KYC on-chain for liquidity expansion

In some ways, the twin challenges of regulation and privacy stand as gatekeepers to the next phase of DeFi growth and crypto in general. New rules are coming in, making the crypto world nervous about losing its privacy and permissionless birthright. However, these regulations could also make DeFi more attractive by bringing in more investment. 

How to onboard institutional investors without losing its core value of privacy is one of the key challenges for DeFi. It's about finding the right balance between keeping things open and private, while also making sure it's safe and welcoming for more people and their investments.

Permissioned DeFi for new liquidity? 

Institutional-Scale Liquidity expansion

The path to DeFi's maturity and its quest to attract new liquidity is partly slowed by the absence of institutional participation. This is largely due to the sector's unregulated nature. Institutions, with their substantial financial clout, could be a key to unlocking DeFi's potential but remain sidelined, wary of navigating an uncharted regulatory landscape. 

This situation presents a classic chicken-and-egg problem: trust is essential for drawing in institutions, which then boosts liquidity and fosters further trust. This Gordian knot could be untangled through Permissioned DeFi—a concept that, historically, finds itself at odds with the inherent permissionless nature of DeFi. This sparkes debate among communities resistant to compliance and KYC measures.

Tools needed to support institutional investment in crypto

So how to address this issue? One thing is certain: if a solution is to emerge, it must come from the crypto sphere itself if it is to be adopted and meet the needs of the market. This is also critical because if the ecosystem fails to find a native solution, others will take their place, leading to a scenario where no effort is made to maintain privacy.

And alternatives to the traditional compliance processes imposed by regulators exist. But, while innovative, these existing solutions have fallen short of reconciling this compliance vs. privacy dilemma. Decentralized identity protocols, Soulbound Tokens (SBT), and Zero-Knowledge Proofs (ZKP) have ventured to forge paths toward legitimate user identification without compromising personal information. However, these efforts, though commendable, have been insufficient in meeting the stringent requirements of global compliance. In this area, traditional KYC has reigned supreme—at the cost of user privacy.

Within this framework, Synaps developed an interest in the integration of on-chain KYC with multi-part encryption.

KYC on-chain and multi-part encryption

An hybrid system  

Synaps has cultivated a profound understanding of the complexities and technologies related to online identity. Our portfolio includes the Anima dID protocol, a Proof of Personhood (PoP) solution, and partnerships with organizations like StarknetID, PolygonID, Ankr Digiverif, Cosmos and more, all willing to tackle the challenges of online reputation. To offer a better balance between compliance and privacy, Synaps and Anima joined forced to come up with this dual system of on-chain KYC coupled with multi-part encryption.

KYC on-chain, combined with multi-part encryption, aims to marry the privacy benefits of decentralized identity with the regulatory compliance of traditional KYC. It reinforces ZKP and adds the missing part to ensure regulatory compliance. At its core, this innovation employs a risk-based decryption method that delicately balances privacy with compliance needs. With this technology, 99.99% of users keep their privacy, and only those identified as problematic have their data revealed.

How this works? 

Consider the operational mechanics: for day to day operations, protocols engage our Smart Contract to check whether a wallet's owner meets AML standards, utilizing Anima's anonymous credentials, thereby preserving user anonymity. 

Importantly, users' KYC information, including sensitive data like IDs, is stored encrypted with a multisig wallet key controlled by 12 entities. We need a 50% consensus to decipher the data.
In cases of an audit or if a judge demands access to information, disclosure to legal authorities necessitates consent from six entities, underscoring the system's commitment to strict privacy protocols.

About the 12 entities in control of the multisig wallet: they are monitored by a DAO, which has the authority to revoke their access if they fail to meet expectations.

The management of the multisig wallet, overseen by the DAO, embodies a collective approach, ensuring the system's longevity and flexibility by allowing for seat reassignment if an entity stops to exist. This structure underscores a deep commitment to democratic principles and system resilience.

By tackling the dual challenges of compliance and privacy, this technology promises to transform the Web3 ecosystem. It paves the way for growth in areas like permissioned DeFi, real-world assets, and gaming, heralding a new era of inclusivity and trust in decentralized finance. This innovation invites us to envision a future where regulatory compliance and privacy not only coexist but propel DeFi to new heights, making the space more welcoming and secure for all.