DeFi

Identity challenges in defi: unlocking institutional investment

Published

8 months ago

21 May, 2024

Identity challenges in defi: unlocking institutional investment

Overcoming identity challenges in defi is crucial for institutional investment. Explore solutions to unlock this trillion-dollar bottleneck.

Decentralized finance (defi) is rapidly transforming the financial landscape, offering unprecedented opportunities for innovation and democratization of financial services.

However, despite the buzz and potential, institutional investment in defi remains surprisingly low. According to analysts, this gap is not due to a lack of interest but rather significant compliance challenges that traditional financial (tradfi) institutions face when considering defi investments.

Institutional investors are accustomed to a well-regulated environment where compliance with know-your-customer (KYC) and know-your-business (KYB) regulations is mandatory.

These regulations are designed to prevent fraud, money laundering, and other illicit activities by ensuring that entities engaging in financial transactions are verified and legitimate.

However, the decentralized nature of defi presents unique challenges to meeting these regulatory requirements. Let’s explore the complexities and potential solutions for these identity challenges and their implications for the future of decentralized finance.

The institutional investment bottleneck in defi

In an interview with crypto.news, Piers Ridyard, CEO of RDX Works, stated that compliance concerns are the primary obstacle hindering institutional investment in the defi space.

Ridyard further emphasized the pivotal need for institutional blockchain compliance frameworks that mirror the features and functionality of permissionless defi, enabling institutions to leverage the full potential of decentralized finance.

Additionally, he underscored the urgency of developing innovative identity solutions capable of applying intricate identity rule sets to marketplaces without impeding the liquidity of underlying assets.

He pointed out that without such solutions, institutional investors’ participation is limited, and the flow of assets and the activity in markets that attract these investors are also hindered.

To unlock the power of DeFi for institutions requires the creation of a new set of identity tools that allow complex identity rule sets to be applied to marketplaces without preventing the underlying liquidity of those instruments to be affected. Without identity solutions that do not hamstring the secondary liquidity of assets and marketplaces that institutional investors are interested in, the DeFi space will be mainly locked out for institutions.

Piers Ridyard, CEO of RDX Works

He contends that without viable identity solutions safeguarding secondary liquidity, defi remains largely inaccessible to institutions, stymieing its evolution into a mainstream financial ecosystem.

Major compliance challenges in defi

Data privacy

While pseudonymity is a feature of many cryptocurrencies, it often brings privacy concerns and challenges with data protection regulations. To align with the law, financial platforms must balance maintaining user privacy and meeting regulatory compliance, especially for users holding significant assets.

Token classification and securities laws

Another compliance challenge facing the decentralized space is whether a cryptocurrency or token qualifies as a security and falls under securities legislation.

For traditional financial institutions to get involved with decentralized finance, regulators must clarify the legal status of the many different tokens used in DeFi protocols. Compliance with securities laws can be complex and has significant legal consequences.

Uncertain regulatory environment

Continuing the point mentioned above, the constantly evolving landscape of digital currency regulations across various jurisdictions also presents significant difficulties for tradfi.

The lack of clarity on how cryptocurrencies should be classified, taxed, and regulated has created uncertainty for businesses and users in the decentralized finance space.

Emerging technologies

While the defi space has kept innovating with new technologies such as decentralized identities (DIDs) and decentralized autonomous organizations (DAOs), these advancements bring additional compliance challenges.

As a result, regulatory agencies often struggle to understand and adapt to these advancements and are constantly left having to play catch-up as the industry progresses.

Cross-border transactions

As much as cryptocurrency facilitates borderless transactions, differing regulations across countries can complicate international transfers. It means that defi platforms and defi users must navigate varying regulatory standards to maintain compliance with global activities.

Rapid user growth

According to the latest data from Statista, more than 5.2 million unique addresses had either bought or sold defi assets by the end of April 2024.

Although it was a considerable dip from the March 2024 figure of 6.8 million unique users, the latest number still represents a 41% increase year over year.

