The Role of Privacy-Enhancing DeFi Protocols in Financial

Stability: A Case Study of Hinkal Protocol

Master thesis is submitted for the Finance Program of International School of

Economics at Tbilisi State University.

Project Supervisor: Giorgi Gvazava

Student: Elene dabrundashvili

Tbilisi, 2025

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Contents

Introduction......................................................................................................3

Industry Context and Relevant Practices.......................................6

Literature review.........................................................................................10

Data And Analysis.......................................................................................13

Findings and Recommendations........................................................18

Conclusion and Implementations......................................................20

Bibliography...................................................................................................23

Introduction

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The development of technology has led to a revolution in many directions. Of
course, finance is no exception, and in the 21st century, an alternative to
centralized finance has emerged in a form of decentralized finance. In the
past, central authorities controlled the movement of money. Control
increased with the strengthening of the banking institution. Traditional
finance is still a fairly important and powerful tool, however, the relevance of
decentralized finance is growing day by day, because this financial system,
based on the blockchain system, does not need intermediaries, such as
banks and brokerages, which gives the owner full control over the assets.
Moreover, the geopolitically unstable situation and destructive actions by
Russia have pushed individual and business users to seek financial stability.
According to the Chainalysis report, cryptocurrency adoption has increased
by 15% in countries with economic instability. Ukraine is one of the leading
countries in this change. As centralized financial systems are experiencing
disruptions, people are increasingly replacing centralized finance with
decentralized ones. According to a survey by the European Central Bank,
60% of respondents in Ukraine are exploring various decentralized platforms
and in times of crisis, even more attention is paid to security and autonomy.
This growing demand for financial stability and security is one of the main
factors in the rapid development of decentralized finance. It is essential to
understand what financial stability means and why maintaining it is critically
important. The financial system consists of banks, payment systems, and of
course markets. Their smooth and efficient operation is essential for financial
stability. A lot of attention is paid to maintaining financial stability, but for
what reasons is it necessary to maintain it? It is important for every person
and business to make various payments, make investments, save, and
borrow. All of this requires a stable financial environment, as financial
instability often leads to the failure of banks, markets, or exchanges. The
consequences of all this, such as job losses, are very damaging to the
economy. Thus, I assert that DeFi protocols should work very hard to
contribute to maintain financial stability. This case is a clear example of how

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important decentralized finance is for financial stability. First of all, current
events in the world negatively affect centralized finance, which often
questions the global security, reliability, and in general, stability of traditional
finance.
It is also worth noting that in developing countries, where access to banks is
limited, citizens need a credit history to get a loan, or banks are not trusted
enough, decentralized finance has opened up new opportunities for financial
inclusion, using decentralized applications (dApps), which, because they are
built on smart contracts, allow people to borrow, trade, and save faster,
more easily, and without unnecessary bureaucracy.
(Schär, 2020) in his study “Decentralized Finance: On Financial Markets
Based on Blockchain and Smart Contracts”, fundamentally discusses DeFi, its
important role and structure.The author believes that decentralized
exchanges (DEX) solve the problem which is common in centralized finance -
the bankruptcy or dishonesty of the platform which can lead to the loss of
users’ asset. This problem is solved on DEX because users are not forced not
lose control over their tokens, as they are stored in their personal wallet.
Although decentralized finance is cheaper for users, it is a new system, and
certain areas must be refined. For instance, there are security risks,
regulatory uncertainty, market risks and money laundering.
Nowadays, there are systematic issues in decentralized finance that require
global changes, for example, the ambiguity of regulations. It is practically
impossible to eliminate such shortcomings by a specific protocol, however,
there are other types of problems, for instance, the passive involvement of
users in the liquidity and ecosystem. This problem can lead to the
bankruptcy of the protocol, since few users on the platform or low
transaction volume make it difficult to protect confidentiality, create the
impression that the protocol is inactive, and hinder the influx of new users.
This problem can be solved at the company level. For
many privacy-enhancing protocols, including Hinkal, active user engagement
in the protocol is critically important to achieve anonymity, as violating the

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anonymity principle undermines both privacy guarantees and financial
stability.

