A Journey to ETHDenver #2 IdentDeFi – A Decentralized Identity KYC Solution

What's the problem?

KYC and compliance is an important but unwelcome issue in crypto. However, it is unavoidable for DeFi to enter the mainstream financial market. On one hand, KYC enables richer DeFi services that previous cannot be implemented, such as uncollateralized lending according to personal credit score or collateralized off-chain personal assets to borrow on chain (e.g. some DeFi projects such as Centrifuge, Goldfinch require KYC verification); on the other hand, traditional financial institutions could enter the DeFi space if it complies with the regulatory standard, this could bring more liquidity to enter the crypto world.

We don't like KYC because we don't want our personal information is controlled by large institutions. In DeFi, it will be a nightmare if we need to provide personal information to every DeFi service we use.

The IdentDeFi solution

The user will go through a KTC procedure, and a non-transferable NFT will be minted by IdentDeFi. The NFT serves as the proof that the user has completed the KYC, DeFi protocol only needs to check whether a user has the NFT when providing permissioned services.

The KYC process is handled by third-party providers, such as financial institutions. Users provide personal information to traditional financial institutions, like banks, KYC information is kept by these regulated institutions and will not be uploaded on the blockchain. Most people already provided their personal information to banks, there is no additional information that needs to be provided by using IdentDeFi, and there is no additional personal information safety risk.

KYC NFT: IdentDeFi links with banks, and mints the KYC NFT, which is non-transferable. The NFT only represents the KYC status (it is a proof that you have completed the KYC procedure of banks), the NFT itself doesn't record any personal information. DeFi protocol can check the KYC status of users by confirming whether they hold the NFT or not. By this means, DeFi protocol doesn't have access to any KYC information and also doesn't need to know the exact KYC information, and users only need to perform the KYC procedure once. Holding the KYC NFT is a confirmation that users are KYC verified and hence can use any DeFi protocol that requires permissioned access.

If a DeFi protocol or regulatory body requires additional KYC information, there will be a DAO governance process to decide whether to disclose the information. The ownership of KYC information is controlled by the DAO, which is supposed to be the users rather than some management staff.

The process of IdentDeFi is as below.

Source: IdentDeFi pitchbook

KYC is a necessary thing in finance, it helps prevent money laundering and illicit financial transactions. However, the current KYC requirement is very tedious and repetitive. IdentDeFi provides quite a neat solution for DeFi & user experience as users only need to go through KYC once and information is not held by DeFi protocol. This could potentially help bring more value and liquidity to DeFi market.

While the idea is pretty good, IdentDeFi faces immediate competition. Circle, the company behind USDC stablecoin, together with Coinbase has initiated a consortium called Center. Center recently announced its KYC solution – Verite, which is very similar to what IdentDeFi is trying to do. The only major difference is Center is a centralized entity while IdentDeFi will be governed by a DAO.

IdentDeFi is a very early stage project, all current available information is a one page lightpaper and a pitchbook. DeFi compliance is an important concept, it deserves a close follow-up.