Number of unique addresses buying and selling defi assets globally | Source: Statista

Per the data, the number of unique defi users has increased by nearly 700% over two years.

This rapid increase presents numerous challenges, including compliance and scalability issues for defi platforms. It has made it difficult for defi protocols to maintain robust compliance processes and procedures as user numbers surge.

The identity challenge in defi

Apart from the challenges mentioned above, a recent study by London-based hedge fund managers Nickel Digital Asset Management identified compliance with KYC and anti-money laundering (AML) regulations as major hurdles keeping tradfi institutions away from defi.

Nearly half of the participants (47%) expressed concerns about the complexities associated with KYC and AML compliance in the defi sector.

Returning to Ridyard, the RDX Works CEO emphasized that overcoming compliance barriers such as KYC and KYB requirements in defi necessitates fundamentally reevaluating how identity is conceptualized, managed, and processed within decentralized finance ecosystems.

Limitations of current layer-1 networks

Layer-1 (L1) networks like Ethereum (ETH), which form the backbone of many defi applications, face significant limitations in integrating identity with asset control. On these networks, identities and assets are often tied to a single private key.

This approach is inherently flawed for several reasons:

Security vulnerabilities: A single point of failure means that if the private key is compromised, all associated assets could be at risk.
Lack of flexibility: Binding identity and assets to one key may limit the ability to manage identities and assets separately.
Inefficiency: Some analysts feel this approach is not scalable and may not accommodate the nuanced requirements of institutional investors who need robust identity management systems.

In his submission, Ridyard highlighted the conventional assumption prevalent on L1s that users are synonymous with their accounts and validate their identity solely through a single private key. In his opinion, this falls short of meeting compliance standards.

Moreover, Ridyard underscored the inadequacy of identity solutions mandating the inclusion of all user identity information onto the blockchain, regardless of encryption.

Instead, he outlined that emerging independent L1 protocols tackle this challenge by integrating identity solutions directly into the blockchain architecture.

According to him, these solutions aim to balance privacy protection with facilitating selective disclosures required for compliance adherence.

Risks associated with a one-size-fits-all approach

The current one-size-fits-all approach to identity and asset management in defi can create multiple risks, including the following:

Security vulnerabilities: A compromised private key can lead to the theft of all associated assets.
Lack of flexibility: Institutions require the ability to manage multiple identities and roles within their organizations, which is not feasible with a single private key.
Inefficiency: The current system does not allow for efficient management of assets and identities, leading to operational bottlenecks.

Potential solutions

Separation of identity and assets

One promising solution to the problems highlighted above is the separation of identity and assets. This approach allows defi users to manage their identities separately from their assets, enhancing security and control.

Additionally, by decoupling these elements, defi platforms can offer a more flexible and secure experience, aligning more closely with the needs of institutional investors.

Touching on this potential solution, the RDX Works CEO said, “When we log in to an application, we want to be able to separate who we are from what we own. To control our accounts and assets, we don’t want a single easily-lost-or-stolen key that we can’t change,”

Multi-factor authentication

Introducing multi-factor authentication (MFA) into defi platforms can also provide a bank-like security experience.

MFA requires multiple forms of personal proof, such as something you know (password), something you have (hardware token), and something you are (biometric verification).

This layered security approach can significantly reduce the risk of unauthorized access and asset theft.

Application-specific identities

Another solution being developed by companies like Radix DLT is the use of application-specific identities. It allows users to create distinct identities for different decentralized applications (dapps), ensuring privacy and security.

By compartmentalizing identities, users can mitigate the risk of a single point of failure and maintain greater control over their personal information.

Credential verification on the network

Facilitating compliance through credential verification on the network is crucial. It involves allowing verified credentials to be shared securely without exposing private information. Such a system can enable defi platforms to meet regulatory requirements while preserving user privacy and decentralization.

“Radix provides these primitives by separating the concept of the account from the concept of identity,” Ridyard explained. “Many accounts can be bound to a single identity, separating ‘actor’ and ‘assets’ in a manner similar to traditional compliance structures.”

