ShadowSync

ShadowSync is a privacy-preserving inter-bank liquidity network built on Canton that enables financial institutions to access emergency liquidity without revealing their financial positions to competitors. Banks subscribe to tiered liquidity pools where borrowing and lending occur through confidential channels with atomic settlement, eliminating counterparty risk while maintaining regulatory compliance.

ShadowSync combines institutional-grade privacy with the speed and security of Canton's multi-party settlement infrastructure.

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Problem

Banks frequently face short-term liquidity crunches but avoid traditional inter-bank borrowing due to critical barriers:

• Reputational Risk: Borrowing signals financial weakness to competitors and markets, potentially triggering adverse reactions
• Information Leakage: Conventional systems expose trading positions, liquidity needs, and strategic vulnerabilities
• Settlement Risk: Non-atomic settlements create dangerous counterparty exposure during multi-party transactions
• Market Impact: Large borrowing requests can trigger adverse price movements and speculation
• Privacy vs Compliance Tension: Existing solutions force banks to choose between confidentiality and regulatory transparency

Current alternatives like the Fed discount window carry stigma, while traditional repo markets lack sufficient privacy protections. This forces banks into suboptimal liquidity management, holding excess reserves that could be deployed more efficiently.

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Solution: Privacy-Preserving Liquidity Marketplace

ShadowSync introduces a subscription-based private liquidity network with the following properties:

1. Confidential Transaction Channels
   Canton's privacy architecture ensures borrowing and lending occur without revealing participant identities or transaction amounts to the broader network.

2. Atomic Multi-Party Settlement
   Daml smart contracts guarantee that liquidity transfers, collateral locks, and interest terms execute simultaneously or rollback entirely, eliminating counterparty risk.

3. Tiered Subscription Access
   Banks subscribe to liquidity pools based on their needs: Bronze ($10M/day), Silver ($50M/day), Gold ($100M+/day), or custom enterprise tiers.

4. Zero-Knowledge Creditworthiness
   Participants prove their credit quality and collateral sufficiency without exposing specific balance sheet details or trading positions.

5. Regulatory Compliance by Design
   All participants undergo KYC/AML verification. Transactions remain auditable by regulators without public disclosure, maintaining the permissioned nature of Canton Network.

6. Dynamic Risk Management
   Real-time collateral valuation, automated margin calls, and privacy-preserving liquidation mechanisms protect lenders while maintaining borrower confidentiality.

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Liquidity Sharing Workflow

1. Subscription and Pool Entry

Banks subscribe to a liquidity tier and deposit available funds into the privacy-preserving pool contract. Each bank operates its own Canton participant node, ensuring complete control over data exposure.

2. Private Borrowing Request

When Bank A needs short-term liquidity:

• Submits an encrypted borrow request specifying amount, duration, and offered collateral
• Request includes zero-knowledge proof of creditworthiness without revealing specific positions
• Canton ensures only authorized matching participants can view the request

3. Confidential Matching

The ShadowSync protocol matches borrowers with lenders based on:

• Available liquidity in the pool
• Interest rate preferences
• Collateral quality and coverage ratios
• Counterparty limits (if specified)

Neither party learns the identity of the other unless they explicitly consent to reveal it.

4. Atomic Settlement

Once matched, Canton executes a multi-party atomic transaction:

• Liquidity transfers from lender to borrower
• Collateral locks in escrow contract
• Interest terms and repayment schedule formalize on-chain
• All steps complete simultaneously or the entire transaction reverts

5. Automated Repayment and Release

At maturity:

• Smart contract automatically executes repayment plus interest
• Collateral unlocks and returns to borrower
• If borrower defaults, collateral liquidates automatically to protect lender
• All settlement occurs within Canton's privacy-preserving infrastructure

6. Privacy-Preserving Analytics

Banks receive aggregated market data (average rates, liquidity availability) without learning specific positions of individual participants. This maintains competitive privacy while enabling informed decision-making.

