.

• Lack of Direct Compensation: When a user deposits assets into a shielded pool, they enhance the anonymity set for all other users. However, they do not receive direct compensation for this contribution. This lack of direct reward for providing anonymity can lead to suboptimal participation levels in the pool.

• Free-Rider Problem: Users may choose to benefit from the anonymity provided by others without contributing themselves. This results in fewer deposits, smaller anonymity sets, and ultimately, reduced privacy for everyone.

Potential Solutions and Their Shortcomings

Addressing the public good provision problem in shielded pools requires designing incentive mechanisms that compensate users for their contributions to the anonymity set. Some potential solutions that were used in the past:

1. Reward Mechanisms: Implementing a system where users are rewarded for depositing assets into the shielded pool. These rewards could be in the form of tokens, reduced transaction fees, or other economic incentives that encourage participation.

2. Anonymity Mining: Similar to liquidity mining in decentralized finance (DeFi), anonymity mining could reward users based on the amount of assets they deposit and the duration of their deposits in the shielded pool. This aligns incentives with the goal of increasing the anonymity set.

3. Social and Governance Incentives: Utilizing governance tokens to give users a say in the future development and management of the shielded pool. This can create a sense of ownership and long-term commitment to the pool.

4. Reputation Systems: Implementing reputation systems where users gain reputation points for contributing to the anonymity set. These points could unlock exclusive features or privileges within the ecosystem.

The Need for Interoperable Token Positions. For incentives to be truly effective, they need to offer rewards that are interoperable with the broader DeFi ecosystem. Users should be able to receive token positions that they can leverage in other DeFi applications, such as lending, borrowing, or trading. Without this capability, the incentive mechanisms fail to provide the flexibility and utility that users seek.

Introducing hTokens

A promising solution to this problem is the introduction of hTokens (Hinkal tokens), which are designed to provide users with an interoperable position that they can use across various DeFi applications. hTokens are a form of tokenized representation of the assets deposited into the shielded pool, enabling users to gain financial benefits while contributing to the anonymity set.

• Interoperability: hTokens are compatible with a wide range of DeFi protocols, allowing users to utilize their deposited assets in lending, borrowing, trading, and other financial activities without compromising their interoperability.

• Liquidity: By receiving htokens, users maintain the ability to participate in other DeFi ecosystems, providing them with the flexibility to manage their assets dynamically.

• Incentives: hTokens can accrue interest or other rewards over time, similar to staking or yield farming, ensuring that users are compensated for their contributions to the anonymity set.

• Market Participation: Users can trade hTokens on decentralized exchanges, providing them with immediate liquidity and the ability to capitalize on market opportunities.

The mechanism for minting hTokens involves depositing collateral tokens into the pool, staking these deposits, and receiving hTokens after a delay. To further enhance anonymity, hTokens will be minted in batches.

Users start by depositing their chosen collateral tokens into the shielded pool. These could be stablecoins, cryptocurrencies, or other tokenized assets. The deposit process ensures the transaction remains private and untraceable through cryptographic techniques such as zero-knowledge proofs.

By depositing tokens into the shielded pool, users contribute to the overall anonymity set, enhancing privacy for all participants. The deposited collateral tokens are securely held in the pool’s smart contract.

Once the collateral tokens are deposited, users proceed to stake their deposits to mint hTokens. Staking involves locking up the deposited assets within the pool to receive an equivalent amount of hTokens, which are tokenized representations of the staked collateral. These hTokens are then credited to the user’s wallet, providing them with versatile financial instruments that can be used across various DeFi applications.

Implementing a Lag Period Before hToken Issuance

The predetermined lag period is a crucial component for enhancing the privacy of transactions within the shielded pool. When users stake their collateral tokens, there is an intentional delay (e.g., several hours) before the corresponding hTokens are issued. This lag period serves several important functions:

• Obscuring Transaction Timing: By introducing a delay between the staking of collateral and the issuance of hTokens, the system makes it significantly more difficult to trace the timing of individual transactions. This obfuscation prevents malicious actors from linking specific deposits to subsequent hToken transfers.

• Increasing Anonymity Set: The lag period allows more transactions to be aggregated, thereby increasing the overall anonymity set. As more users’ transactions are batched together, it becomes harder to isolate any single transaction, enhancing the privacy of all participants.

• Security and Trust: This delay also provides an additional layer of security by ensuring that the system can verify and process multiple transactions collectively, reducing the risk of fraudulent activities and ensuring the integrity of the shielded pool.

To Further Enhance Anonymity, hTokens Will Be Minted in Batches

Batch minting involves aggregating multiple staking requests over a set period (e.g., every few hours or once a day) and processing them together. By doing so, the shielded pool ensures that the exact timing of each individual transaction remains obscured. This method prevents the possibility of linking deposits and withdrawals by timing, as multiple users’ transactions are combined into a single batch. The larger the batch, the greater the difficulty in tracing any single transaction, thus significantly enhancing the overall anonymity of the system. This approach also helps in managing network congestion and optimizing gas fees, making the system more efficient and cost-effective for users.