#learn defi

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The Blockchain Council encourages individuals to familiarise themselves with DeFi, or decentralised finance.

learn defi

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How digital identities will help realise the true potential of DeFi

While DeFi has many advantages in terms of filling the gap left by conventional finance, it also carries with it a number of major risks that must be taken into account.

As a starting point, there is the looming possibility of more government regulation to be worried about. The party's membership among legislators is expected to continue to increase in the near future, as well. In an unregulated business where millions of dollars are transferred on a nearly daily basis, and when millions of dollars are transferred on a daily basis, there is a significant risk of fraudulent behaviour. Despite the fact that high-profile incidents involving anonymous founders have happened, there is little reason to believe that the industry will be able to effectively self-regulate.

Second, because of a lack of KYC (Know Your Customer) rules (which can only be enforced in person), DeFi loans are significantly overcollateralized, making them inaccessible to both unbanked individuals and small and medium-sized companies (SMEs) (SMEs). Because of this, it is a logical inference to draw that the potential use of these marketplaces as major facilitators for DeFi is significantly reduced as a consequence of the decision. Nobody can create a credit history to demonstrate that they are creditworthy borrowers since the blockchain lacks both identity and pseudonymity, which makes it impossible to establish credit in this manner.

This is at the core of the issue since there are no identification and access control measures in place at all. The implementation of a digital identification (DID) solution in the future may pave the way for individual consumers and small companies to reap the full economic benefits of open finance in their respective jurisdictions. Citizen self-sovereignty over personal data would be enabled via the deployment of decentralised, privacy-preserving DIDs, eliminating the need for outdated, bank-like KYC processes that often go farther than is necessary for the purpose of compliance.

First movers

At the time, even though blockchain was being hailed as a cure-all for all of humanity's problems, thought leaders from inside the blockchain ecosystem spent a significant amount of time discussing the subject of self-sovereign digital identities throughout their discussions. Alternatively, DIDs continue to be a realistic use of blockchain technology, in contrast to the many other fictional applications that have been proposed in the past year, such as e-commerce and other financial services. Due to the fact that identity on the blockchain works best when it is integrated into the infrastructure rather than as a "opt-in" application, going forward has proven to be more challenging.

The identification of users on conventional blockchain platform like Ethereum has not been a top priority for the network, despite the fact that it has long been a concern. Many newer efforts are in a difficult position because they have put a greater emphasis on becoming "Ethereum-killers" than they have on solving real-world issues.

In spite of the fact that Concordium is a relative newcomer to the blockchain platform industry, it places a significant emphasis on identification as one of its main goals. Founded in 2013, Concordium is a for-profit company focused on research and development. The primary objective of the project is to ensure that the technology is deployed across the organisation. In this instance, the fact that the other side of the transaction cannot be confirmed as legitimate acknowledges that no modern business can demonstrate compliance in this situation.

A decentralized credit score

According to the previous paragraph, ontology is yet another platform that is involved in the development of decentralised identity solutions, in addition to the platforms that have already been mentioned. The completion of this job as quickly as feasible is a key objective for the project, which has lofty goals and will be used in a wide range of application scenarios when it is completed. Ontology's newly launched DID solution, which was recently unveiled, provides clients with a 360-degree view of all their digital assets across all wallets, all from an one dashboard. Additionally, as a companion to the project, a decentralised credit rating system that is compatible with a variety of blockchains is offered as an add-on feature.

Using this technology, lenders will be able to verify that users are creditworthy and have sufficient assets to pay back the amount of a loan without having to physically examine the assets or having to significantly overcollateralize loans at the end of the day.

Wrapping up

Digital identities have the potential to become a key facilitator for the whole DeFi sector, as shown by the ability of unbanked people and small and medium-sized companies (SMEs) to adopt digital identities. The long-term benefits in terms of economic equality and user privacy are anticipated to be substantial, despite the fact that we are just at the beginning of this journey.

However, whether or not the sector is prepared to take the necessary steps to create some kind of self-regulation via the use of digital IDs will ultimately rely on whether or not the industry is willing to make the necessary investments in time and resources. Learn DeFi to understand the intricacy of this field.