This paper aims to answer the question: how important is the development
of privacy-enhancing DeFi protocols like Hinkal for global financial stability
and how to increase user participation in the protocol.
This challenge is also faced by Hinkal Protocol, which is a privacy-enhancing
DeFi protocol that I will discuss in detail later. Before that, I would like to
discuss what DeFi’s reliance on blockchain technology means. The integrity
and security of the ecosystem is ensured by the main code and the network
participants. Of course, in theory, various errors in smart contracts and
hacking attacks that lead to destabilization of the financial system are not
excluded, but despite these risks, interest in DeFi protocols is growing, which
is due to the development of decentralized finance.
The main goal of privacy-enhancing protocols like Hinkal is to protect privacy
- that is, to hide the user's identity and transaction details, for which it uses
various advanced cryptographic tools, which is critically important, as with
the growth and development of DeFi, regulatory authorities are trying to
monitor transactions that could hinder user participation in the decentralized
system. Accordingly, the
goal of my research is to analyze, using the example of Hinkal, the role of
privacy-enhancing DeFi protocols in maintaining global financial stability, and
how important it is for users to engage in privacy-enhancing protocols. This
issue becomes especially relevant during geopolitical or economic crises,
such as the one currently facing the world. Decentralized finance and
protocols like Hinkal, have great potential to positively impact financial
stability. It is important to explore how privacy-enhancing protocols can be
developed and refined more quickly to make the financial environment more
stable. To do this, I first decided to compare the price risk between a
centralized platform and a decentralized platform, because price risk is very
important for any user or investor.

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Industry Context and Relevant Practices
Hinkal Protocol is a Georgian company, whose founders have linked the
national dish to blockchain. Although the company's founders share the view
that cryptocurrency will replace the banking system, they actively emphasize
how big challenge it is that other people have access to actions taken via
blockchain, which is why cyberattacks and other criminal cases are
common.This problem is discussed by (Josh Sammu, 2024) In his paper,
“Regulatory Compliance Challenges in Decentralized Finance (DeFi),” he
examines the challenges facing the DeFi ecosystem, including systemic
issues such as criminal cases. To eliminate
this problem, this protocol uses technologies that help increase privacy and
security. The founders note, that in two years, the company has raised $5.7
million, which is a fairly small amount compared to others, but Hinkal has
taken quite significant steps in terms of gaining trust, which is crucial in this
area. This is evidenced by the fact, that the idea of storing money in a virtual
wallet and making transfers without anyone seeing them, has attracted
investors such as Tim Draper and Anthony Scaramucci.
Although the Hinkal Protocol uses a technological approach to protect
anonymity, that technically does not require liquidity, Zero-Knowledge Proofs
(ZKPs), still poses a challenge for the protocol. This method allows the
protocol to maintain confidentiality by hiding details, such as the sender,
recipient and transaction amount, to authenticate users’ claims before a
transaction is executed without revealing key data. Accordingly, the number
of users does not directly affect the confidentiality of transactions, unlike
methods of mixing/tumbler protocols, which protect anonymity by combining
transactions and mixing the connections between them, which is
effective,but almost technically impossible, without a large number of users
and large transaction volumes.
But, even though the Hinkal Protocol technically does not protect anonymity

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at the expense of liquidity, user activity and their involvement in the
ecosystem are still critically crucial, because in decentralized finance,
anonymity protection depends on the anonymity set. After all, when the
anonymity set is large, it is more difficult to trace. For instance, when 15,000
people use a decentralized protocol and make similar transactions, it is
impossible to determine the person who made the transaction, even by
observing the deposits and dates, but if 15 people make transactions, of
course, everything is relatively simpler. During my collaboration with the
company, I analyzed the severity of the problem and developed
recommendations that will help the company’s development.
Consider a case where $1,000,000 worth of Ethereum is mobilized on a
smart contract and a user wants to make a deposit in Ethereum from a
public wallet and then exchange it for another token. In such a case, it is
impossible to understand how much Ethereum is held by an each individual
in the protocol if many users own a given token. However, this set of
anonymity does not work effectively if there are not enough users and large
amounts in the smart contract. If only one person owns BTC in a smart
contract, then the transactions carried out by them will no longer be
confidential. Based on this, we can conclude that the guarantee of
confidentiality is to make a deposit in a token that has many owners in the
protocol and then carry out swaps. This is one of the most important areas
for the company to focus on, so as not to violate the main principle of
anonymity. Therefore, it is important for the user to understand that if, for
instance, there is more WETH than another token, a deposit in WETH and
then a swap to the token that is needed, will provide better privacy
protection.
It is also important to consider the case when an institutional client deposits
a large amount - say, $ 1 million - and if the Hinkal smart contract also
mobilizes approximately the same amount of Ethereum, in this case $
1,000,000, it is clear on the chain that the large transaction made, most
likely belongs to this institution.