The Implications for institutional investors

Meeting compliance needs

Defi platforms that integrate robust identity solutions can meet the compliance needs of institutional investors. By providing a secure, flexible, and compliant environment, these platforms can attract significant institutional capital. It will not only enhance the credibility of defi but also drive its mainstream adoption.

Unlocking $100 trillion in capital

The potential for unlocking an estimated $100 trillion in institutional capital cannot be overstated. This influx of investment can bring unprecedented liquidity to defi markets, facilitating more efficient and scalable financial services.

Furthermore, institutional involvement can also spur innovation as new products and services are developed to meet the needs of these large investors.

Sharing his view on the potential implication on the broader defi ecosystem of unblocked institutional capital, Ridyard remarked, “Institutional capital entering defi has the potential to be a transformative force. It is likely the catalyst needed to bring defi mainstream and to the masses.”

Broader impact on the defi ecosystem

Increased institutional participation can also have a ripple effect across the defi ecosystem. Experts like Ridyard believe enhanced liquidity can lead to more stable and efficient markets, while the influx of capital could drive innovation and development.

Additionally, integrating robust identity solutions can enhance the overall security and trustworthiness of defi platforms, benefiting all users.

Conclusion

The transformative potential of defi lies in its ability to democratize finance and provide open access to financial services. However, to fully realize this potential, addressing the identity challenges that hinder institutional investment is crucial.

By developing solutions such as the separation of identity and assets, multi-factor authentication, application-specific identities, and credential verification on the network, defi platforms can bridge the gap between decentralized finance and traditional financial institutions.

Fuente

DeFi

Haust Network Partners with Gateway to Connect to AggLayer

Published

6 months ago

1 August, 2024

Financial Block Staff

Haust Network Partners with Gateway to Connect to AggLayer

Dubai, United Arab Emirates, August 1, 2024, Chainwire

Consumer adoption of cryptocurrencies is a snowball that is accelerating by the day. More and more people around the world are clamoring for access to DeFi. However, the user interface and user experience of cryptocurrencies still lag behind their fundamental utility, and users lack the simple and secure access they need to truly on-chain products.

Haust Network is a network and suite of products focused on changing this paradigm and bringing DeFi to the masses. To achieve this goal, Haust Network has announced its far-reaching partnership with bridgeseasoned veterans in rapidly delivering revolutionary blockchain utilities for projects. The Gateway team empowers blockchain developers to build DAOs, NFT platforms, payment services, and more. They drive adoption of crypto primitives for individuals and institutions around the world by helping everyone build their on-chain presence.

Gateway specializes in connecting sovereign blockchains to the Aggregation Layer (AggLayer). The AggLayer is a single unified contract that powers the Ethereum bridge of many disparate blockchains, allowing them all to connect to a single unified liquidity pool. The AggLayer abstracts away the complexities of cross-chain DeFi, making tedious multi-chain transactions as easy for the end user as a single click. It’s all about creating access to DeFi, and with Polygon’s technology and the help of Gateways, Haust is doing just that.

As part of their partnership, Gateway will build an advanced zkEVM blockchain for Haust Network, leveraging its extensive experience to deploy ultra-fast sovereign applications with unmatched security, and enabling Haust Network to deliver its products to its audience.

The recently announced launch of the Haust Wallet is a Telegram mini-app that provides users with access to DeFi directly through the Telegram interface. Users who deposit funds into the wallet will have access to all standard send/receive services and generate an automatic yield on their funds. The yield is generated by Haust Network’s interconnected network of smart contracts, Haustoria, which provides automated and passive DeFi yielding.

As part of this partnership, the Haust Network development team will work closely with Gateway developers to launch Haust Network. Gateway is an implementation provider for Polygon CDK and zkEVM technology, which the Haust wallet will leverage to deliver advanced DeFi tools directly to the wallet users’ fingertips. Haust’s partnership with Gateway comes shortly after the announcement of a high-profile alliance with the Polygon community. Together, the three will work to build Haust Network and connect its products to the AggLayer.

