ZK-Statechains Without States

Statechains, introduced over six years ago by Ruben Somsen, have evolved significantly with Commerce Block's Mercury Layer being the most advanced implementation incorporating blinded signing. We present a new protocol enhancing privacy through zkSNARKs for state transitions and offering smart contract flexibility on Bitcoin. This approach aims to address the non-fungibility of statecoins and introduces private zero-knowledge smart contracts.

The protocol serves as an L3 solution in the Bitcoin ecosystem, leveraging a bridge contract on a Bitcoin rollup. It operates as an independent network with a unique consensus mechanism, connecting to Bitcoin or other blockchains for message passing. The focus is on improving privacy for Bitcoin users by adapting statechain mechanisms, wherein users can deposit funds into a multisig wallet with an operator and transfer ownership through key exchanges without compromising privacy.

Statechains facilitate transfers by allowing users to lock funds in a 2-of-2 multisig, pre-signing unilateral exit transactions. Ownership transfers involve handing over private keys, with the Mercury Layer and Spark being notable implementations. Spark introduced "leaf splitting" for fractional UTXO transfers but lacks blind signing, posing privacy and operational challenges. Our protocol integrates zkSNARKs to validate key changes and manage timelocks, enhancing privacy and simplifying operations compared to traditional statechains.

Our proposed architecture includes a ZK Ledger for validating transactions via zkSNARKs, minimizing information leakage. It involves three actors: the operator, sender, and receiver, each playing distinct roles in ensuring secure and private transfers. The payment flow begins with depositing funds into a multisig address, mirrored on the ZK Ledger, facilitating peer-to-peer transfers validated by zkSNARK proofs.

The protocol incorporates an advanced note structure within the ZK Ledger, allowing for private and secure transfers. It addresses potential double-spending and proposes market-based solutions for improving note fungibility within a shielded pool. This setup seeks to balance privacy with security, enabling a more efficient and private transaction mechanism on top of Bitcoin.

Incorporating Nostr provides a decentralized method for relaying encrypted transactions, further enhancing privacy. This integration points towards a modular, encrypted registry system, independent of ZK Ledger development goals.

Concluding, our proposal merges statechain flexibility with zkSNARK privacy, positioned between existing Statechains and ShieldedCSV or ZKCoins. It explores programmable market-based mechanics for seamless on/off ramping into shielded pools, presenting a novel approach to privacy-focused Bitcoin transactions. Acknowledgments extend to Janusz, Gus Gotoski, SuperTestnet, and fiatjaf for their insightful feedback on this innovative protocol.