Aave, Fireblocks and Galaxy Explore Next Steps Toward Permissioned DeFi

The whitelisting and blacklisting of DeFi participants will make life easier for institutions, but potentially at a cost.

Jul 2, 2021 at 5:24 p.m. UTC
Updated Sep 14, 2021 at 1:20 p.m. UTC

Before banks and financial institutions can get involved in automatic anonymous lending, permissioned versions of decentralized finance (DeFi) will have to emerge – and with it, a system of whitelisted and blacklisted wallet addresses, according to Aave founder Stani Kulechov.

Financial institutions, including banking majors, see the power of DeFi and the potential threat to existing business models. What they don’t see is the ability to carry out know-your-customer (KYC) checks in the realm of pseudonymous lending pools and automated market making. 

“We believe that creating this kind of ability of whitelisting and blacklisting addresses regarding this institutional market makes it easier to scale in institutions, because it lowers the risk in general,” Kulechov said this week in a webinar called “Next Steps for Institutional DeFi.” 

Also on the panel with Kulechov were Fireblocks CEO Michael Shaulov and Galaxy Digital CEO Michael Novogratz. 

Kulechov said permissionless DeFi will always exist, but there will also be “layered and tailored” DeFi made up of private pools and whitelisted markets. Fireblocks is assisting Aave to explore how such markets can be deployed.

“We are able to basically operate within a network where we already know the participants,” said Shaulov. “We are able to basically validate and vet them into the network and essentially create this sort of gated community.”

This would be “phase one,” Shaulov said, leveraging the multi-party computation (MPC) used by Fireblocks. “We can basically then sort of whitelist them essentially, into those pools and allow them to interact with one another, while guaranteeing that they’re sort of isolated from the general pools,” he said.

Novogratz of Galaxy pointed to two options going forward: the “walled garden” approach being explored by Fireblocks and Aave, and what he called the “chain surveillance option” where enough work can be done to figure where transactions are coming from.  

“I think both of those are going to work to give a prophylactic to the user,” Novogratz said, adding: 

“The $64,000 question for anyone who’s running protocols is, are the regulators going to say, ‘Hey, we love you for being at 82% or 46% regulatory compliant, with your good customers, with your white labels. But we really don’t like the blacklist customers.’ So will businesses like Aave have to say, ‘We’re not going to be open and permissionless like we were. We’re going to have some form of KYC.’”

Watch the full conversation:

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