The Wormhole DeFi bridge connecting the blockchains was hacked last week for over $320 million worth of Eth wrapped in the Solana blockchain.
Wormhole said he refunded the money, but regulators who build crypto controls couldn’t have been happy with such hacks.
Although Web3 hates regulation by default, losing millions to a lack of security can ruin lives.
A partnership announced at the end of the year could change that: a DeFi-enabled KYC and credit check system that preserves user privacy.
By the end of 2022, crypto lenders will verify customer credit reports through a partnership between Spring Labs and Trans Union. The partnership was announced at the end of the year but was one of the most promising in 2021.
What does this mean for tradfi, DeFi and fintechs?
As John Sun, CEO and Founder of Spring Labs, described, the partnership will build on Spring Labs Ky0x platform, an Ethereum-based passport system, or, as John Sun, CEO and co-founder of Spring Labs mis, a network of verifiable secrets.
“So let’s say I have a MetaMask wallet and want to be able to post the verifiable secret about myself. I want to be able to report to a DeFi app that I have at least 750 FICO points,” Sun said. “I would be able to do this through the Ky0x platform, and we will distribute it through an Ethereum-based passport network.”
Sun said the challenge is to offer credit scores and KYC to businesses within an ecosystem that values anonymity. However, as Valentin Blehaut, Chief Strategy Officer at Spring Labs, said, most crypto users already accept less than strictly anonymous practices, like centralized exchanges with funds that require full KYC.
“Not all of us use Zcash, [confidential crypto,]said Bléhaut. “So it’s clear that people have accepted some level less than anonymity, or whatever they initially associated with decentralization.”
Blehaut said that Ky0x has been sort of the blockchain department of Spring Labs for a few years. Previously, the team launched a Defi Compliance toolkit on the platform over the summer and plans to put more off-chain data on-chain via Ky0x soon. The Spring Labs team called from Eth Denver and said they were constantly working to figure out where the ecosystem was heading.
Velentine said Spring Labs will continue to develop products to deliver crypto and challenge platforms and the Trans Union partnership is a vast source of data that makes this possible.
“Even if you provide credit data today, most challengers don’t have the modeling capability or the ability to establish APR metrics of their loans that they make,” Blehaut said.
Spring Labs: Decentralized does not mean anonymous
This is not the anonymous crypto world of the Silk Road Days; New York police have arrested the alleged culprits of the $3.6 billion Bitfinex hack in 2016 this week.
Authorities and exchanges can already track hackers down in today’s crypto world. But in DeFi, anonymity is very important; privacy and ownership of user data is the whole point. To strike a balance between the traditional credit model, we own all the data, and DeFi’s Wash-Trading-R-us model, Sun said it all comes down to user approval.
“What would happen in practice, from a user experience perspective, is that they would try to interact with the app that requires a credit score,” Sun said.
“The web3 application will automatically come to us and us to retrieve this information, on behalf of the user from TransUnion. And the user could take this information and self-publish it as a verifiable secret that we would essentially co-sign, for prove that a third party has verified a credit score and be able to associate it with a wallet address.
Like a privatized passport stamp that sits in a wallet address, credit and KYC verification would help exchanges looking for minimal background checks. Sun emphasized that the user controls verification and exercises ownership of the data by sharing it.
Building a bridge as partners
A real verified private check would change everything for crypto lending, but why is TransUnion leading the way in what could be the next era of credit checks?
DeFi has exploded in value over the past year, with dapps built on Ethereum alone surging to $200 billion in November from around $20 billion the year before, according to JP Morgan.
Taking credit data off-chain on-chain and performing KYC could be the key to unlocking the asset class for traditional institutions like Fidelity that cannot hold crypto directly on US balance sheets.
By speaking with Liz Pagel, Senior Vice President of Consumer Lending at TransUnionthe firm was excited about DeFi, more than previously known.
Pagel was excited to talk about the partnership and the start of countless products that TransUnion could bring to the DeFi space.
“So when we think about what Spring Labs can do, it really complements what TransUnion can bring to market. TransUnion has the data, has the analytics and has those assets,” Pagel said.
“Combining data and analytics from TransUnion with privacy-preserving technology from Spring Labs will bring traditional credit scores to the blockchain. This is a key element in bridging the gap between on-chain and off-chain.
$20 billion international giant TransUnion partnered with Spring Labs months ago, leading their $30 million Series B round last May. Even back then, Steve Chaouki, the president of US markets, told Tech Crunch TransUnion was not a private equity firm; it was investing in building something.
Sun immediately said he had reached out to senior management at TransUnion and it didn’t take long for the partnering capability to materialize.
Where TransUnion Fits In
So what will they do to keep the bridge on the TransUnion side? Pagel said the possibilities are endless and in the future they may allow DeFi users to put all types of data in their wallets, but for now they are sticking to one standard. ‘industry.
“At the start, it will be a VantageScore, which is universally recognized, very easy to understand and something that institutional investors understand, something that consumers understand,” Pagel said.
“So if a consumer group goes to a DAO and says, hey, I want to put one of the rules, that the credit threshold is 720, they can make it happen.”
From there, the possibilities are endless. This will only be the first stage of adoption. The partnership will allow Spring Labs, with the help of Trans Unions, to integrate credit data off-chain, throughout the user-approved process. After credit data, Ky0x can move in any direction.
“I think decentralization is in many ways what makes blockchain unique, but at the same time, decentralization doesn’t mean anonymity; I don’t think the two are necessarily dependent on each other,” Sun said.
“Decentralization in the sense that structures are created to be distributed, and ownership is created to be distributed, and you know, dis-intermediate as much as possible, and you create technology and code that is compostable.”