Analytics firm ConsenSys is launching a compliance service to trace transactions made with Ethereum-based tokens in the decentralized finance industry (DeFi).
Ethereum co-founder Joseph Lubin’s firm has rolled out a new service focusing on DeFi. It will track user transactions for over 280,000 tokens launched on the Ethereum network, according to Bloomberg.
KYC Coming to DeFi?
ConsenSys is rolling out a know-your-customer (KYC) based product targeting the regulatory compliance requirements that have previously hampered many crypto companies. The company tweeted:
“Today we launch #CodefiCompliance, an automated and agile regulatory and compliance platform for digital assets built on #ethereum…”
Centralized exchanges are required to ask their customers for proof of identity, and often a physical address. Failure to provide this information results in a limited account with withdrawal restrictions. The regulations are part of government anti-money laundering (AML) laws that are commonplace in many countries.
DeFi has so far escaped such regulations, but it’s only a matter of time thanks to the ConsenSys announcement. The company appears to be accelerating the process with its latest offering. Lex Sokolin, an executive at the firm, explains;
“There are more and more people building decentralized apps that need this as a Lego piece. What we are trying to do is make activity on the decentralized financial infrastructure much more safe, transparent, much easier to trace.”
He added that there had been massive growth in DeFi services in recent months. The emerging industry’s user base has ballooned to 200,000 recently, up from just 20,000 last year.
If 2017 and 2018 were the years of Initial Coin Offerings, then 2019 was the year for DeFi. The nascent industry has grown over 400% from small beginnings to over a billion dollars of total value lockup in just over a year.
DeFi’s ethos has revolved mainly around the ‘unbanked’ and freeing society from the clutches of centralized, state-controlled banking systems which monitor and limit financial transactions. The smart contract-based crypto lending and borrowing ecosystem mainly operates through decentralized exchanges (DEXs) and dapps that are completely anonymous.
Co-founder and CTO of CasaHODL, Jameson Lopp, quipped that ‘Defi’ is for
defiance compliance. Other comments were also critical of the apparent erosion of the supposed decentralized part of the new financial landscape;
“Ethereum looks to ConsenSys for leadership, not for this kind of pro-centralization/anti-privacy propaganda…”
In contrast, centralized exchanges employ the services of analytics firms such as CipherTrace, Elliptic and Chainalysis. The latter recently added Dash and Zcash to its compliance services, to monitor accounts and tokens potentially linked with criminal activities.
ConsenSys is entering a crowded compliance market. It hopes that a singular focus on Ethereum, the foundation for the DeFi industry and where most tokens are issued, will help it get ahead.
ConsenSys Bullish on DeFi With New Products
The company clearly sees a big future for DeFi and has increased its focus on the fledgling market in recent months. ConsenSys also offers a service called DeFi Score, which is an open framework for evaluating DeFi protocols.
As with the rest of the crypto industry, DeFi has not escaped the controversy of compromise. Earlier this year, a malicious actor took advantage of a smart-contract vulnerability with a ‘flash loan’. The perp walked away with some handsome profits. In April, another DeFi app was suspended after $25 million was drained from its smart contract.
The DeFi Score measures the coverage and authenticity of security audits across a DeFi protocol’s set of smart contracts. It also analyzes financial risk for each platform and assigns a rating accordingly.
The latest compliance and KYC token tracking service from ConsenSys aims to further bolster security while reducing risks associated with embryonic DeFi platforms. It may, however, come at the expense of anonymity and decentralization.