About Haust Network

Haust Network is an application-based absolute liquidity network and will be built to be compatible with the Ethereum Virtual Machine (EVM). Haust aims to provide native yield to all users’ assets. In Telegram’s Haust Wallet, users can spend and collect their cryptocurrencies in one easy place, at the same time. Haust operates its network of self-balancing smart contracts that interact across multiple blockchains and then efficiently funnel what has been generated to Haust users.

About Gateway

bridge is a leading white-label blockchain provider that offers no-code protocol deployment. Users can launch custom blockchains in just ten minutes. They are an implementation provider for Polygon CDK and have already helped projects like Wirex, Gnosis Pay, and PalmNFT bring new utility to the crypto landscape.

About Polygon Labs

Polygon Laboratories Polygon Labs is a software development company building and developing a network of aggregated blockchains via the AggLayer, secured by Ethereum. As a public infrastructure, the AggLayer will aggregate the user bases and liquidity of any connected chain, and leverage Ethereum as the settlement layer. Polygon Labs has also contributed to the core development of several widely adopted scaling protocols and tools for launching blockchains, including Polygon PoS, Polygon zkEVM, and Polygon Miden, which is currently under development, as well as the Polygon CDK.

Contact

Lana Kovalski
haustnetwork@gmail.com

Fuente

DeFi

Ethena downplays danger of letting traders use USDe to back risky bets – DL News

Published

6 months ago

1 August, 2024

Financial Block Staff

Ethena downplays danger of letting traders use USDe to back risky bets – DL News

Ethena and ByBit will allow derivatives traders to use USDe as collateral.
There is a risk in letting traders use an asset partially backed by derivatives to place more bets.

Ethena has downplayed the dangers of a new feature, which will allow traders to put up its synthetic dollar USDe as collateral when trading derivatives, which are risky bets on the prices of crypto assets.

While allowing users to underwrite their trades with yield-bearing USDe is an attractive prospect, Ethena said there is potential risk in letting traders use an asset partially backed by derivatives to place even more derivatives bets.

“We have taken this risk into account and that is why Ethena operates across more than five different sites,” said Conor Ryder, head of research at Ethena Labs. DL News.

The move comes as competition in the stablecoin sector intensifies.

In recent weeks, PayPal grown up the amount of its stablecoin PYUSD in circulation 96%, while the MakerDAO cooperative plans a rebrandingaiming to increase the supply of its DAI stablecoin to 100 billion.

US dollar growth stagnates

It comes as Ethena has lost momentum after its blockbuster launch in December.

In early July, USDe reached a record level of 3.6 billion in circulation.

That figure has now fallen by 11% to around 3.2 billion.

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New uses for USDe could boost demand for Ethena’s products.

This is where the new plan, announcement Tuesday with ByBit, one of its partner exchanges, is coming.

Ethena users create USDe by depositing Bitcoin or Ether into the protocol.

Ethena then covers these deposits with short positions – bearish bets – on the corresponding asset.

This creates a stable support for USDe, unaffected by price fluctuations in Bitcoin or Ether.

Mitigate risks

While using USDe as collateral for derivatives trading is proving popular, it is unclear what the effects will be if the cryptocurrency market experiences major fluctuations.

Using derivatives as collateral to place more bets has already had disastrous effects.

In June 2022, Lido’s liquid staking token stETH broke its peg to Ether following the fallout from the Terra collapse.

Many traders who used looping leverage to increase their stETH staking yields were liquidated, creating a cascade that caused the price of Ether to drop by more than 43%.

Ethena Labs founder Guy Young said: DL News His office and his partners have taken many precautions.

Ethena spreads bearish bets supporting the USDe across the five exchanges it partners with.

According to Ethena, 48% of short positions supporting USDe are on Binance, 23% on ByBit, 20% on OKX, 5% on Deribit, and 1% on Bitget. website.

In doing so, Ethena aims to minimize the impact of an unforeseen event on a stock market.

The same theory applies to the distribution of risks across different supporting assets.

