Know-your-customer (KYC) policies, which require investors to prove their identity, are the cornerstone of the cryptoasset regulations being put in place around the world.
Yet DeFi’s essential feature — the lack of centralized authorities — makes complying with KYC almost impossible.
As a result, we are seeing a new breed of permissioned protocols that enable regulated institutions with strict compliance requirements to enter DeFi.
Permissioned DeFi requires participants to undergo a whitelisting process that involves identity and background checks such as KYC. In this way, compliance-conscious institutions can be assured that all of their trading counterparties have been vetted, and that they won't be left holding blacklisted assets.
This contrasts with the vast majority of DeFi protocols, which are completely permissionless and allow anyone to access a range of new financial opportunities by simply connecting a Web3 wallet.
The total value locked in smart contracts of decentralized applications peaked above $100 billion in November 2021, supported by a growing range of traditional financial products – from derivatives and insurance, to decentralized exchanges.
As of yet, only a handful of DeFi protocols have made the leap into the nascent permissioned market. Most of these are loan platforms that allow KYC'd players to easily borrow and earn yield by lending.
Leading DeFi lending protocol Aave has amassed More than $13B TVL by allowing anyone to borrow against their crypto — in much the same way as a pawn shop.
Aave Arc is the institutional version of Aave, and provides an isolated lending market that can only be accessed by whitelisted clients.
Both Aave and Aave Arc are built on Ethereum, and deployed on Layer 2 networks Optimism and Arbitrum that are supported by Qredo's Web3 wallets.
Qredo partner Clearpool offers an alternative model to Aave: non-collateralized lending.
Clearpool's liquidity pools have a single institutional whitelisted borrower, and multiple lenders. Anyone can become a lender simply by connecting a Web3 wallet.
On Clearpool, yields for lending stablecoins can be relatively higher than other DeFi protocols. This is because borrowers do not have to put up any collateral, and pool interest rates are enhanced by additional LP rewards paid in CPOOL (Clearpool’s utility and governance token).
Clearpool has launched on Ethereum, and has plans to launch on blockchain scaling solution Polygon.
"Right now we see mainly crypto-native institutions participating, but the interest from more traditional financial institutions for on-chain debt origination is rapidly increasing as the benefits — in transactional capabilities, settlement speed, costs, etc — become clear for all to see. This could be the beginning of a massive migration of US$130 trillion, if you measure the current size of the global bond market. "
— Robert Alcorn, Co-founder & CEO of Clearpool
Alkemi Earn is Alkemi Network's permissioned borrowing and lending protocol.
Similarly to Aave, Alkemi operates two pools: a permissioned pool that is accessible only to KYC'd participants, and a separate permissionless liquidity pool that is also open to non-KYC'd users.
Institutions pursuing DeFi strategies must manage significant security concerns— including sophisticated phishing attacks, and malware such as clippers which intercept and replace copied blockchain addresses from the clipboard.
Governance can be equally challenging. Institutions must reconcile organizational structures with the vulnerability of a single private key, and meet compliance and accounting needs by maintaining an audit trail.
The Qredo-MMI integration enables easy, secure, and compliant access to DeFi for professional investors. Organizations can sign transactions through a familiar MetaMask interface, backed by the bespoke governance and top notch security of decentralized multi-party computation.