Back to Blog
March 16, 2023

How Web3 can comply without compromising on decentralization

A delicate equilibrium exists between adopting decentralized approaches that safeguard user privacy and facilitating the growth of compliance and regulation within the blockchain ecosystem. By employing cutting-edge methods such as Know Your Transaction, Zero-Knowledge Proofs, and DIDs like the Rebus NFTID, the sector can demonstrate to regulators that it is actively working toward self-regulation. This, in turn, strengthens the position of DeFi to maintain its innovative momentum.

The year 2022 will be etched in history as a difficult period for the cryptocurrency sector. Poorly managed blockchain and crypto ventures and an economic slump resulted in a significant loss of trust and faith in major centralized exchanges and services. The Terra-Luna collapse emerged as one of the primary factors contributing to the decrease in total value locked (TVL) — liquidity locked — within DeFi protocols during the latter part of May and June.

Moreover, the overarching economic downturn has prompted users to exercise greater caution with their investments. Despite persistent enthusiasm for blockchain technology and the emergence of inventive startups and solutions, prospective users have become increasingly cautious about participation. This situation has underscored the critical issues the industry must tackle, such as compliance and regulation, while considerably overshadowing its core advantages — decentralization, transparency, security, and privacy.

Embracing Self-Regulation to Drive DeFi Adoption and Restore Trust

Blockchain innovation and the early challenges of DeFi stem from its decentralized nature and the ease of transactions on blockchain-based dApps, which have attracted startups and developers. The rapid development of protocols and the introduction of smart contracts have significantly contributed to adopting decentralized finance solutions. However, the industry has faced issues related to regulations and compliance, with some builders and users showing caution.

Recent events have underscored the importance of regulation and compliance at various levels, including retail, institutional, and policymaker levels. The industry’s caution towards regulation and emphasis on permissionless solutions and user privacy has revealed the need for necessary safeguards to protect users and establish a secure foundation for the next wave of DeFi adoption.

Historical examples like the Global Financial Crisis of 2008 and the Dotcom Bubble in 2000 demonstrate the need for regulatory measures to protect consumers and provide industry guidelines. The recent black swan events in the blockchain space have further emphasized the need for regulation to better protect users.

Although introducing regulation may differ from the original vision of blockchain, it is essential for the industry’s longevity and maturation. Focusing on self-regulation and limiting unnecessary government intervention can help the industry move forward and regain trust. Institutions and enterprises are interested in DeFi’s value but must navigate regulatory pitfalls. Self-regulation and solutions that promote it represent a favorable route, demonstrating to policymakers that DeFi can self-regulate without excessive government intervention.

Striking the Right Balance: Decentralization, Compliance, and Self-Regulation in DeFi

Regulations may not prevent malicious activities, but they make it easier to prosecute wrongdoers. Decentralization and smart contracts offer verifiable and immutable transactions, providing a level of trust in DeFi.

DeFi is still evolving, and defining compliance in the decentralized space is an ongoing challenge. Centralized systems offer full compliance and high security but lack privacy, while permissionless DeFi solutions provide greater privacy and control but lack regulatory protection.

The dilemma lies in promoting the benefits of decentralization while incorporating compliance in blockchain without diminishing DeFi’s inherent advantages. Traditional financial markets have a deep history that allows governments to better understand and regulate them, but their knowledge of blockchain and cryptocurrency is limited.

Regulation is necessary, but how it is implemented is crucial. Self-regulation and reduced government intervention present an opportunity for the industry. By leveraging DeFi’s innovative nature, self-governing regulations, and standards can be developed to protect users without encroaching on decentralization. The industry must explore solutions that help promote self-regulation while preserving the benefits of DeFi.

Innovative Solutions Paving the Way for Self-Regulation

Know Your Transaction (KYT) is a solution that analyzes a transaction’s risk by performing comprehensive on-chain analytics on a target wallet address. Unlike KYC, which verifies the identity of the address owner, KYT ensures that the transaction history is free from fraudulent activities or associations with financial crimes, money laundering, or terrorism financing.

Users can scan the addresses of participants in a pool to check for a clean KYT score before depositing funds. They can continue monitoring the pool and the risk scores of incoming depositor addresses while their deposit is locked. If a high-risk deposit is detected, users can immediately withdraw their funds. Implementing KYT reduces the likelihood of malicious behavior, prioritizing user safety and encouraging participation from traditional companies.

Zero Knowledge Proofs (ZKPs) represent a groundbreaking approach to preserving user privacy by only sharing evidence of a statement’s truth derived from authenticated information. Although ZKPs have been a theoretical concept for many years, privacy-focused technologies and cryptography advancements have enabled practical applications. ZKPs serve as a means for one party (the prover) to demonstrate to another party (the verifier) the validity of a statement without disclosing any details other than the fact that the particular statement is true.

Decentralized Identity (DID), also known as Self-sovereign Identification, is a user-centric identity system created, owned, and controlled by individuals themselves. Each user has a unique Decentralized Identifier (DID) associated with cryptographic content to authenticate users and verify their credentials.

The foundation of a decentralized identification system is a distributed ledger or blockchain, which stores public DIDs of businesses and is managed by their owners. User DIDs can be either private or public. This blockchain-based decentralized identity framework enables the implementation of digitally verifiable credentials, empowering users with greater control over their own identity.

DID is Rebus’ solution for ensuring users control their data. Our NFTID is a blockchain-based decentralized identification system created for worldwide adoption, enabling organizations to authenticate and verify their members effectively.

With blockchain technology, users own their identities and control their data. The distinct characteristics of NFTs make them well-suited for establishing digital identities. Each NFT possesses a unique identifier, ensuring it cannot be replicated or falsified, offering enhanced security compared to conventional identification methods.

NFTID is adaptable and customizable, allowing users to enter details such as their name, birth date, and nationality or even create entirely fictional information. Users have absolute control over the data accessible to others, as it does not constitute legal documentation.

As self-custody emerges as a refuge for the industry and the potential of DIDs for self-regulation becomes evident, NFTID is set to be a timely and revolutionary solution.

NFTID use case extends beyond DeFi, encompassing various Web3 domains such as social, gaming, and e-commerce. It paves the way for a compliant, private, and decentralized future across a wide range of industries.

Learn more about Rebus

Cookie Settings

By clicking "Accept All Cookies", you agree to the storing of cookies on your device to enhance site navigation, analyze site usage and assist in our marketing efforts. More info

Strictly Necessary (Always Active)
Cookies required to enable basic website functionality.
Thank you! Your submission has been received!
Oops! Something went wrong while submitting the form.