Proof of Source of Funds: Efficient On-chain Provenance of Cryptoassets

2026-06-08

AI Summary

This work addresses the limitations of existing DeFi compliance mechanisms, which rely on centralized on-chain monitoring that compromises user privacy and frequently yields false positives, thereby imposing excessive compliance burdens on platforms. To resolve this, the paper proposes a client-side proof-of-funds-origin mechanism leveraging zero-knowledge proofs, enabling users to proactively demonstrate that their funds originate from compliant sources while allowing platforms to verify these claims in constant time. The core innovation lies in shifting compliance responsibility from platforms to users, achieving both strong privacy guarantees and highly efficient verification. A unified temporal directed acyclic graph (DAG) model is introduced to support both UTXO- and account-based ledgers while concealing transaction paths. Implemented on Ethereum, the prototype requires approximately 1.8 seconds per user-side proof update and only 1.5 milliseconds (∼800k gas) for on-chain verification, achieving O(1) verification complexity.

Abstract

Regulatory compliance is increasingly mandatory for decentralized finance and privacy-enhancing technologies. Current approaches rely on binary inclusion/exclusion lists or retroactive graph analysis by centralized blockchain intelligence firms. This approach strips honest users of their financial privacy, leads to false positives and negatives, and forces decentralized platforms to bear the burden of on-chain transaction monitoring. In this work, we propose a paradigm shift: moving from platform-side surveillance to user-side provenance. We introduce Proof of Source of Funds (PoSoF), a novel cryptographic framework that shifts the burden to the user. Rather than the platform tracing funds, the user locally generates a zero-knowledge proof demonstrating that their deposit originates exclusively from a set of compliant sources. The platform is thus relieved of chain-analysis duties, requiring a constant-time, O(1) verification to enforce admission control. We formulate a unified temporal Directed Acyclic Graph (DAG) abstraction that formalizes both UTXO and account-based ledger histories within a generalized value-flow model. Users extract a compliant sub-DAG of their transaction history and utilize Incrementally Verifiable Computation (IVC) to prove rigorous state-transition predicates that protect against various attack vectors. Crucially, PoSoF provides verifiable cryptographic provenance; it guarantees the legitimacy of the funds without leaking the intermediate transaction topology, intermediary addresses, or the specific origins utilized. We formally define the security properties of PoSoF and evaluate an Ethereum-compatible prototype. Our benchmarks demonstrate that fully private, proactive compliance is highly practical, requiring only ~1.8 s to incrementally update a user's PoSoF per new transaction, and a constant-time ~1.5 ms (~800k gas) for final on-chain EVM verification.

Problem

• regulatory compliance
• financial privacy
• cryptoasset provenance
• decentralized finance
• blockchain surveillance

Innovation

• Proof of Source of Funds
• zero-knowledge proof
• incrementally verifiable computation
• compliance privacy
• on-chain provenance