The world has evolved significantly within the past decade as more people embrace emerging technologies. Today, most interactions happen through social media platforms such as Facebook and Twitter. The trend is gradually catching up with the financial ecosystem following the debut of nascent markets like crypto.
While Bitcoin may have started as a revolution against centralized money transfer systems, it has paved the way for more financial-related innovations. Currently, the total crypto market cap is well over $2.1 trillion, comprising various niches; some of the most popular ones include Decentralized Finance (DeFi) and Non-fungible tokens (NFTs).
DeFi has grown significantly since the first decentralized governance token was launched in Summer 2020. As it stands, there is over $237 billion in total value locked (TVL) across various DeFi protocols. That said, there are still some fundamental challenges in this growing ecosystem.
One of the biggest growth hurdles has been the integration of proper KYC/AML processes to accommodate more serious investors. Though lucrative, DeFi protocols have locked out institutional investors who would prefer to invest within the regulatory provisions set by oversight authorities.
Furthermore, the lack of proper KYC structures has exposed DeFi users to increased levels of fraud. According to a report by Elliptic, DeFi users suffered over $10 billion in losses in 2021 due to fraud and theft. Unfortunately, most of the stolen funds can hardly be traced given that the malicious players were using digital addresses with no KYC or link to their personal information.
Why KYC is a Game-Changer for DeFi Innovations
As much as the crypto ethos is based on decentralization and non-censorship, time has proven that financial markets can turn chaotic if left unchecked. This can be seen in the crypto ecosystem where rogue players are taking advantage of anonymity to rip off unsuspecting users.
Can KYC change the narrative? Most crypto natives might defer on the value proposition of introducing KYC, but it is a necessity if the market will grow into a global ecosystem. Luckily, both sides can strike a balance by leveraging DeFi protocols such as Photochromic, which features tokenized NFTs embedded with one’s personal information.
With Photochromic’s tokenized NFTs, individuals and corporations can create a verifiable on-chain identity to access multiple DeFi platforms. Even better, users have the option to customize the NFT and the flexibility to choose which information to reveal while interacting with the DeFi market.
While the idea of revealing personal information might not be appealing to most crypto diehards, it is a big step towards attracting institutions into the DeFi and NFT ecosystem. In fact, some DeFi projects like Aave have already introduced decentralized KYC pools to serve the growing demand. Protocols such as Photochromic will not only play a pivotal role in accessing such pools but also ensure DeFi users retain control of their personal information.
Building An all Inclusive Financial Ecosystem
As mentioned earlier, Bitcoin is the pioneer cryptocurrency, but more importantly, it set the stage for a decentralized financial ecosystem. Most of the beneficiaries of this burgeoning ecosystem have been retail investors, until recently when institutions started to buy Bitcoin while the aggressive ones are going a notch higher by investing in DeFi.
However, the interest in crypto assets has not gone unchallenged by regulators across the globe. Last year, U.S Senator Elizabeth Warren referred to DeFi as ‘the most dangerous part of the crypto world’. Similar sentiments have been aired by officials and regulatory authorities from other parts of the world, including China’s PBoC.
With so much at stake, the big question is how crypto can be made an all-inclusive financial ecosystem that operates within global regulatory stipulations. Introducing KYC options is one of the ways crypto stakeholders can balance it out with regulators. As we move into the next phase of adoption, new money from institutions will likely opt for KYC compliant ecosystems.
The new money will also be able to access multiple chains seamlessly given the rise of cross-chain solutions such as the Wanchain protocol. Ideally, KYC will help individuals and institutions remain KYC compliant while chasing the lucrative yields and opportunities featured within various blockchain ecosystems.
Conclusion
We live in a world where things are changing by the minute, thanks to innovative technologies like blockchain and crypto. Despite the value proposition, it is evident that these upcoming innovations have to be constantly monitored to protect the consumers. KYC protocols will not only make it safer to use crypto but also attract the much-needed approval by financial regulators.
