Decentralized Finance & Self-sovereign Identity: A tale of decentralization

May 27th, 2021

DeFi’s growth is explosive and inevitable, yet its growth needs to be sustainable and responsible, and this can be done through Self-Sovereign Identity technology. Bridging these two concepts has the potential to spur global economic growth.

Self-Sovereign Identity (SSI) is a nascent technology combining the simplicity and usability of a single sign-on with advanced cryptography that provides government-grade secured access to digital services.

The main idea behind decentralized digital identity or SSI is giving users back control over their personal information, meaning where their personal data -- usernames, email, address, sex, nationality, etc. -- is shared, who has access to it and what entities do with it.

Now let’s break down DeFi: it's the industry replicating traditional finance market instruments into a decentralized and blockchain-enabled system using smart contract functions. Therefore, without relying on intermediaries.

While SSI focuses on giving users control of their data, DeFi’s goal is to give users access and control of their finances.

DeFi meets SSI, SSI meets DeFi

So, where do both worlds collide? DeFi, unlike other centralized financial systems, lacks the identity layer aspect, which usually takes the form of KYC (Know-Your-Customer) checks.

This is partly because introducing such features would decrease their decentralized nature as its users remove their anonymity cape. Instead, DeFi directly links to smart contracts and eliminates the need for a legal identity verification process, and thus the platform is not required to interact with your identity to execute trades. As of now, a user only needs a blockchain wallet within the liquidity pool where they wish to exchange tokens.

In addition to prioritizing decentralization, DeFi places a large emphasis on anonymity. Decentralized Apps (DApps) users are attracted to the idea of being able to borrow, trade, exchange, and lend without the other side knowing a single characteristic about the user.

The downside of this structure is that users cannot make informed decisions on how much to lend, interest rates, and loan lengths, which results in high collaterals. This, in turn, restricts the pool of potential borrowers as it requires their collateral to be worth just as much as the loan itself - which may not be available to them at the moment.

So, by treating all users with the same level of risk, DApps are unable to offer personalized services and non-collateralized borrowing, decreasing the user experience.

Decentralized Know-Your-Customer (KYC)

While we believe KYC will be needed, at least as an option for users, to maximize the efficiency of decentralized financial services and reduce fraud/terrorism online.

We’re conscious the methods used by centralized exchanges (CEX), such as Binance, Kraken, and Coinbase, are not the answer. These CEXs request highly sensitive data, including proof of address and personal identification documents, which are then stored in their databases. The solution is a decentralized KYC model using self-sovereign identity technology.

SSI is built on blockchain fundamentals but maintains identity credentials stored off-chain. Hence its technology enables participants to securely identify themselves with only necessary information and guarantees their sovereignty or control over their data.

Through this layer of decentralized identification, SSI can enable protocols to assess a user’s ability to repay a loan (without the need for a centralized credit score) and eliminate some of the risks associated with decentralized lending.

Introducing decentralized KYC checks also unlocks value by:

  • Opening the path for more DeFi services by offering users a certain level of trust or reputation
  • Providing one KYC across all platforms, eliminating end-user frustration
  • Enabling users the ability to revoke a platform’s access to their information at any time
  • Safeguarding access to users whose identity has been verified
  • Tackling the young trader demographic problem
  • Eliminating design vulnerabilities in current authentication protocols

Additionally, regulatory entities such as the Financial Action Task Force (FATF), comprised of 37 members including strong economic powers such as the US, Switzerland, UK, and China, considers anonymous financial transactions to be dangerous and vulnerable to exploitation by criminals, a minimal tie to identity is necessary for the DeFi sector to continue existing if it wants to avoid massive regulation or elimination.

Gataca Studio, the DeFi App’s ideal partner

One of Gataca Studio's applications is real-time, decentralized KYC. Our decentralized identity platform positions itself as the ideal service provider for any DeFi App, as it complies with European blockchain regulations but does not risk its decentralized nature.

Through a monthly subscription and a seamless integration, you can start implementing Self-Sovereign Identity into your own solutions. What can you do with Gataca Studio?

  • Issue your own credentials: Create, validate, and digitally sign identity credentials. You can easily create credential issuance templates to integrate an issuance process into your website or application.
  • Authenticate users in just one click: Gataca Studio enables you to quickly create customizable verification templates for onboarding and sign-in processes while reducing personal data stored in your infrastructure.
  • Manage identity credentials in one place: Gataca Studio lets you effortlessly manage your company’s issued credentials, their status, and verified users from one dashboard.

Discover Gataca Studio and get started for free

DeFi and SSI

What’s more, GATACA is working with government organizations to provide financial consumers with verifiable digital KYC/AML-related certificates to enable instant access to financial services while reducing identity fraud risks.

Financial consumers would only need to scan a QR code and consent to share these verifiable credentials stored in their wallet to instantly access any DeFi service worldwide and would have the ability to revoke access to such info at any time. The value added? GATACA is blockchain-agnostic, promising interoperability and rejecting vendor lock-in situations.

Join Gataca in leading the digital identity revolution.

Get started with Gataca Studio - If you're curious to see the benefits of our technology on your workflows today, get started for free here.

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