In brief DeFi can be used in a regulated way.

Trustology offers a way of ensuring compliance while using DeFi protocols.

DeFi could help create global liquidity pools.

Decentralized finance (DeFi) is one of the most exciting innovations in the crypto space. It lets anyone, anywhere send money to each other, or random strangers, just using the blockchain.

DeFi has a lot of potential; for instance, it lets you lend out your money and get a reliable interest rate, or trade your money, without relying on a centralized exchange. But there’s a problem for businesses. If the protocols are decentralized, then they can’t conform to regulations, such as meeting know-your-customer (KYC) requirements—where you submit your passport or ID to confirm your identity.

Regulating DeFi

All is not lost, though. One pioneer in the space is Trustology, a custodial wallet provider that supports DeFi apps. Speaking at Digital Asset Summit, Trustology CEO—and self-proclaimed “DeFi geek”—Alex Batlin explained how it’s possible to use decentralized protocols in a regulated way.

“We KYC every single individual that comes onto our platform,” he said. “We have the link between the individual and the public addresses, so we can work with the decentralized apps and whitelist addresses on the exchange.”

So, those wanting to stay compliant can use a DeFi app—as long as they identify a suitable partner on the other side of the trade, or loan, who has undergone KYC. As a result, the protocol stays decentralized while those using it ensure regulatory compliance.

Batlin added that this organization can be done in advance, or in real time, using decentralized oracle services, such as Chainlink. This makes it easy for blockchains to connect to sources of data, such as a whitelist, in real time.

The potential of DeFi

Batlin added that he sees a lot of potential in the DeFi industry. He acknowledged that there are plenty of risks and weaknesses in the current system but that it could fix one issue with the current financial system.

He would know; Batlin previously ran the innovation lab at UBS and was the global blockchain lead at BNY Mellon. Prior to founding Trustology, he also helped form the Enterprise Ethereum Alliance, designed to get more businesses using blockchain.

DeFi has the potential to create liquidity pools that exceed any of the centralized liquidity pools, Batlin explained: “Once it’s safe enough you’ll see this movement of liquidity to global pools.”

DeFi could create a global pool of liquidity. Image: Shutterstock.

Liquidity pools are large sources of assets. In this case, it could be a large amount of Ethereum that various DeFi platforms interact with and can use. Liquidity is useful for making more reliable trading and to make it easier for people to take out large loans.

What’s different about DeFi, Batlin said, is that all these protocols typically use one blockchain—Ethereum—making it easier for them to interconnect.

“We can take ETH, we can mint some DAI, we can create compound DAI, trade the DAI and actually have a derivatives position, with Synthetix, all within the same ecosystem, the same wallet, same keys, allowing you to do all those things,” Batlin said.

“Try doing that with conventional finance. You just can’t do that. We talked about unified identity across providers. Same key for all those different assets and venues. I think that’s pretty amazing,” he said, adding, “That’s the future of finance.”