Fifty percent of USDe is backed by Bitcoin, 30% by Ether, 11% by Ether liquid staking tokens, and 8% by Tether’s USDT stablecoin.

Previous reviews

Ethena has already been criticised regarding the risks associated with USDe.

Some have compared USDe to TerraUSD, an undercollateralized stablecoin that collapsed in 2022.

“It’s not a good design for long-term stability,” said Austin Campbell, an assistant professor at Columbia Business School. said as the USDe launch approaches.

Young replied to critics, saying the industry needs to be more diligent and careful when “marketing products to users who might not understand them as well as we do.”

Ethena has since added a disclaimer on its website stating that USDe is not the same as a fiat stablecoin like USDC or USDT.

“This means that the risks involved are inherently different,” the project says on its website.

Tim Craig is DL News DeFi correspondent based in Edinburgh. Feel free to share your tips with us at tim@dlnews.com.

Fuente

DeFi

Cryptocurrency and defi firms lost $266 million to hackers in July

Published

6 months ago

1 August, 2024

Financial Block Staff

Crypto companies, defi lost $266m to hackers in July

In July 2024, the cryptocurrency industry suffered a series of devastating attacks, resulting in losses amounting to approximately $266 million.

Blockchain Research Firm Peck Shield revealed in an X post On August 1, attacks on decentralized protocols in July reached $266 million, a 51% increase from $176 million reported in June.

The most significant breach last month involved WazirX, one of India’s largest cryptocurrency exchanges, which lost $230 million in what appears to be a highly sophisticated attack by North Korean hackers. The attack was a major blow to the stock market, leading to a break in withdrawals. Subsequently, WazirX launched a program in order to recover the funds.

Another notable incident involved Compound Finance, a decentralized lending protocol, which suffered a governance attack by a group known as the “Golden Boys,” who passed a proposal who allocated 499,000 COMP tokens – valued at $24 million – to a vault under their control.

The cross-chain liquidity aggregation protocol LI.FI also fell victim On July 16, a hack resulted in losses of $9.73 million. Additionally, Bittensor, a decentralized machine learning network, was one of the first protocols to suffer an exploit last month, lo m ing $8 million on July 3 due to an attack targeting its staking mechanism.

Meanwhile, Rho Markets, a lending protocol, suffered a $7.6 million breach. However, in an interesting twist, the exploiters research to return the stolen funds, claiming the incident was not a hack.

July 31, reports The Terra blockchain protocol was also hacked, resulting in a loss of $6.8 million across multiple cryptocurrencies. As crypto.news reported, the attack exploited a reentrancy vulnerability that had been identified a few months ago.

Dough Finance, a liquidity protocol, lost $1.8 million in Ethereum (ETH) and USD Coin (USDC) to a flash loan attack on July 12. Similarly, Minterest, a lending and borrowing protocol, saw a loss of $1.4 million due to exchange rate manipulation in one of its markets.

Decentralized staking platform MonoSwap also reported a loss of $1.3 million following an attack that allowed the perpetrators to withdraw the liquidity staked on the protocol. Finally, Delta Prime, another decentralized finance platform, suffered a $1 million breach, although $900,000 of the stolen funds was later recovered.

Fuente

DeFi

The Rise of Bitcoin DeFi: Then and Now

Published

6 months ago

1 August, 2024

Financial Block Staff

The convergence of Bitcoin’s robust security and Layer 2 scaling solutions has catalyzed the emergence of a vibrant DeFi ecosystem.

By expanding Bitcoin’s utility beyond simple peer-to-peer payments, these advancements have opened up a new frontier of financial possibilities, allowing users to participate in decentralized lending, trading, and other complex smart contract operations on Bitcoin.

Read on to learn about the rise of Bitcoin-based decentralized finance and how the space has expanded to accommodate a new generation of native assets and features.

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What is DeFi?

Decentralized finance (DeFi) represents a paradigm shift in financial services, offering internet-based financial products such as trading, lending, and borrowing through the use of decentralized public blockchains.