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A very interesting direction for me was to investigate on which exchange the
investor faced greater price risk - on a centralized exchange or on a privacy-
enhancing protocol. Firstly, I believed that the main reason of less user
activity was a price risk. I will talk about the results of the study and the
methods used later, but before that I would like to talk about the important
aspects, the discussion and analysis of which were essential for the study.
When a user places money in the Hinkal system, he first makes a deposit in
the Hinkal smart contract. After that, if the user wants to swap to another
token, it is carried out through other decentralized exchanges (DEXs), such
as Uniswap, 1inch or Odos. Hinkal itself does not have its own liquidity pool
for swaps, it is an intermediary that offers its users the one that has the most
profitable price for the user from three different providers.
Making a transaction through Hinkal may be desirable because it always
chooses the best price among the three providers. It is worth noting, that
odos and 1Inch are aggregators themselves, they search for the best price
on other exchanges, if Uniswap has the best price at that moment, the swap
will be made through it, if another exchange has an advantage, the
conversion will take place there. In many cases, Uniswap has a price
advantage. With all this, the user has the right to choose the desired
provider from the offered ones. However, this advantage is accompanied by
some specific considerations related to transaction time. When talking
about this advantage, it is also necessary to consider that the transaction
process includes additional steps that are not performed when the user
makes a swap on Uniswap. When making a transaction on Hinkal, the system
generates a zero-knowledge proof (ZKP), creates a secret address, and
performs other privacy-preserving operations that may cause a slight delay,
as a rule, a swap through Hinkal can take about 1 to 2 minutes, while a
possible transaction on Uniswap can be completed in 10-30 seconds. Given
that the crypto market is very volatile, the situation can change dramatically
within seconds, which is reflected in the rapid change in the market
exchange rate of the token pair. In addition, the specifics of Hinkal's work

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require a higher gas fee. Hinkal
has a fixed fee of 3 basis points (bps) for each swap transaction. This means
that any fees charged by the DEX aggregator (e.g., Odos or 1 inch) are
added to the Hinkal fee. The protocol has a relayer, which is responsible for
invoking smart contracts. It has the ability to withdraw funds and execute
transactions through collaboration with other exchanges, for example, on
Uniswap. When a user initiates a transaction, a zero-knowledge proof (ZKP) is
generated to prove that the user has the necessary funds on their balance to
execute the transaction. This ZKP is sent to the relayer, and after it confirms
that the user has the necessary funds for the transaction, it communicates
with the smart contract and the money is sent to the liquidity pool of the
exchange, that has a better price and the swap is executed.

The relayer receives a gas fee from the user for the transaction. Although the
user pays the fee in any token, user does not need a native token and the
relayer makes the payment in the native currency. For example, ETH on
Ethereum or Matic on Polygon - therefore, it must maintain a sufficient
balance of the native token to avoid delays in the transaction, sothis problem
will not be caused by a lack of liquidity.
At this stage, Hinkal’s fee income is not significant and is not publicly
disclosed in detailed financial statements. The fee income is mainly used to
cover the costs necessary to carry out anonymous transactions. The
company is not yet profitable and is actively developing a more sustainable
monetization strategy. For instance, we have actively considered offering
institutional clients membership fees - a monthly or annual fee based on the
assets under management, in exchange for transaction fees. Due to the fact,
that additional operations are performed on Hinkal, which are necessary for
confidentiality, the network fee is also quite high compared to Uniswap,
approximately 7-8 times higher. To
meet regulatory requirements, Hinkal includes KYC (Know Your Customer).
We have also considered the case where customers will have to go through

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KYC for transactions under $1,000 - the reason being to minimize the risk of
money laundering. The company has two options for KYC:
Customers do not go through KYC if they prove that they have a CEX account
(KYC is mandatory on CEX) and can prove that they have an existing CEX
account. The second option is when the customer
goes through KYC traditionally, by uploading documents, however, this
process is carried out using ZKP technology, which means that after
verification, personal information is not saved on blockchain and only a proof
is generated.
The protocol is also planning a very interesting project. It plans to create a
private wallet, according to which users will have smart contract privacy
through the Hinkal wallet. Users will be able to make private transactions
using any DeFi protocol on the chains that Hinkal supports.

Hinkal has great potential to positively impact financial stability. It is

important that developers, policymakers, users and interested parties in
general understand how privacy-enhancing protocols work in order to
manage their assets with the most appropriate strategy. I hope my study will
help them in this.

