As any traditional financial institution that has tried to offer crypto services, any DeFi protocol that has tried to integrate with or onboard traditional finance entities, or any individual whose financial life is split across the two systems knows. There is a chasm between regular finance and decentralized finance.
The linchpin of this oil-and-water separation is identity – both the legal and practical implications of knowing who is the source of a transaction.
Without KYC, decentralized finance protocols cannot integrate seamlessly with traditional finance institutions, compete with many services they offer, or serve them as customers.
With KYC, traditional finance cannot offer the self-sovereignty, interoperability, and accessibility of DeFi.
Traditional financial services have a meaningful KYC burden that limits their ability to interact with DeFi, but it also comes with expanded functionality. Because of this KYC burden, a traditional financial institution couldn’t take a loan on Aave without knowing that every lender on the platform is KYC/AML compliant. Many wouldn't even hold assets on-chain, given the risk that anyone on the network could dust their wallet with tainted funds. On the functionality side, however, knowing the identity of their users allows them to seamlessly provide essential services that DeFi cannot: uncollateralized lending, payroll, transfers of real estate title, etc.
Decentralized finance, however, sacrifices the ability to provide these services and integrate with the modern financial system in exchange for openness, accessibility, and seamless interoperability within DeFi. Most importantly, this sacrifice allows DeFi protocols to protect users’ privacy by preserving their sovereignty over their own data and assets.
The Kinto network allows both TradFi and DeFi to have their cake and eat it too. It provides decentralized protocols all of the benefits of KYC without the sacrifices, and provides traditional financial services all of the benefits non-KYCed DeFi protocols enjoy. By bringing DeFi and traditional finance under one roof, Kinto creates a new seamlessly interoperable and composable ecosystem of financial services that will erase the barrier between the two.