KYC implementation in DeFi is a complex issue that must balance regulatory compliance with the decentralized nature of DeFi. The concern is that KYC requirements may compromise the decentralized principles that DeFi seeks to uphold.
1. KYC requirements will be a significant barrier to entry for users, which may lead to a reduction in DeFi’s overall user base. The concern is that this barrier could limit DeFi’s potential for growth and development.
2. By requiring KYC, governments may gain access to sensitive user information, which could raise privacy concerns for users. The problem is that this access could violate users’ privacy rights and undermine the security of DeFi systems.
3. KYC requirements may reduce user trust in DeFi services and discourage user adoption. This concern arises from the belief that users may perceive KYC requirements as an additional layer of unnecessary bureaucracy that could limit their freedom to engage in decentralized finance.
4. Mislabeling upcoming projects as DeFi products can cause confusion and reduce trust in the DeFi industry. This concern highlights the importance of clear labeling and transparent communication to ensure that users can make informed decisions about the DeFi products they use.
5. KYC is being used as a “stamp of approval” for DeFi projects, which may be problematic as KYC verification is not always guaranteed a project’s legitimacy.
6. If DeFi products cannot exist on the clear web, they may move to the dark web, creating additional challenges for regulatory compliance and risk management. The concern is that the move to the dark web could further limit the accessibility and mainstream adoption of DeFi.
7. Many DeFi transactions are automated and communicate with smart contracts directly, which makes KYC verification challenging.
8. One of the challenges that existing DeFi products face when implementing KYC systems is transitioning their userbase to the KYC new system, especially if a significant portion of their user base comprises bots or pseudonymous users
One potential solution could be to explore decentralized identity verification methods, such as blockchain-based identity solutions, something that is mapped to the address or all possible addresses that a secret phase can create, that can provide a secure and privacy-preserving approach to identity verification.
7 thoughts on “There are several reasons why implementing KYC in DeFi can be problematic and an alternative solutions”
But my question here is why the hell are we silent about any form of KYC, the report state and I quote”Actors like the Democratic People’s Republic of Korea (DPRK), cybercriminals, ransomware attackers, thieves, and scammers are using DeFi services to transfer and launder their illicit proceeds. They are able to exploit vulnerabilities, including the fact that many DeFi services that have an anti-money laundering and countering the financing of terrorism (AML/CFT) obligations fail to implement them.”And the report goes on not to quote any instance of where funds were stolen by the Democratic People’s Republic of Korea (DPRK) using DeFi services. and the worst part is that there is no instance where defi protocols are used to launder illicit proceeds, this entire statement is speculation most of the money laundering is done on the darknet using darknet atomics. This statement is only true when you classify mixing services as part of defi which they are not. And flash loan attacks are not a bad thing in defi they are mostly used to stabilize and arbitrage dex, whale alone should not have such power in defi. The only thing they might manage to protect is the hacks that happen, but then hackers are always a couple of steps ahead of you even with KYC Binance in 2019 still hacked, and there is still possible deniability claiming your identity was stolen which in many cases case will be true. In my opinion, this regulation will archive nothing
What are the inputs for the blockchain based identity system?
Identity.com has a pretty cool solution to your concerns around identity. I believe they use zK tech for anonymity.
I enjoy KYC from the aspect that it makes the blockchain more secure when it comes to security and illegal activities. However, I understand that some of us dgens just want to dgen. There really isn’t a perfectly fine line between both in my book.
I covered some of these points in detail [here today as I was commenting Societe Generale’s KYC coin launch](https://twitter.com/moo9000/status/1649164733763780608). The most major point we can argue today is that all innovation has happened on permissionless chains.
The only alternative I know is that of the NexeraiD. Using zero-knowledge proof is the best way to go about it.
The identity solution space has been experiencing impressive growth and playing a significant role in driving the widespread adoption of crypto and blockchain technology. Leading protocols like ORE ID, Nexera ID, Verus ID, and others are transforming the perception of identity solutions and showcasing their immense benefits to the public.