DeFi

Identity challenges in defi: unlocking institutional investment

Published

8 months ago

23 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.

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DeFi

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

Published

6 months ago

1 August, 2024

BlockChainGuardian 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.

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DeFi

Centralized crypto exchanges are slowly losing ground to their DeFi counterparts

Published

6 months ago

1 August, 2024

BlockChainGuardian Staff

Centralized crypto exchanges are slowly losing ground to their DeFi counterparts, according to an in-depth data analysis conducted by Decrypt.

DeFiLlama’s decentralized exchange (DEX) volume data and CoinGecko’s total cryptocurrency trading volume data show that the percentage of cryptocurrency trading volume occurring on DEXs relative to total trading volume has increased from 4.6% in February to over 7% this month. This is an increase in the share of trading volume driven by DEXs of over 52%.

Source: Adrian Zmudzinski

Kunal Goel, a senior research analyst at Messari, told Decrypt that several factors are fueling the growth in DEX market share. He cited “the growth of meme coins and long-tail assets” as one of the reasons, explaining that they tend to list first on DEXs and only appear on centralized exchanges much later.if they last that long.

“The onchain user experience has improved with low fees and high throughput on Solana and Ethereum L2,” he added, highlighting advancements making decentralized finance (DeFi) solutions increasingly easier to use.

DeFiLlama data further shows that over the past 24 hours, DEX volume accounted for 22% of total trading volume. The crypto price aggregator notes that this percentage is meant to represent the dominance of decentralized exchanges over aggregated decentralized exchanges and centralized exchanges.

So far in 2024, DEX volume has seen a slow and steady increase.

CEX and DEX trading volume increased from $133.5 billion in January to $179.5 billion this month, an increase of about 34%. The year-to-date high was recorded in March, when CEX and DEX volumes saw a sharp increase, reaching $4.8 trillion and $266.89 billion, respectively.

Goel noted that at the time, “Bitcoin hit new all-time highs in March and trading activity is generally positively correlated with price and sentiment.” Looking ahead, he expects centralized exchanges to move on-chain and disrupt their own business models before others can. He added that “Base and BNB Chain are the most prominent examples of this.”

TradingView also shows a DeFi market cap dominance chart, in percentage terms. Currently at 3.86%, it fell from 4.47% on January 1 and hit a 2024 high of 4.81% on February 25. Goel noted that this was unexpected since “DEX volumes are a key driver of DEX value, so it’s a bit contradictory.”

Challenge is an umbrella term for a group of financial tools built on a blockchain, including DEXs, exchanges that operate primarily on-chain. The primary goal of DeFi is to allow anyone with internet access to lend, borrow, and bank without relying on intermediaries.

Similarly, the main goal of DEXs is to allow anyone with internet access to trade or even provide liquidity in exchange for a stake. DeFi and DEXs are one of the main areas of focus in decentralized application (dapp) development, which have seen considerable adoption this year.

Edited by Stacy Elliott.

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DeFi

Pump.Fun Overtakes Ethereum in Daily Revenue: A New Leader in DeFi

Published

6 months ago

1 August, 2024

BlockChainGuardian Staff

Pump.Fun Overtakes Ethereum in Daily Revenue: A New Leader in DeFi

In a remarkable turn of events, Pump.Fun, a memecoin launchpad, has surpassed all other platforms in the decentralized finance (DeFi) sector, achieving the highest gross revenue in the last 24 hours. According to data from DeFiLlama, Pump.Fun amassed $867,429 during this period, surpassing Ethereum’s $844,276. This achievement underscores the growing influence of memecoin infrastructure within DeFi.

Pump.Fun Revenue Milestones

The impressive revenue numbers go beyond daily performance. Pump.Fun is generating $315 million in annualized revenue, averaging $906,160 per day over the past week. This revenue surge is largely due to the recent memecoin frenzy, with Solana-based memecoins being particularly popular among on-chain enthusiasts. The platform’s user-friendly interface allows non-technical users to quickly launch their own tokens, spending as little as $2 without needing to provide any initial liquidity.

How Pump.Fun works

Pump.Fun’s operating model is designed to facilitate the use and rapid launch of tokens. Users can create new tokens in minutes, which are then allowed to trade along a bonding curve until they reach a market cap of approximately $75,000. At this point, the bonding curve is burned on Raydium, establishing a secure liquidity pool. The platform generates revenue through a 1% fee on transactions made on the platform. However, once a token is bonded and burned on Raydium, Pump.Fun stops charging this fee.

Ethereum: Traditional Power

Despite its daily revenues, Ethereum remains a cornerstone of the DeFi ecosystem. It is the blockchain of Ether, the second-largest cryptocurrency with a market cap of $395 billion. Ethereum powers many applications and digital assets, backing over $60 billion worth of smart contracts. Revenue generation on Ethereum is done through transaction fees, called gas, which are paid in ETH for executing transactions and smart contracts.