By implementing blockchains, smart contracts, and digital assets, DeFi protocols provide financial services through a decentralized ecosystem, where participants do not have to deal with intermediaries when transacting.

What is Bitcoin DeFi?

The inherent limitations of the Bitcoin mainchain in supporting the intricacies of decentralized finance have created the need to develop smart contract-based Layer 2 solutions.

Additionally, the advent of the Ordinals protocol in 2023, which facilitated the emergence of fungible token standards such as BRC-20 and Runes, catalyzed the growth of DeFi on the Bitcoin blockchain.

This expansion in protocol diversity has broadened the applications of the world’s leading cryptocurrency network beyond the core base-layer use cases around value preservation and transactional capabilities.

Therefore, Bitcoin DeFi has become a nascent sector within the digital asset market, after previously being a missing essential part of the Bitcoin ecosystem.

Bitcoin DeFi in its early days

Integrating decentralized finance (DeFi) concepts into the Bitcoin ecosystem has been a journey of innovation and perseverance. Early attempts to bridge the gap between Bitcoin’s fundamental simplicity and DeFi’s complexities have spawned pioneering projects that, while laying essential foundations, have also encountered significant obstacles.

Colored coins

Colored coins represented an early foray into tokenizing real-world assets on the Bitcoin blockchain. By leveraging the existing network to track ownership of assets ranging from stocks to real estate, this approach highlighted Bitcoin’s potential as a platform beyond digital currency. However, scalability and practical implementation challenges have limited its widespread adoption.

Counterpart

Building on the colored coins, Counterparty has become a platform for creating and trading digital assets, including non-fungible tokens (NFTs), on Bitcoin.

The introduction of popular projects like Rare Pepe NFTs has demonstrated the growing appeal of digital collectibles. However, constraints around user experience and network efficiency have hampered its full potential.

These early experiments, while not fully realizing their ambitions, served as valuable stepping stones, informing Bitcoin DeFi’s subsequent developments. Their challenges highlighted the need for more sophisticated infrastructure and protocols to harness the full potential of decentralized finance on the Bitcoin network.

Bitcoin DeFi Today

Today, building DeFi applications on Bitcoin is primarily done in the realm of Layer 2 (L2) networks. This architectural choice is motivated by the limitations of Bitcoin’s base layer in supporting complex programmable smart contracts.

Bitcoin’s original design prioritized security and decentralization over programmability, making it difficult to develop sophisticated DeFi protocols directly on its blockchain. However, the recent emergence of protocols like Ordinals, BRC-20, and Runes, while not DeFi in their own right, has sparked possibilities for future DeFi-like applications on the main chain.

In contrast, L2 solutions offer a scalable and programmable environment built on Bitcoin, enabling the creation of various DeFi products.

By expanding Bitcoin’s capabilities without compromising its core principles, L2s have become the preferred platform for developers looking to build DeFi applications that encompass trading, lending, staking, and more.

Leading L2 networks such as Lightning Network, Rootstock, Stacks, and Build on Bitcoin provide the infrastructure for these efforts. Some of these L2s have even introduced their own native tokens to the network, further expanding Bitcoin’s DeFi ecosystem.

Essentially, while Bitcoin’s core layer presents challenges for DeFi development, its security and decentralization have provided a foundational layer for the innovative L2 landscape to thrive.

Bitcoin Layer 2 offers a promising path to building a robust and thriving Bitcoin-based DeFi ecosystem that offers trading, staking, lending, and borrowing. All you need is a DeFi Wallet like Xverse to access the new world of decentralized financial services secured by Bitcoin.

Conclusion

The integration of DeFi principles into the Bitcoin ecosystem, primarily facilitated by Layer 2 solutions, marks a significant evolution in the digital asset landscape.

Building on the foundational work of pioneers like Colored Coins and Counterparty, the industry has evolved into more sophisticated platforms like Rootstock, Stacks, and Build on Bitcoin to create a thriving Bitcoin-powered DeFi ecosystem.