Decentralized ID the key to mainstream DeFi adoption—Quadrata co-founder

Decentralized identities would open Web3 to a range of services requiring personal information and allow platforms to offer tailored products, according to the CEO of Quadrata.

Decentralized identity (DID) and compliance services will become a “key infrastructure” to the success of decentralized finance (DeFi) and the transition of real world financial assets onto the blockchain according to Fabrice Cheng, CEO and co-founder of Quadrata.

Speaking with Cointelegraph, Cheng said the key driver behind the demand for DID will come from Web3 protocols, which will utilize the DID of users to build better products that are “catered” to existing customers and also “targets new sets of customers.”

Quadrata provides a Web3 identity solution which allows users to perform KYC compliance without sharing personal data, it recently partnered with Ethereum Layer-2 scaling solution Polygon to integrate its Web3 Passport Network.

DID refers to a self-owned, independent proof of identity which could be used to access services requiring such information at the discretion of the user. Personally identifiable information such as a user's name, age, or ID document number would be anonymized with services only seeing that a user's DID was verified by a trusted party.

The proof of identity issued varies from protocol to protocol, but Quadrata’s solution, the Quadrata Passport, is represented in the form of a non-transferable nonfungible token (NFT).

Web3 users will need to fill out basic Know Your Customer (KYC) information as part of the on-boarding process, once that’s done, they won’t have to do it again as it’ll be universally recognized on-chain, according to Cheng.

Cheng also said that much like traditional businesses, Web3 companies will need to analyze their customers to gain a competitive advantage:

“When we go to Amazon, the first thing that we're going to look at is the reputation of an item, the reviews, and the ratings. So we're already accustomed to those things where you rely on some sort of reputation and trust.”

“Similar things will happen with Web3,” he added.

Cheng said DeFi was the biggest potential use case for DID as more “real world assets” and institutional capital will move on-chain if they’re accompanied by an “identity or reputations solution.”

Cheng added once DID becomes widely adopted, “it will send a clear message to the entire space that blockchain is a great technology for financial services.”

As for why Web3 users would be incentivized to complete KYC information, Cheng stated while it is not necessary now, some users may be barred from accessing protocols which require KYC:

“If you start seeing a product that offers you better parameters, because you can borrow more with less, or you can potentially access or unlock and secure loans, then suddenly, you start having an incentive to use those [KYC] products, because they are better.”

Cheng noted a key advantage that DID has over traditional identity solutions is the need to only fill out KYC once.

“You KYC on Coinbase and you go to Binance and have to KYC again,” he explained, “then you go to the Bank of America, KYC again. It’s just a lose-lose situation, because [both] the company [...] and customers hate doing that.”

However, Cheng stated that Quadrata and its competitors will be faced with the tough ethical dilemma in deciding where to draw the line between providing Web3 companies with key identity data and preserving user anonymity.

Before a DID solution takes full effect, Cheng noted that Web3 wallet infrastructure needs to improve to a point where both retail and institutional users can navigate a wallet and feel comfortable obtaining custody over their funds.

“Hopefully in one or two cycles, we’ll get there,” he added.

Zero-knowledge KYC could solve the privacy vs compliance conundrum: VC partner

AML

Zero-knowledge Know Your Customer (KYC) would allow businesses to adhere to strict AML/CTF rules while ensuring customer privacy.

As the Web3 industry matures, Zero-knowledge Know Your Customer (zkKYC) is becoming more widely discussed as a means to comply with strict financial regulations while maintaining user privacy, according to the partner of a venture capital firm.

In an interview with Cointelegraph, John Henderson, partner at Australian-based venture capital firm Airtree Ventures said the successful implementation of a zkKYC system would be “great news for both regulators and consumers” and could increase cryptocurrency adoption:

“Institutions and retail users are more likely to participate in DeFi if they can be confident that they are complying with their AML/CTF obligations.”

Henderson explained a zkKYC system would allow users to prove certain things about themselves to service providers without having to divulge personally identifying data such as their names or identification documents.

In theory, the sharing of that information would be enough to satisfy Anti-Money Laundering (AML) and Counter-terrorist Financing (CTF) regulatory requirements placed on the crypto industry.

“[The system] involves a trusted third party validating my personal information and then issuing a cryptographic proof to my personal wallet, which I could then choose to share, or share attributes of, with financial service providers.”

The benefit of such an approach is that no personally identifying information could be leaked in the event of a security breach of a service provider such as a crypto exchange, Henderson claims, with the identification documents only recoverable when required by authorities.

Many in the crypto community have been critical of the way their personally identifiable information has been handled by some crypto platforms.

Recently, the community shared their concerns after court documents published on Oct. 5 publicly disclosed the personal information and transaction history of thousands of Celsius customers, with some warning they could be used to “dox” users.

Calls to improve privacy for individuals were also loudly sounded at the September Converge22 conference in San Francisco.

Jeremy Allaire, CEO of stablecoin issuer Circle, expressed the need for “advancements” in technologies that prove identities and credentials while simultaneously ensuring individuals’ privacy.

Henderson however admitted that “storage of sensitive information is still an unsolved problem,” sharing two ideas on how the management of such information could take place.

“One idea would be to have trusted entities hold identity documents off-chain and port proof of identity on-chain, without the original documents. Another idea is to sign a wallet transaction with a regulatory institution, who would then register that account with an identity.”

Despite the challenge, Henderson was adamant a zkKYC protocol will form the “building blocks of on-chain reputation scores” allowing “more useful” financial products and services.

“My priority is onboarding the next hundred million users to crypto,” he said, “If we want to achieve internet scale, we need a solution for AML/CTF compliance.”

Airtree Ventures led a $4.7 million seed round into ReputationDAO on Apr. 13, a decentralized autonomous organization which aims to provide a financial reputation and identity service for decentralized finance (DeFi).

blockchain ID