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pattern-privacy-l2s.md

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title Pattern: Private L2s
status draft
maturity PoC
layer L2
privacy_goal Execute financial logic with private state enabling confidential value and unlinkable identity
assumptions Privacy-native rollup (ZK or FHE), L1 bridge contracts, viewing key infrastructure
last_reviewed 2026-04-27
works-best-when
Strong privacy is required beyond value-hiding
identity unlinkability, programmable access.
Institutions want to embed compliance hooks (view keys, audit proofs).
avoid-when
You need conservative, battle-tested infra on Ethereum L1 today.
Overhead is unjustified if only minimal value privacy is needed.
dependencies
L1 bridge contracts
Viewing key infra / off-chain attestations
context both
crops_profile
cr os privacy security
medium
partial
full
medium

Intent

Use a privacy-native rollup (ZK or FHE-based) to execute financial logic with private state, enabling both confidential value and unlinkable identity flows.

Ingredients

  • Standards: ERC-20/3643 (bridged); ERC-7573 optional for settlement
  • Infra:
    • ZK rollups: Aztec, Aleo, Lita, Miden
    • FHE rollups: Zama/fhEVM, Inco
  • Off-chain: Key management, regulator view proofs

Protocol (concise)

  1. Bridge assets from L1 to privacy L2 via deposit contract.
  2. Assets converted to private notes/commitments on the L2.
  3. Execute transactions privately within L2 (amounts, senders, receivers shielded).
  4. Generate ZK proofs (or FHE computations) for state transitions.
  5. Optionally couple with ERC-7573 for atomic DvP/PvP settlement.
  6. Provide viewing keys or disclosure proofs to regulators as needed.
  7. Exit to L1 via withdrawal with proof of valid state.

Guarantees

  • Private transactions: Transaction details (amounts, senders, receivers) are shielded within the L2.
  • Private state: Balances and contract state are stored as encrypted commitments/notes.
  • Interoperability with L1 state: Rollup state roots anchor on L1, enabling bridging and settlement with L1 assets.

Trade-offs

  • Maturity risks: Most private L2s are early-stage, limited production deployments.
  • Migration/bridging required: Assets and apps must move from L1 or other L2s; adds friction.
  • New attack surfaces: Viewing key compromise, bridge exploits.
  • Regulatory auditability uncertain: While selective disclosure is possible, no standardized frameworks exist yet for regulator access or compliance proofs.
  • Sequencer centralization: Most private L2 sequencers are currently centralized; can censor transactions until decentralized sequencing is implemented.
  • CROPS context (both): CR could reach high if sequencer selection shifts to permissionless leader election. OS improves to yes by requiring full source publication under copyleft with binding no-proprietary-prover commitments. Security could reach high by moving to committee-based state attestation with randomly selected validators signing each checkpoint. In I2I, decentralized sequencing ensures no single operator can censor institutional settlement transactions. In I2U, permissionless block production protects end users from unilateral transaction exclusion or ordering manipulation.

Example

  • Bond issuance + settlement on Aztec notes.
  • FHE L2 running private credit risk models with encrypted inputs.

See also