Literature review
Over time, it has become important for the financial world to replace
centralized intermediaries with blockchain-based protocols. (Schär, 2020) in
his study “Decentralized Finance: On Financial Markets Based on Blockchain
and Smart Contracts”, fundamentally discusses DeFi, its important role and
structure. Decentralized
finance (DeFi), as a very important financial system, faces potential risks.
There may be flaws in smart contracts, lack of liquidity may lead to the
bankruptcy of protocols, there are regulatory issues. The above risks must be
managed effectively, as market panic and losses may occur. Given that
various DeFi systems are closely interconnected, a problem on one platform
may disrupt the operation of other applications, which is already a systemic

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problem and will weaken trust in the system. Under such circumstances,
DeFi cannot make a positive contribution to ensuring financial stability.
Most of the tokens on the cryptocurrency market are small and insignificant,
although some tokens are very popular and are traded quite often.
Therefore, it is important to have a space where trading these tokens is easy
and safe. Since in the past, people mainly used centralized exchanges, there
were often cases of exchange hacking, which led to the loss of capital. The
author believes that decentralized exchanges (DEX) solve this problem,
because when using a DEX, users do not lose control over their tokens, as
they are stored in their personal wallet, and the bankruptcy or dishonesty of
the platform does not lead to the loss of users’ assets. However, the author
discusses the opportunities of DeFi in his work, as well as its risks. Although
DeFi smart contracts do not require banks, transactions are carried out
cheaper and faster. The researcher considers that errors in smart contracts
cannot be ruled out, which can lead to the loss of user money. Due to the
fact that DeFi applications depend on each other. If there is a flaw in one
platform, it may disrupt the operation of another application. It is also
possible, that some people may use DeFi to hide illegal activities.
To summarize, DeFi is, undoubtedly, an innovative and important financial
service, although it faces certain challenges, the elimination of which will
increase its effectiveness and people's engagement.

(Josh Sammu, 2024), In his paper, “Regulatory Compliance Challenges in

Decentralized Finance (DeFi),” he examines the regulatory challenges facing
the DeFi ecosystem, including systemic issues such as identity verification
and money laundering. For a long time,
centralized financial systems have been strictly regulated and have full
information about their users. They have operated under strict regulations.
All of this is still an integral part of centralized systems. In the case of DeFi,
there are no systemic regulations that control transactions and require
detailed information about users, as this contradicts the main principles of a

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decentralized system. However, the author believes that the development of
systemic regulations in some direction is necessary. For example, DeFi is
such a new system that some of the laws are vague, people may understand
a specific regulation differently, or since DeFi has users all over the world
and every country has its own laws, the legislation of a country may conflict
with some of the DeFi regulations. Therefore, I think that there should be a
unified system of DeFi legislation, to which the existing regulations in the
countries will be adapted. The
writer also pays great attention to the fact that in the era of technology, this
direction is developing so quickly that regulators develop new laws later, and
moreover, the accessibility of DeFi creates a threat to people. It is easy for a
criminal to deceive a user, because his identity is not known.
The analyst believes that close cooperation between DeFi platforms and
governments is crucial. One of his recommendations is that DeFi projects
should agree on basic rules and develop a unified regulatory system.

Thus, the above studies are very important for my thesis, in order to assess
the systemic challenges associated with regulations. It is unlikely that a
single protocol can eliminate the problem in this direction, but it is
impossible to ignore the uncertainty of regulations in the process of studying
the protocol.

(Vincent Gramlich, 2023) in their work “Decentralized Finance (DeFi):

Fundamentals, Applications, Potential and Challenges”, the authors describe
in detail the opportunities and challenges of decentralized finance. In their
work, they have brought together the existing views on DeFi in the world,
assessed its importance and discussed the problems associated with it. The
work discusses the history of the creation of Bitcoin and Ethereum. They
assessed the importance of smart contracts and, in general, the rapid growth
rate of DeFi. Despite the many benefits, the authors, of course, also discuss
the challenges and to some extent agree with regulators that if DeFi
continues to grow at such a speed without any oversight and unified

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regulatory system, this could harm financial stability. That is why Hinkal’s
smart contracts undergo audits, which confirms that the system is secure.
Quantstamp, a company with a strong reputation, conducted an audit of
Hinkal's smart contract. In its conclusion, it states that the flaws discovered
during the audit were fully eliminated by the protocol team. (Quantstamp,
2024)This confirms that Hinkal Protocol has a secure system. The protocol
requires KYC, which the user goes through without violating the main
principle of the protocol - their personal data is not made public or stored on
the blockchain.
It is Hinkal that offers users a solution to the problem that the present study
discuss - in DeFi, wallet addresses and amounts are public.
The study describes the problem of price volatility on decentralized
platforms. It was this study that inspired me to compare price risk on
centralized and decentralized systems, the results of which I will discuss a
little later. However, before that, I would like to discuss the researcher view
on DEX. With the help of decentralized exchanges, users trade tokens, but
the uniqueness of DEXs lies in the fact that the exchange does not have the
ability to manage user assets. That is why the analyst believes that DEX is
the main pillar of DeFi, because after centralized systems, where you have to
transfer the right to manage your assets to someone else, DEXs inspire more
trust. Because transactions made by wallets on a DEX are public, the
presence of Hinkal is crucial, as it maintains the fundamental principles of
DeFi while legally protecting user privacy.

