Permissioned DeFi — DeFi for the Corporate Institutions by@talktomaruf

Permissioned DeFi — DeFi for the Corporate Institutions

Decentralized finance has apparently solved the limitations known with Centralized finance. DeFi became the financial revolution of this current age by raising the bar of seamless financial transactions against what is known in the traditional financial ecosystem. With DeFi being deep-rooted in the public blockchain, its massive adoption has led to a market value and TVL of approximately $200 billion. In order to expand the tentacles of DeFi and allow institutions to be part of it, DeFi enthusiasts and investors are envisaging a permissioned DeFi.
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Abubakar Maruf

Technical writer and enthusiast for everything blockchain

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What is Permissioned DeFi?

Decentralized finance has apparently solved the limitations known with Centralized finance. DeFi became the financial revolution of this current age by raising the bar of seamless financial transactions against what is known in the traditional financial ecosystem.

Centralized Finance

Centralized finance is the traditional financial system that involves central authorities calling the shots. Furthermore, it constitutes layers of intermediaries and tons of paperwork before authorizing financial transactions. Conventional banks and other financial institutions like investment companies, insurance companies, mortgage companies, and their ilk adopted this financial system. This traditional financial landscape is bridled by flaws and other factors that nip its use cases to some particular time of the day and week.


Users or clientele cannot conduct financial transactions seamlessly without downtime at some particular time due to the systematic procedures involved. This and many more limitations led to the discovery of a ground-breaking innovative way of conducting financial transactions with the backing of blockchain technology.

Decentralized Finance—DeFi.

DeFi is the innovative way of financial transactions brought about by the advent of blockchain technology. Blockchain is an immutable decentralized public ledger that records transactions chronologically in blocks and links blocks of transactions together as they are succeeding one another. One of the numerous use cases of blockchain technology is its financial use cases that birthed DeFi. Blockchain decentralization enables the modern technological way of financial transactions to eliminate central authority and intermediaries of all levels.


DeFi successfully cut off intermediaries like governments and financial brokers, making traditional finance a hard nut to crack. The tons of paperwork, downtime, hierarchy of intermediaries involved, and limited time window of financial transactions that constraint traditional finance were eliminated by this financial innovation breathed by DeFi.


With DeFi, you’re in total control of your assets and can transact with anyone, anytime, anywhere.


DeFi is more affordable than traditional finance since intermediaries and governments that will claim charges and taxes have been cut off from the ecosystem.


Furthermore, it is more accessible to broader users because it is permissionless, unlike traditional finance. DeFi being permissionless means no permission or authorization is required from anyone before you can participate in any DeFi protocol and enjoy its financial capabilities. This has made its adoption explosive as the only enabling tool is internet access alongside computing devices.

In other to outperform the traditional financial ecosystem, almost all financial goods and services rendered on the traditional finance are offered seamlessly on DeFi. For every service on traditional finance, there is a modified replica on DeFi.


With DeFi being deep-rooted in the public blockchain, its massive adoption has led to a market value and TVL of approximately $200 billion. This was achieved in a few years from when MakerDAO was created in 2015 till this time—2022—without government regulations. Many corporate organizations were eager to join the train of DeFi and be part of the new financial wave due to what it has become in a few years of its evolution. Unfortunately, they are skeptical due to its lack of regulation and some security concerns.


Blockdata projected that a trillion-dollar could be waiting to flood DeFi if regulated and monitored because it will allay the fear of institutions convincing them to join in. In order to expand the tentacles of DeFi and allow institutions to be part of it to increase its market value and adoption further, DeFi enthusiasts and investors are envisaging a permissioned DeFi.

What is Permissioned DeFi—PDeFi?

Permissioned or Institutional DeFi is another nascent innovation of DeFi where participants are authorized before participating in DeFi protocols. By authorizing, this means participants will undergo whitelisting procedures before being allowed to participate.

How?

Background checks will be done on all intending participants on their identity through KYC and KYB before participating in DeFi. This was considered and introduced to pave the way for corporate institutions to be part of DeFi, assuring them that participants have undergone a background check.

What are KYC and KYB?

KYC—Know Your Customer/Client— is a process of verifying the identity of a customer or client, as the case may be. It involves facial, ID card, biometric, and document verifications like utility bills to ascertain proof of address. In the finance industry, KYC helps detect and prevent money laundering, terrorism financing, and other illicit misconduct like tax evasion.


KYB—Know Your Business— is another verification process almost like KYC. Only businesses are involved instead of individuals. It aims at identifying business enterprises, companies, and organizations.


KYC and KYB are incorporated into PDeFI to identify individuals and corporate organizations quickly. KYB will be for investors like Liquidity providers and liquidators, while KYC will be for borrowers and traders.

  • Liquidity Providers—LPs— are institutional investors providing liquid assets to the PDeFi marketplace. In return, they earn interest through transaction fees.
  • Traders are individual trading assets in the PDeFi marketplace.
  • Borrowers borrow collateralized assets from the liquidity market.
  • Liquidators are enterprises or individuals who purchase a portion of a debt at a discount rate when borrowers are not meeting up.

Unlike the usual DeFi, where participants are anonymous, participants of PDeFi will be onymous. The concept behind PDeFi is to provide a secured and regulated DeFi ecosystem where participant complies with the AML—Anti Money Laundering. Corporate institutions can hop in and be rest assured that participants are in total compliance after being permissioned to participate.

Why Permissioned DeFi?

  • PDeFi will bring the era of giant financial institutions into DeFi; this will, in turn, broaden DeFi’s market value and perpetual adoption.
  • PDeFi will also curb money laundering and other financial crimes via its permissioned processes.
  • All DeFi projects will not be tampered with, but participants will now be KYC’d.

Aave Permissioned DeFi

One of the notable DeFi projects that have realized PDeFi is Aave. Aave is a decentralized cryptocurrency lending platform that enables users to borrow, lend, and earn interest without the involvement of a third party. In July 2021, Aave announced the launch of Aave pro and Aave Arc.

Aave Pro will be the permissioned version of the Aave protocol, while Aave Arc is the permissioned pool for institutional investors. Aave arc is meant for authorized institutions who will be the LPs and borrowers on the PDeFi.

Fireblocks—a digital asset custodian— will be responsible for the customer on-boarding, KYC, and AML compliance. Fireblocks—alongside other whitelisting agencies like Celsius, CoinShares, Anubi Digital, Canvas Digital, and GSR — have been lined up and whitelisted 30 financial institutions to partake in the Aave arc as LPs, borrowers, and liquidators.

Alkemi Earn

Alkemi is another permissioned platform for lending and borrowing protocols. It has two pools; permissionless and permissioned pools. The permissionless pool is open to all and sundry, while the permissioned pool is only available to participants that have been verified through KYC.

Clearpool Finance

Clearpool is another permissioned DeFi platform. It operates on a single pool, which is permissioned. Yields from stablecoin lending are higher on clearpool than on other DeFi platforms because it operates non-collateralized lending.

Conclusion

The advent of DeFi has birthed several financial revolutions that keep growing massively. Even naysayers could not agree less about the technological breakthrough of DeFi. This made traditional finance operators seek subtle entry into a regulated DeFi, which birthed permissioned DeFi. The concept of permissioned DeFi is to make room for institutional investors to allow them to participate in DeFi protocol.


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