The motivations for cryptocurrency adoption are as numerous and diverse as the people embracing digital currencies and blockchain technologies. Some are interested in exploring a novel asset class appropriate for the digital age. Others are looking to diversify their investments or engage with platforms that reflect their values and priorities.
For many, financial freedom and privacy are top priorities. Often, these features drew people to crypto in the first place, and a growing number of decentralized finance (DeFi) platforms are quickly expanding access and opportunity for millions of people.
Meanwhile, traditional finance (TradFi) products, including mortgage lenders, personal and business loan providers and stockbrokers, haven’t fully transitioned to crypto or blockchain standards, requiring technological bridges to connect traditional and DeFi products and services. This is both a risk and an opportunity, threatening to undermine privacy in exchange for access.
That’s why the crypto sector needs a privacy-preserving ID that allows access to these TradFi services while keeping control over the ID in the hands of the user. DeFi protocols that allow for the sharing of information that proves eligibility without revealing sensitive information could be the answer. This type of mechanism often uses zero-knowledge at its core.
DeFi protocols can protect privacy
Today’s Ethereum-based DeFi ecosystem is expansive, with dozens of platforms providing a global, alternative approach to the financial system. These companies often embrace the crypto sector’s privacy ethos, but identity verification still plays an important part in the process.
Not only are DeFi platforms required to follow rigorous know-your-customer (KYC) protocols, but also, lenders need to know that borrowers are likely to repay a loan and that the terms are fair for all parties.
What’s more, identity verification helps solve a variety of problems plaguing the DeFi industry’s development, including institutional interest, surging customer enrollments and cybersecurity concerns.
Of course, the blockchain’s decentralized and public infrastructure makes DeFi prone to what Nasdaq describes as “economic espionage and surveillance without their knowledge or approval.”
By leveraging zero-knowledge proofs, some blockchain protocols are offering a way for institutional and retail users alike to avoid exposing their transaction data.
While the idea of zero-knowledge proofs is not new it was introduced by computer science researchers in 1985 the concept has been newly reimagined to support the surging DeFi ecosystem. This mechanism allows one party to verify something about another party without revealing any additional information, making it a powerful verification tool for DeFi and TradFi platforms.
The privacy path
When DeFi platforms and traditional financial institutions can perform identity verification without compromising privacy, the opportunities to truly remake the industry are endless.
For instance, mortgage companies can expand their lending framework, relying on digital assets, including ETH, BTC, USDC and other popular tokens as collateral. In addition, borrowers can leverage off-chain data, including credit scores, to facilitate responsible lending and equitable borrowing without compromising privacy.
This can significantly even the playing field, expanding access to homeownership to millions of people who don’t have the credit to acquire a traditional mortgage agreement. Undoubtedly, these financial services will expand to incorporate auto loans, investment assets and personal and business loans.
With more consumers increasingly considering privacy a top priority, DeFi or traditional financial services companies can leverage these privacy controls as a competitive differentiator that promotes growth and expansion at a critical time. To meet this growing demand, financial services firms would be wise to implement privacy-preserving ID to support crypto natives accessing DeFi and TradFi services.
Meeting customers where they are
Personally identifiable information (PII) is an incredibly valuable asset, and after years of jaw-dropping data breaches and privacy violations, many customers are understandably prioritizing privacy above all else. As a result, they are turning to DeFi solutions to help facilitate their financial futures without compromising information integrity.
DeFi platforms have an opportunity and a responsibility to meet consumers where they are, bridging the gap between crypto and traditional financial services without compromising integrity, security or usability.
Ryan Berkun is the founder and CEO of Teller, DeFi’s unsecured lending protocol. Ryan is an a16z crypto startup school alumni, angel investor and mentor at CELO, a mobile-first blockchain optimized for peer-to-peer payments. Previously, Ryan focused on Web 3.0 infrastructure for projects such as Tezos, 0x and Livepeer.
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