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The motivations for cryptocurrency adoption are as many and varied as those embracing digital currencies and blockchain technology. Some are interested in exploring new asset classes appropriate for the digital age. Others want to diversify their investments or engage with platforms that reflect their values and priorities.
For many, financial freedom and privacy are top priorities. Oftentimes, these features attract people to crypto early on, and a growing number of decentralized finance (DeFi) platforms are rapidly expanding access and opportunities for millions of people.
Meanwhile, traditional financial products (TradFi), including mortgage lenders, personal and business loan providers and stockbrokers, have not yet fully transitioned to crypto or blockchain standards, requiring technological bridges to link traditional and DeFi products and services. This is both a risk and an opportunity, one that threatens to undermine privacy in exchange for access.
That’s why the crypto sector requires a privacy-preserving ID that allows access to this TradFi service while still keeping the ID in the hands of the user. A DeFi protocol that allows sharing of verifiable information without disclosing sensitive information could be the answer. This type of mechanism often uses zero knowledge at its core.
DeFi protocol can protect privacy
The current Ethereum-based DeFi ecosystem is vast, with dozens of platforms providing a global alternative approach to financial systems. These companies often adhere to the crypto sector’s privacy ethos, but identity verification still plays an important role in the process.
Not only are DeFi platforms required to follow strict know-your-customer (KYC) protocols, but also, lenders need to know that borrowers are likely to repay loans and that the terms are fair to all parties.
What’s more, identity verification helps solve various problems plaguing the development of the DeFi industry, including institutional interests, spikes in customer registrations, and cybersecurity issues.
Of course, public infrastructure and decentralized blockchain make DeFi vulnerable to what Nasdaq described it as “economic espionage and surveillance without their knowledge or consent.”
By leveraging zero-knowledge proofs, some blockchain protocols offer a way for institutional and retail users to avoid disclosing their transaction data.
While the idea of proof without knowledge is not new introduced by computer science researchers in 1985 the concept has been redesigned to support the growing DeFi ecosystem. This mechanism allows one party to verify something about the other party without revealing any additional information, making it a powerful verification tool for both DeFi and TradFi platforms.before
When traditional DeFi platforms and financial institutions can perform identity verification without compromising privacy, the opportunities to completely recreate the industry are endless.
For example, 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 fair lending without compromising privacy.
This can be significantly even a playing field, expanding access to home ownership to the millions of people who don’t have the credit to obtain traditional mortgage agreements. Undoubtedly, these financial services will expand to include auto loans, investment assets and personal and business loans.
With more and more consumers considering privacy as a top priority, DeFi or traditional financial services companies can leverage these privacy controls as a competitive differentiator that drives growth and expansion at critical times. To meet this increasing demand, financial services companies should implement privacy-preserving IDs to support native cryptos accessing DeFi and TradFi services.
Meet customers where they are
Personally identifiable information (PII) is a very valuable asset, and after years of experiencing data breaches and privacy breaches, many customers understandably prioritize privacy above all else. As a result, they are turning to DeFi solutions to help facilitate their financial future without compromising information integrity.
DeFi platforms have the opportunity and responsibility to meet consumers wherever they are, bridging the gap between crypto and traditional financial services without compromising integrity, security or usability.
Ryan Berkun is founder and CEO Cashier, DeFi unsecured lending protocol. Ryan is an alumni of crypto startup a16z, 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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