Bridge Over Troubled Fiats: Zk-Setu On & Off Ramp Solution Cuts Out the Middleman

Aligned Layer

Aligned Layer

— 4 min read
Bridge Over Troubled Fiats: Zk-Setu On & Off Ramp Solution Cuts Out the Middleman

Bridging fiat and crypto can often feel like navigating a maze of intermediaries, hidden fees, and potential censorship.

Zk-Setu, a project built by Gautam, Shivansh & Ayush for the Aligned hackathon, breaks through these barriers by offering a trustless, zero-knowledge-proof-based P2P escrow platform for fiat-to-crypto exchanges. With Aligned enabling cost-effective verification on Ethereum, Zk-Setu ensures that fiat payments are genuinely completed before releasing on-chain funds, bringing extra levels of security and transparency to transactions.

Zk-Setu: A Trustless P2P Fiat-to-Crypto Escrow, Verified by Aligned

Zk-Setu is a decentralized escrow platform designed for fiat-to-crypto transactions, ensuring a trustless exchange between buyers and sellers. By leveraging zero-knowledge proofs (ZKPs) and smart contracts on the Ethereum Holesky testnet, Zk-Setu provides enhanced security and transparency. Aligned plays a crucial role by verifying proofs and posting the results to Ethereum, allowing ZKPs to be used with minimal gas costs..

Why Zk-Setu Stands Out

Traditional fiat-to-crypto exchanges often rely on centralized intermediaries, introducing risks such as fraud, potential censorship, and high fees. Zk-Setu eliminates these concerns by offering a proof-based, decentralized alternative. Aligned ensures that proofs of fiat payments are verified before crypto funds are released, reducing the risk for all participants.

Core Features

Decentralized Fiat-to-Crypto Escrow: Secure transactions between fiat and USDC, directly connecting OnRampers (fiat-to-USDC) and OffRampers (USDC-to-fiat).

  • Zero-Knowledge Proofs: Enhances user privacy and maintains transaction integrity through ZK-proof-based payment validation.
  • Smart Contract Escrow: USDC is securely held in escrow and released only after successful fiat payment verification.
  • Aligned Layer Verification: The Aligned layer provides final proof verification for fiat payments, ensuring authenticity before USDC is released.

Zero-Knowledge Proof Generation with PhonePe ID

Zk-Setu leverages zero-knowledge proofs (ZKPs) to verify fiat transactions without exposing sensitive details. Here’s how the process works:

PhonePe is a popular digital payments and financial services app in India that allows users to send and receive money, pay bills, recharge mobile phones, shop online, and more—all using UPI (Unified Payments Interface).

The PhonePe ID is a unique identifier linked to a user’s account on PhonePe, enabling seamless and secure digital payments.

Transaction Identification: The off-ramper submits a claim using their numeric PhonePe ID, which acts as a reference for the transaction.

Payment Verification: The on-ramper completes the required payment on PhonePe, ensuring that the transaction matches the order request.

Email Confirmation as Proof Source: After payment, PhonePe sends an email confirmation containing transaction details. The user can download the raw .eml file or extract the content to generate proof. This relies on the DKIM email authentication protocol, which digitally signs emails to show that it was sent from a specific domain.

Zero-Knowledge Proof Generation: Zk-Setu, running in the SP1 zkVM, processes the .eml file and verifies that:

  • The PhonePe ID in the email matches the claim.
  • The amount paid aligns with the requested order.
  • The payment was successfully processed.
  • The email was not modified.

Proof Submission: The generated proof is submitted to Aligned and verified, with the results being posted to Ethereum allowing the smart contract to release USDC to the on-ramper without revealing private transaction data.

By using PhonePe IDs and email confirmations as proof sources, Zk-Setu ensures a trustless, efficient, and privacy-preserving fiat-to-crypto on-ramp experience.

Case Study: ZKP2P

ZKP2P is another innovative example of zero-knowledge proof-based decentralized escrow solutions. It enables peer-to-peer transactions with enhanced privacy by leveraging ZKEmail in the background. ZKEmail allows users to verify financial transactions using email-based cryptographic proofs without revealing sensitive details. This approach ensures that transactions remain private, secure, and verifiable.

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Watch our stream with Aayush from ZKEmail team to learn more about what cool use cases this feature unlocks!

Challenges & Roadblocks

SP1 Integration Issue:
Zk-Setu currently faces a challenge integrating SP1 due to version differences. While proof generation and verification succeed on the SP1 prover network, Aligned only supports SP1 version v1.0.1, requiring local proof generation. SP1 also has high computational requirements (32GB RAM minimum), making local proof generation difficult. Though the code is functional, computational limitations remain a bottleneck.

Next Steps

Zk-Setu is enabling decentralized fiat-to-crypto transactions by eliminating intermediaries and introducing a trustless escrow system. With the Aligned layer as a verification mechanism, users gain enhanced security and privacy while transacting seamlessly. Although computational challenges persist, Zk-Setu marks a significant step toward a future where fiat-to-crypto exchanges are truly decentralized, efficient, and secure.

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Our developer community continues to grow, with over 288 members in our Telegram group. Join us to stay updated on technical developments and future hackathons!

Stay tuned:  🐦 Twitter | 🗨️ Telegram | 👾 Discord | 🌐 Website | 📝 Manifesto

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