Data And Analysis

When I started working on the thesis, which is a case study–based practical
thesis, I tried to focus on the main reasons that cause low user engagement
in the protocol. Initially, I identified two main areas. The first is the issue of
trust, and the second is price risk. Regarding the trust factor, Hinkal has
taken quite significant steps, its smart contract has been audited 5 times and
has been proven to be a truly secure system.

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The protocol had not conducted any research that would analyse price risk. I
decided to compare where an investor would win/lose more money with the
same amount, in the same situation, on different platforms. Studying this
was very important to me, because if price risk was the cause of low user
engagement, the protocol could not develop without eliminating this
problem. Security, safety, and profit are very important for any investor. If an
investor has a higher return on a particular token than on another protocol in
the same situation, or loses less money in bad times, it is clear that he will
invest in this protocol. I have already talked about the qualitative data of
Hinkal, discussed how the protocol works. In this section, I want to focus
more on quantitative analysis. In order to study the price risk of Hinkal, I
decided to analyze how user activity and liquidity affect centralized
platforms and to what extent they reduce price risks. On Binance (CEX) there
are much more active users than on Uniswap, Odos and 1Inch combined, so I
decided to see how liquidity affects price risk. Is there higher engagement on
centralized platforms due to price risk, or vice versa, to what extent does low
liquidity lead to higher price risk. The
data was not easy to obtain. Since Hinkal does not record daily returns, it
does not have a liquidity pool for spots, I had to use the daily returns of
Uniswap, 1 inch and odos platforms for decentralized finance. 1 inch and
Odos are aggregators themselves, so their data is not available. After
consulting with Hinkal, we agreed to use Uniswap data, which is relevant,
because in most cases the best prices for highly liquid tokens are on this
exchange, due to deep liquidity. Given that the most deeply liquid token on
Hinkal is Ethereum, I compared the behavior of Ethereum on centralized
(Binance) and decentralized (Uniswap) platforms. Ethereum is one of the
most popular platforms in both centralized and decentralized finance. Some
users trade Ethereum on exchanges that operate like traditional financial
institutions, while others choose to manage their own assets on exchanges.
So this comparison helped me answer my main question: Is low price risk the
main reason why users are attracted to centralized platforms? The results

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are very interesting, but before I get into that, I need to discuss the methods
I used to compare price risks.
For the analysis, I used the daily closing prices of Ethereum on Binance and
Uniswap pool data. Uniswap does not have closing prices. Each trading pair
has its own liquidity pool. The price is calculated by the ratio of the two
tokens in the pool. For instance, if there are 1000 Ethereum and 3,000,000
USDC in the pool, the price of 1 Ethereum will be 3,000 USDC. Each pair has
its own smart contract, through which reserves are managed. The daily price
is calculated using the time-weighted average price (TWAP). The change in
the ratio of tokens is continuously monitored, the total indicator is updated,
and at the end of the day this total is compared with the indicator of the
previous 24 hours, as a result of which the average price is calculated. I used
The Graph (Uniswap v3 Subgraph) to download the data. For Binance data,
Binance’s API. The necessary information about Hinkal was mainly provided
to me by the protocol representatives during consultations.

After processing the data in Excel, I used the following analysis methods:

1. Value at risk
o Historical VAR
o Parametric VAR
o The Monte Carlo simulation method
2. Sharpe Ratio,
3. Maximum DrawDown,
4. Time Series using close prices (daily price on Uniswap) and daily
returns.

Value at Risk (VaR) is a fairly commonly used method for estimating losses.
It shows how much money an investor can lose in a bad case. For example, a
1-day 99% VAR of $800 means that there is a 99% chance that the investor
will not lose more than $800 tomorrow. Historical VaR is based on past data,
in which daily returns over a certain period are sorted from worst to best and

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the lowest is selected. On the one hand, it is realistic, but on the other hand,
history does not always repeat itself, so I used the mean and standard
deviation too(Parametric VAR).

VaR=μ−Z ⋅ σ

With this formula and 95%, 99% confidence levels, I determined what the
loss could be.

