How digital identities will help realise the true potential of DeFi

For all of the benefits that DeFi offers to fill the gap created by traditional finance, it also comes with significant hazards that must be addressed.

For starters, there’s the impending danger of regulation. Legislators are bound to join the party at some time. There is a huge danger of fraud in an uncontrolled industry where millions of dollars change hands every day. High-profile instances with anonymous founders provide no reassurance that the sector can self-regulate efficiently.

Second, DeFi loans are highly overcollateralized owing to a lack of KYC (regulated banking’s “know your customer” rules, which can only be enforced in person), limiting their usefulness to both unbanked people and SMEs. As a result, the potential usefulness of these markets as key enablers for DeFi is limited. Nobody can build a credit history to establish that they’re trustworthy borrowers due to a lack of identification and the pseudonymity of blockchain.

The lack of identity and access control is at the heart of the problem. A digital identity (DID) solution might pave the way for a future in which people and small businesses can take advantage of open finance’s full economic potential. Citizens would have self-sovereignty over their data thanks to decentralized, privacy-preserving DIDs, which would eliminate the need for antiquated, bank-like KYC checks that frequently go farther than they need to for the sake of compliance.

First movers

In 2017 and 2018, while blockchain was being promoted as the solution to all problems, the blockchain ecosystem’s thought leaders addressed the concept of self-sovereign digital identities extensively. DIDs, on the other hand, remain a viable use case for blockchain technology, unlike many other fictitious ones. One issue with moving ahead is that identification on the blockchain works best when it’s built into the infrastructure rather than being an “opt-in” application.

As a result, while traditional blockchain platform like Ethereum are still focused on tackling long-standing issues like scalability, identification hasn’t been a top concern. Unfortunately, many newer initiatives have prioritized being “Ethereum-killers” above addressing real-world issues.

Concordium, on the other hand, is a newcomer to the blockchain platform arena, with identification at the top of its priority list. Enterprise adoption is a key goal for the project. As a result, it recognizes that no contemporary firm can show compliance if they can’t verify that the opposite side of a transaction is real.

A decentralized credit score

Ontology is another platform that works on decentralized identification solutions. DID for DeFi is a priority for the project, which has ambitious goals that span a variety of use cases. Ontology’s freshly released DID solution enables customers with a unified dashboard that gives them a 360-degree view of all their digital assets across all wallets. It’s accompanied by a decentralized credit rating system that’s compatible with different blockchains.

Finally, lenders will be able to verify that users are creditworthy and have sufficient assets to pay the value of a loan without having to inspect the assets in person and without having to severely overcollateralize the loans.

Wrapping up

Given the potential for unbanked individuals and SMEs to embrace digital identities, it’s clear that digital identities may become a major enabler for the whole DeFi industry. After all, it’s only the beginning, and the long-term advantages in terms of economic equality and user privacy may be enormous.

It will, however, all depend on whether the industry is ready to take efforts to create some level of self-regulation through the use of digital IDs. Learn DeFi to understand the intricacy of this field.