Decentralized finance (DeFi) is becoming more commonplace, but it is not without its risks. Given the unregulated nature of and perceived risk in decentralized finance in all its forms, adoption of cryptocurrency, trading and lending, and so on will not improve until a more trusted DeFi environment is developed to reduce such concerns.
To strike a balance between anonymity and trust in the DeFi-ecosystem, the company Experian is performing breakthrough data experiments in its DataLabs with a multi-layered, instantaneous approach to mitigate the risks that involves methods such as privacy-preserving identity, Secure Multiple Party Computation (SMPC), blockchain forensics, AI and graph analytics, fraudulent-wallet detection as well as off-chain factors.
To understand more about the trends impacting on DeFi, Digital Journal caught up with Vijay Mehta at Experian.
Digital Journal: What are the biggest challenges for the mainstream adoption of DeFi?
Vijay Mehta: Mass adoption of DeFi will come down to three considerations.
- Simplicity in user experience, development environments, and interoperability. For example, one thing impeding mass adoption is cross-chain bridging. Anyone who has ever tried to move an asset from one blockchain network to another knows there is work to be done to make the user experience simple. DeFi needs to be as simple to use as FinTech. Once we have better useability, we will have mass adoption.
- Security in all aspects of the lifecycle. While blockchain is very secure at its core, from a consumer standpoint the identification and authentication process can be a bit scary–the 12-word pass phrase comes to mind. Do we expect the average person to understand security key management, or do we look at alternative simpler security mechanisms for mass adoption?
Another example is how cross-chain bridges are inherently complex and create vulnerabilities. While I understand that the complexity is there because of architectural/algo differences in consensus, finality, block size, hashing, etc., this complexity is a real issue.
- Product market fit for individual industry/transactional needs. DeFi is still at an early stage with products that are still evolving. It remains a complicated subject for the average consumer, and the market is susceptible to misinformation surrounding everything crypto/DeFi related. Not only does this impact the value of the currency, but this type of misinformation and volatility makes it difficult for consumers to fully embrace DeFi.
DJ: How do we attribute some type of a truth or trust factor to those who conduct DeFi transactions (trading, lending, investing)?
Mehta: We know blockchain technology, by design, has made it virtually impossible to alter a record of transactions once they have been verified, and as such, they create immutable records of truth. Even still, the trust aspect becomes a bit complex if we follow the ideal of complete anonymity in decentralized networks.
I believe — as consumer demand for DeFi products grows and gains mainstream adoption — it is likely we are going to see regulations that require greater standards around identity such as Knowing Your Customer (KYC), and management of personal identifying information (PII). Experian has always operated in a highly regulated environment. We continue to work closely with regulators and are well equipped to navigate future changes related to decentralized finance and blockchain technologies.
As regulators and others coming in from CeFi (the traditional financial system we all know) become involved, I expect better systems will be established that will create greater trust and drive adoption of decentralized finance. Our goal at Experian is to help develop a system that can effectively protect the privacy of consumers while still allowing innovation to thrive as well as economic growth.
DJ: Bridging on- and off-blockchain information in crypto / DeFi transactions can drive a more trusted experience. What types of information should be used to bridge the two, while preserving users’ privacy?
Mehta: To strike a balance between anonymity and trust in the DeFi-ecosystem, Experian is working on a multi-layered, instantaneous approach to mitigate risk and prevent fraud that involves methods and technologies such as privacy-preserving identity, Secure Multiple Party Computation (SMPC), blockchain forensics, AI and graph analytics, fraudulent-wallet detection and other off-chain factors.
These layers of protection will be important to improve the adoption of DeFi applications because they will provide additional security in multiple potential attack vectors and begin to provide the protection, we are used to seeing in CeFi.
DJ: What new protocols in crypto / DeFi transactions are instilling trust in DeFi? What additional ones could help even further strengthen trust?
Mehta: Similar to how the internet first evolved from read-only pages (Web 1.0) to read-write interactions (Web 2.0), I suspect we will begin to see some level of consolidation among the different DeFi protocols where we end up with a set of standards. This may take some time, but — at some point — the way that we think about key management, identity, encryption and more will become more consistent, at which time we will have a more mature security environment.
We will know we’re on the right path toward instilling more trust in DeFi and driving mainstream adoption when we see more volume from major global banks. After all, transacting on the blockchain does enable a less expensive mechanism for transferal of funds and assets across geographies.
DJ: Where can government regulations play a role in promoting trust in DeFi?
Mehta: In traditional CeFi, we have regulations around every aspect of trading, credit, and banking. I expect that over time, we will see more regulations that align DeFi to CeFi. Some examples include stable coin backing, risk management in lending, and KYC/AML checks when identifying a consumer.
The obvious follow-up question is when this might happen. More than likely, we’ll see acceleration in regulatory standards when more of the large cap banks jump into the space and must be accountable to shareholders, customers and existing regulations. For example, we know many global banks are already considering how and when they will enter the DeFi arena in a meaningful way as their clients have sought access to DeFi products/services. They will apply their own rigorous standard to mandate certain keys and identifiers are included in the blockchain. We also know that everything crypto has the eye of the politicians in the US, so it really is just a matter of time before we see changes.
It is hard to put any real timeframe on this sort of market maturity, but I think we’ll begin to see these de facto elements being added into every blockchain with the next two to three years as consumers interest and demand continues to rise.
DJ: Well-publicized instances of token theft have characterized the DeFi market? How could those thefts have been avoided? What’s happening to avoid them in the future?
Mehta: Token theft has come in many different forms. Examples include bugs in the protocol or exchange, problems with management and oversight, or traditional fraud and scams. As the industry and technology matures, so will the security. Fraud prevention efforts will get stronger, which is already happening in conjunction with advancements surrounding identity.
DJ: What are credit bureaus like Experian doing to advance the adoption of DeFi?
Mehta: Experian fosters a culture of innovation through R&D, innovations in our credit and identity and fraud businesses, partnerships, and investments. Our goal is to be the platform to bridge the on- and off-chain gap with truthful information, while preserving the user’s privacy, enabling them to safely interact with other financial products. This will help drive a lending environment that can offer better loans and more available liquidity.
AI is going to play a significant role in proving the truth in DeFi. There is a vast number of transactions openly available on the blockchains that can uncover fraudulent activity. Detecting suspicious transaction patterns, such as NFT wash trading where individuals self-finance the trades with multiple related addresses, can be indicative of fraud. Identifying the association of illicit and/or fraudulent wallet addresses can also be another red flag for bad actors.
DJ: Three to five years in the future, what will the marketing landscape in DeFi look like with respect to mainstream adoption? What will need to occur to spark consumer adoption?
Mehta: As the industry continues to mature, we will see better tools, user experience, and clear information regarding safety and security in the space. Additionally, we will see more competition among DeFi products to create offerings that match and outperform CeFi.
As this industry matures and regulatory-driven standards begin to govern transactions, the current risk factors in DeFi transacting will decrease. We expect that this will lead to an increase in consumer adoption. As this occurs, having authoritative data to resolve and verify identity, measure, and monitor risk, and proactively prevent fraud will be critical. This is where Experian’s deep expertise in identity resolution, advanced analytics, and fraud protection technology will be an asset in driving consumer trust.
During this evolving environment, Experian will remain a committed early adopter of any technology that might improve the power of data for its clients and consumers.