However, the crypto market is very volatile and the situation often changes
radically. This method may not be effective in shock situations.
Therefore, I used the Monte Carlo simulation method to calculate the value
at risk. Using the mean and standard deviation of the daily returns, I
simulated ten thousand random returns, and then calculated what the loss
would be at the 95% and 99% confidence levels. The next
analysis method I used is the Sharpe ratio. It shows how much return an
investor gets for each unit of risk taken.

R p−R f
Sharpe Ratio=
σp

R p - Average Return

R f - Risk-Free Rate

σ p – Standard Deviation of Returns

I used 5% for the risk-free rate because it represents the minimum return an
investor can earn without taking on any risk, such as from a US Treasury
bond. I have converted given annual rate to daily, calculated average return
and standard deviation of return and calculated sharpe ratio.
I have also used Maximum Drawdown (MDD) which is the biggest drop from
peak to low. For instance, If there is the worst scenario for investor – he/she
bought ETH on the highest price during month and sold on the lowest.

Trough Price−Peak Price

MDD=
Peak Price

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MDD shows shows what the loss would be in the worst-case scenario.
I also used time series analysis, which gave me a clear picture of how the
following variables - daily price and profitability - develop and change. Their
movement and behavior are clearly visible. I did it separately for both
Binance and Uniswap. When I compared
the historical value-at-risk (VaR) of a $10,000 Ethereum investment (10,000
USDT on Binance and 10,000 USDC on Uniswap) on Binance and Uniswap,
there was a noticeable difference. Interestingly, due to the deeper liquidity, I
expected trading on Uniswap to be riskier. However, at the 95% confidence
level, the potential daily loss on Binance was $619.11 versus $558.08 on
Uniswap, and similarly, at the 99% confidence level, it was $1,096.65 on
Binance and $815.59 on Uniswap. For parametric Var with 95% confidence,
investor won’t lose more than $586.453 in one day on Binance — but there’s
a 5% chance investor might lose more and for Uniswap potential loss with
95% confidence level is $548.65. With 99% coinfidence level on binance
investor will not lose more than $832.444 in one day and on Uniswap
$778.86. To move on Monte Carlo Simulation method for Var calculation
before I will explain reason for the results, for binance with 99% confidence,
investor will not lose more than $857.49. However, there is a 1% chance that
the actual loss could exceed these amounts. For Uniswap with the same
coinfidence level investor won’t lose more than $548.65 in one day. On
binance for 99% coinfidence level investor will not lose more than $847.64
and on Uniswap more than $760.2. I think my
expectations were not met because Binance, being the biggest centralized
exchange with deep liquidity experiences more price swings, which are
caused by high volumes and large transactions, that are very frequent. On
Uniswap, price movement is more stable because of averaging effect of price
calculation. I think the reason for these
results also can be because of a fact that Uniswap uses an AMM (automated
market maker) model, which uses a constant product formula to determine
the token price - x⋅y=k, where x and y are the reserves of two tokens in the

17
pool, and k is constant.
Using this formula, the price changes of tokens are not as dramatic and are
less characterized by sudden fluctuations, compared to Binance, which uses
an order book system. Due to the order book system, speculative activities
are more frequent. I think this is why, despite the very deep liquidity, the
price risk is lower on Uniswap.
To discuss sharpe ratio, Uniswap has a slight advantage over Binance, 0.478
on Binance and 0.4838 on Uniswap. However this difference is quite small
and I think it is not worth assigning statistical significance. We can say that
risk-adjusted performance is almost same for both platforms. The situation is
similar for the maximum drawdown. For an Ethereum investment, the MDD
on Uniswap is -45.58%, and on Binance -46.32%. Accordingly, in the
worstcase scenario, the investor would lose 46.32% of the investment on
Binance, and 48.48% on Uniswap. The MDD is quite high in both cases, but
Uniswap has a slight advantage here too. I think the reason for Uniswap’s
slightly better MDD and Sharpe Ratio is due to the same reasons that led to
the lower VaR values for Uniswap. For the reasons mentioned above, we can
say that Uniswap has a slightly better investment environment for Ethereum
than Binance.

Findings and Recommendations

When I started writing the paper and thought that Hinkal would have price
risk, I believed that one way to solve this problem would be to build its own
liquidity pool to control liquidity depth and have less slippage, however, my
research showed that Hinkal does not have price risk, compared to
centralized exchanges. Given that the audit concluded that Hinkal’s smart
contract is secured, I think Hinkal should focus on the following areas:
Hinkal has staking, anonymous staking on Ethereum to increase anonymity
set and TVL. Also protocol collaborates with Curve Finance, where, hETH
reached over $3 million in transaction volume. (Hinkal, 2024). Through
“anonymity staking,” Hinkal integrates privacy into the core DeFi system.