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ShadowSync Architecture Overview

LiquidityPool (Daml Template)

• Holds deposited funds from subscribing banks in privacy-preserving escrow
• Enforces access control based on subscription tiers
• Tracks available liquidity without revealing individual bank contributions
• Manages subscription fees and automated billing

BorrowRequest (Daml Template)

• Captures borrowing parameters (amount, duration, collateral offered)
• Includes zero-knowledge creditworthiness attestation
• Maintains confidentiality until matched with lender
• Enforces collateral sufficiency requirements

PrivateLoan (Daml Template)

• Formalizes the terms between matched borrower and lender
• Locks collateral in atomic settlement with liquidity transfer
• Encodes repayment schedule and interest calculation
• Triggers automated enforcement at maturity or violation

CollateralManager (Daml Template)

• Continuously monitors collateral valuations via oracle feeds
• Calculates margin requirements and triggers calls when needed
• Executes privacy-preserving liquidations if thresholds breach
• Returns excess collateral upon successful repayment

RiskOracle (Off-Chain Component)

• Provides real-time collateral price feeds
• Validates creditworthiness proofs without accessing sensitive data
• Issues attestations for loan eligibility
• Maintains privacy by revealing only binary approval signals

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Privacy Model

Canton Network's architecture enables ShadowSync to deliver institutional-grade privacy:

• Private Escrow Per Participant: Each bank's liquidity contributions remain confidential from other pool members
• Encrypted Matching: Borrowing and lending requests are only visible to eligible counterparties
• Zero-Knowledge Verification: Credit quality and collateral sufficiency proven without revealing balance sheets
• Selective Disclosure: Banks control what information, if any, they share with counterparties
• Regulatory Auditability: Authorized regulators can audit transactions without compromising market participant privacy
• Confidential Settlement: Canton's multi-party atomic transactions hide amounts and identities from the broader network

This level of privacy and compliance is impossible to achieve on public blockchains without sacrificing either transparency for regulators or confidentiality for market participants.

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Prototype Demo

Coming Soon

Architecture diagrams and workflow demonstrations will be available at:
[Demo Link Placeholder]

The demo illustrates the confidential borrowing and lending workflow with visual representation of Canton's privacy-preserving settlement.

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Why ShadowSync Matters

ShadowSync solves a critical inefficiency in modern banking: the inability to access peer liquidity without signaling weakness. By combining Canton's privacy infrastructure with atomic settlement guarantees, we enable banks to:

• Optimize Capital Efficiency: Deploy excess reserves productively while maintaining access to emergency liquidity
• Eliminate Stigma: Borrow confidentially without market or competitive repercussions
• Remove Counterparty Risk: Atomic settlement ensures complete execution or rollback
• Maintain Compliance: Operate within regulated frameworks while preserving strategic privacy
• Reduce Systemic Risk: Improve liquidity circulation without creating information cascades

ShadowSync represents a new category of financial infrastructure—privacy-preserving, compliant, and built for institutional scale.

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Technology Stack

• Daml SDK 3.3.0: Smart contract development and business logic
• Canton Network: Privacy-preserving settlement layer with multi-party atomic transactions
• Participant Query Store (PQS): Confidential querying of available liquidity
• TypeScript/React: Bank-facing dashboard and analytics
• JSON Ledger API: Integration between Daml contracts and frontend applications
• PostgreSQL: Off-chain analytics and reporting infrastructure

Current Implementation

The prototype includes core Daml smart contracts in Folder DAML:

• Types.daml - Core data structures (Tier, Currency, CollateralSpec, LoanStatus)
• Liquidity.daml - Liquidity pool management and bank contributions
• Loans.daml - Borrow requests, loan matching, and lifecycle management

Note: This is a conceptual prototype demonstrating the core workflow. Production implementation would include:

• Canton-specific privacy features (confidential channels, ZK proofs)
• Real-time collateral valuation oracles
• Automated interest calculation and compounding
• Cross-chain collateral support