Comparative analysis of revenue models

While Ethereum’s revenue model relies on gas fees for transactions and smart contract executions, Pump.Fun takes a different approach. By enabling easy and low-cost token launches, Pump.Fun caters to a broad audience, including non-technical users. This inclusiveness, combined with the excitement surrounding memecoins, has led to rapid revenue growth. The 1% transaction fee ensures continued revenue generation until the token transitions to Raydium, creating a sustainable business model.

Memecoin frenzy

The recent rise in popularity of memecoins has been a major contributor to Pump.Fun’s success. Memecoins, particularly those based on Solana, have captivated the DeFi community, generating substantial activity on platforms like Pump.Fun. This trend highlights a shift in DeFi dynamics, where niche platforms catering to specific interests can achieve significant revenue milestones.

Future prospects

Pump.Fun’s recent successes suggest a potential shift in the DeFi landscape. As the platform continues to attract users with its simple token launch process and low-cost entry point, it could solidify its position as a leader in the DeFi space. The memecoin phenomenon shows no signs of slowing down, indicating that platforms like Pump.Fun could continue to see robust growth.

In conclusion, Pump.Fun’s ability to surpass Ethereum in terms of daily revenue underscores the evolving nature of the DeFi space. By providing a user-friendly platform for launching memecoins, Pump.Fun has tapped into a lucrative niche, demonstrating the potential for niche platforms to thrive alongside traditional blockchain giants like Ethereum. This development signals a broader trend toward diversification and innovation within the DeFi ecosystem, with new entrants challenging established players through unique value propositions and targeted services.

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DeFi

$10 Billion Venture Firm May Target 10x Opportunities in Ripple (XRP) and This DeFi Token

Published

6 months ago

1 August, 2024

BlockChainGuardian Staff

$10 Billion Venture Firm May Target 10x Opportunities in Ripple (XRP) and This DeFi Token

According to recent reports, one of the largest venture capital firms is looking for new opportunities in the cryptocurrency space as Bitcoin (BTC) attempts to break its all-time high and start a new bull run in the cryptocurrency market. They are balancing risk with low-risk, low-reward and high-risk, high-reward opportunities.

The first investment candidate is a top cryptocurrency, Ripple (XRP); it doesn’t have much growth potential because it’s already a large cap. Another scenario the firm is targeting is DTX ExchangeThe new hybrid exchange is expected to revolutionize the foreign exchange industry. According to analysts, its growth potential is immense and the risk is also very limited due to its low price.

Market is bullish as Trump wants to make US a Bitcoin (BTC) superpower

Over the past 30 days, Bitcoin (BTC) has increased by about 10%, and one of the catalysts for this price increase has been Donald Trump recently speaking out as a crypto pro. Presidential candidate Donald Trump has promised to make the United States the world leader in cryptocurrencies if elected in November. Speaking at the Bitcoin2024 conference in Nashville, Trump compared Bitcoin (BTC) to the steel industry of 100 years ago, highlighting its potential.

Trump’s plans include firing SEC Chairman Gary Gensler and immediately creating a “Presidential Advisory Council on Bitcoin (BTC) and Cryptocurrencies.” He stressed the importance of American leadership in the cryptocurrency space, saying, “I am laying out my plan to ensure that the United States is the cryptocurrency capital of the planet and the Bitcoin (BTC) superpower of the world.”

$600 Million Worth of Ripple (XRP) to Be Released in August

Ripple (XRP), the company behind the XRP Ledger blockchain and its native token Ripple (XRP), unlocks up to 1 billion tokens on the first day of every month. Since 2017, they have used several major escrow wallets, including Ripple (XRP) (24) and Ripple (XRP) (25), to evenly distribute these monthly unlocks.

However, Ripple (XRP) often relocks a large portion of newly issued XRP. For example, on June 1, Ripple (XRP) relocked 800 million XRP but still sold about 300 million XRP, worth $182 million at the time.

While Ripple (XRP) releases up to 1 billion XRP tokens each month, the actual amount released into circulation is typically much lower due to this re-escrow process, as noted in a 2017 XRP Ledger blog post.

DTX Exchange Follows Bitcoin (BTC) Path

The main target of large private equity firms is the DTX exchange (DTX), the reason being a clearly high utility like Bitcoin (BTC). This project has attracted global attention thanks to its exceptional pre-sale performance, offering early buyers a 100% return on investment and raising over $1 million. Projections suggest that this figure will reach $2 million by the end of August 2024.

DTX Exchange offers a revolutionary hybrid trading platform, combining the best features of centralized (CEX) and decentralized (DEX) exchanges. Traders can enjoy a seamless experience with access to over 120,000 asset classes, no KYC verification upon registration and ultra-fast transaction speeds of 0.04 seconds.

These benefits have attracted traders to this new cryptocurrency exchange. Currently, in Phase 2 of its pre-sale, DTX Exchange is listed at $0.04, which is double its starting price of $0.02. Market analysts predict that the upcoming listing of DTX Exchange on the Level 1 CEX in late 2024 could trigger a 100x bullish rally, making DTX Exchange the top cryptocurrency exchange to watch.

Learn more:

Visit the DTX Presale

Read White paper

Join the DTX community

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