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Before I continue the discussion on staking, I want to mention Hinkal’s
collaboration with Request Network. It allows users to create, send, and
settle invoices securely using blockchain technology. Users make anonymous
payments through Hinkal on this protocol, which will raise awareness of
Hinkal. (Hinkal, 2025) Hinkal does
not give users yield. They have a point system. In general, Points are
accumulated as a result of making transactions or locking money in the
protocol. Protocol participants use points for leaderboard. After Hinkal will
launch token, owners will be given Hinkal tokens as a reward according to
the points. I think before Hinkal releases its token, it would be good if it
distributes small rewards to the users , such as, USDT, USDC or ETH from
treasury fund, which are also important to develop. It will help in managing
potential problems through protocol. Treasury fund can be constructed by
using specific part from received fees. Which can be used to help the
platform grow. They do not have Yield
Farming, but good news is that With HETH (staking token) it is possible to do
Yield Farming on Curve and Balancer. From my point of view it will good to
add yield farming inside Hinkal, because users like passive income
opportunities, users who farm, keep their tokens longer in protocol, so it can
increase TVL, which is essential for Hinkal.
To maximize privacy, a user should make a deposit in Hinkal in a token that
is in large quantities. So, to maximize privacy, a user should make a rational
decision about which token to deposit in. Currently, approximately
$1,000,000 ETH and 13,000 USDT are locked inside Hinkal, there is
information about the total number of users, but I think it would be important
for the user to know how many people’s money is locked on a specified
token. With this information, the user will not have to worry that a few
people have their currency locked on a particular token. Of course, even if a
few people have a locked token, Hinkal offers privacy to them as well,
because in a smart contract there are only those tokens for which the
protocol protects privacy, however privacy can be maximized by making a

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deposit in a token that many people have locked.
Hinkal has its own Discord and Telegram channels where they have ’Ask Me
Anything’ sessions. Which are good, because when users feel that their voice
matters, it can encourage them to be more active. However, it would be nice
if the protocol develops a system where privileged users would have the
right to vote on certain decisions, which Curve does and is a pretty proven
method.
Although the Hinkal’s smart contract is secure and it is very unlikely that
hackers will be able to withdraw money from it, in the long term, to attract
users, I think it would be good if the protocol offers an insurance option to its
users. I am sure that this would be an additional trust factor for users. It is
also possible to create own system or cooperate with other insurance
companies, such as Nexus or InsurAce.
The Hinkal website is currently only available in English. I think it would be
excellent if it was also available for people who are not fluent in English.
Also, I think Hinkal should be more transparent about how it discloses certain
information. For example, posting live data on the website, such as the
number of active users, how much money is locked in Hinkal, how many
privacy protection transactions were done, would lead to more trust and new
users. Hinkal
has marketing more on the X platform, which is great, but I think it’s
important to explore other platforms as well. Especially to reach an audience
that doesn’t have detailed information about what decentralized finance is,
what privacy-enhancing protocols do, and how Hinkal works. In addition to
collaborating with influencers on other platforms, I think it would be effective
to create an educational channel on a platform like YouTube, because Quite
a lot of people don’t have information about such protocols and
decentralized finance in general.

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Conclusion and Implementations
My thesis was focused on DeFi and the privacy-enhancing Hinkal Protocol.
Hinkal Protocol maintains confidentiality during token exchanges. It uses
zero-knowledge proofs (ZKP) and smart contracts. The protocol does not
have its own liquidity pool for spot transactions and in this case it acts as an
intermediary between the user and several decentralized exchanges. These
are Uniswap, 1inch and Odos. The structure of the protocol’s work is to
protect anonymity on the one hand, and on the other hand, the user
undergoes verification on the protocol. The participant passes KYC (Know
Your Costumer) through ZKP (Zero Knowledge Proofs). This reduces the risk
of money laundering (AML) and unsures anonimity.

(Vincent Gramlich, 2023) in their work “Decentralized Finance (DeFi):

Fundamentals, Applications, Potential and Challenges” talks about
challenges which can have negative impact on financial stability. Beacause
of this, regulators are closely monitoring protocols that preserve
confidentiality, since ensuring financial stability is primarily the responsibility
of governments and central banks. Accordingly, the rapid growth rate of DeFi
has not gone unnoticed by them. As the system grows, its failure will lead to
significant losses. Many large investors have developed their
own trading strategies that they do not want to disclose. A businessman may
not want his business operations to be public. Hinkal can provide all this. In
the process of research, I tried to highlight both the advantages of the
protocol and those areas that require further development in the future.
It is undeniable, that Hinkal has great potential to make a positive
contribution to financial stability. Firtsly, the security of smart contracts is
maximized, secondly, through ZKP, users undergo KYC without violating the
anonymity of the participant and at the same time minimizing the illicit
money circulating in the protocol. The structure of the protocol’s work can
gain great trust from users, which will lead to more people using the protocol
frequently and overcoming the main challenge - fewer people engaging in

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the protocol. Hinkal has a secure system, the risk of money laundering is
low, and if the protocol has more active participants, it will contribute to the
development of DeFi and financial stability. Transactions performed
anonymously by the protocol are no longer just an advantage. As time goes
by, both individual and institutional users demand confidentiality when
conducting financial transactions. However, it is necessary that anonymity
does not lead to illegal money circulation. The effective combination of zero-
knowledge proofs, secure smart contracts, and KYC gives Hinkal Protocol a
very high potential and development perspective.
Regulators are closely monitoring protocols that preserve confidentiality,
since ensuring financial stability is primarily the responsibility of
governments and central banks. Accordingly, the rapid growth rate of DeFi
has not gone unnoticed by them, as the system grows its failure will lead to
significant losses. Conducting
independent audits is crucial to supporting financial stability. Problems will
be identified without delay and eliminated more rapidly. That is why Hinkal
conducted five smart contract audits, the conclusions of which confirm that
the protocol has a very secure system. This information is crucial for
regulators as well as for attracting new users. The audit
conducted on the Hinkal smart contract protocol also helps to gain the trust
of regulatory authorities.
However, Khinkal still faces a liquidity problem. The low TVL and anonymity
set are quite a challenge for the protocol. The results of my research are
positive on the one hand, because the protocol does not have price risk,
which requires fundamental changes for any platform to eliminate, but of
course, the main thing for development is to solve the liquidity problem.
As I mentioned earlier, the goal of my master's degree was to study the role
of the DeFi privacy-enhancing Hinkal protocol in financial stability. Given that
the protocol's smart contracts and user privacy are protected, and it
cooperates with quite large and important DeFi exchanges, it clearly has the
potential to make a positive contribution to financial stability. The

22
recommendations that I mentioned in the study can not be implemented in a
short time, because Hinkal has started very important projects - the creation
of the Hinkal wallet and the issuance of its token. However, the development
of such a protocol in a short time is unthinkable. This is a continuous, long-
term process and I think if Hinkal gradually devotes time to the development
of the treasury fund, adds Yield Farming to its protocol and expands its
marketing, it has a good chance of eliminating the liquidity problem, as each
of them is focused on retaining existing users and attracting new ones. It is
also important to make their product accessible to more people. This can be
done by translating the site into more languages, uploading instructional
videos. Along with new projects, I think the need to offer an insurance option
will also increase. It will create more trust and a sense of security among
users.
With a well-designed phased strategy, Hinkal has huge potential to set a new
standard for future privacy-enhancing technologies in DeFi.

Bibliography
Josh Sammu, M. S. (2024, November). Challenges of Regulatory Compliance in Decentralized Finance
(DeFi). Retrieved from ResearchGate:
https://www.researchgate.net/publication/385950042_Challenges_of_Regulatory_Compliance_
in_Decentralized_Finance_DeFi

Protocol, H. (2024). Retrieved from linkedin.com: https://www.linkedin.com/posts/hinkal_heth-

reached-3m-volume-in-our-curve-pool-activity-7244657025157066752-6xFB/

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Protocol, H. (2025, January 16). Retrieved from linkedin.com: https://www.linkedin.com/pulse/request-
network-enables-private-payments-powered-hinkal-hinkal-wlrce/

Quantstamp. (2024, 08 24). Retrieved from

https://certificate.quantstamp.com/full/hinkal-protocol/66b9b783-8b42-4a4e-89ed-
3ef2a2df5958/index.html?utm_source=chatgpt.com

Schär, F. (2020). Decentralized Finance: On Blockchain- and Smart Contract-based Financial Markets. St.
Louis.: Federal Reserve Bank of St. Louis.

Vincent Gramlich, M. P. (2023). Decentralized Finance (DeFi): Foundations, Applications, Potentials, and
Challenges. Bayreuth: Fraunhofer Institute for Applied Information Technology FIT.

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