The idea of CeDeFi — the combination of Centralised and Decentralised Finance — unites two ways of interacting with assets into one. Centralised Finance (CeFi) represents traditional entities (e.g. banks, brokers, funds), Decentralised Finance (DeFi) covers blockchain financial applications, cryptocurrencies, exchanges, decentralised payment services, etc. By merging the two, high transparency, impactful innovation, and wide adoption can be achieved.
We already know that blockchain applications are not limited to finance. CeDeFi is just one part of the Centralised Decentralised Industry (CeDeX), where X stands for every industry and possible application.
A common challenge for CeDeX: SSI is a solution
Centralised and Decentralised providers adopt different approaches to interact with users and their data. Centralised companies typically collect as much data as they can to provide personalised, monetizable, and targeted services. Decentralised providers prioritise users’ anonymity and transparency: for the sake of decentralisation values, only minimal information is requested, even if it’s in tension with user safety and compliance.
Self-sovereign identity (SSI) is a way to provide users control over their data, where information is issued to a user-managed wallet before being shared to the third party. This approach opposes the current model of data collection and management, where users rarely know how their data is collected, and have a limited say on its use.
For now, neither CeFi or DeFi (and, CeXs and DeXs by extension) have found a safe and comfortable way to interact with sovereign identities. Let’s take a look at two examples to summarise why.
- CeFi: Central Bank Digital Currencies (CDBC) are an example of innovating CeFi’s approach. By introducing CDBC into circulation, financial institutions can provide users with “nearly fast” processing and “nearly zero” commission on all transfers, including cross-border payments. However, widespread use of CDBC will generate a lot of data: in the worst-case scenario, institutions and governments would be able to track the financial movements of every person. Without a well thought-out and secure identity layer, this innovation could quickly turn into a dystopian privacy invasion.
- DeFi: existing decentralised exchanges (like Uniswap), allow users to make payments without providing identity information. DeFi ignores established Know Your Customer (KYC) and Anti-money Laundering (AML) measures, exposing itself to the risks of sponsoring money laundering, tax evasion, etc. Regulators’ concerns are obviously increasing — so much so that the lack of a proper identity layer could become a driver for massive legal penalties.
An ideal identity layer that suits both CeFi and DeFi needs
Since both approaches are imperfect, it’s necessary to come up with a new way to interact with user data. What would be the key characteristics of a reliable self-sovereign identity?
- KYC with anonymity
To fit the CeDeX needs, a new approach should find ways to collect data without disclosing users’ identities. The only goal for collecting data should be to prove the legitimacy of the user. So, storing data for personalisation, financial tracking, or advertising should not be allowed, at least not unless the user explicitly agrees.
2. A new perspective on compliance
Building an SSI system is a technical and regulatory challenge. First and foremost, we should reconsider the KYC requirements. What and how much data is enough to consider a user KYC’ed? Are the current KYC and AML systems achieving their goals, and what could be improved? Why do users dislike KYC and how to eliminate the major pain points? SSI management is a multi-dimensional challenge that requires the cooperation of financial providers, legislators, and end participants.
3. Creation of revenue streams
The ability for individuals and companies to hold and control their data will create entirely new revenue streams. For example, who could foresee that a combination of passport, antibody test, and boarding pass would be a crucial blend to allow international travel. Furthermore, since the user is now at the centre of the ecosystem, they can become part of the commercial framework rather than being surveilled and monetised. Extending the work that Brave browser and the Basic Attention Token have begun, incorporating SSI and authentic data will push the value of personal data even higher since it is accurate and trustworthy.
4. Providing full trust
When the payment sender has no verification of the receiver’s identity, there’s a risk of making payment to the wrong address. If there was a way for participants to know more about each other without compromising key identity information, it would greatly reduce the chance of erroneous money transfers.
Additionally, it would open digital asset transactions to much wider adoption. Trusted SSIs remove the need to triple-check addresses, conduct test payments, Zoom calls, etc. SSI on its own should be enough to provide all the proof. This could be as comprehensive as sharing a digital version of a passport or as privacy-preserving as just a Telegram handle with both of these cryptographically attested and visible to only those involved in the transition, i.e. peer-to-peer.
5. Defining opportunities and limits
SSI has thousands of potential applications each with unique requirements. When we talk about managing identities, we care about the legitimacy of participants and the nature of transactions.
If we incorporate SSI into an advertising network, we need to define compensations for user data, and the limits to which privacy can be exploited even under consent for commercial purposes, etc.
Applications of SSI
Let’s take a look at several possible use cases for SSI to appreciate the versatility of the challenge.
- NFT: SSI can solve the provenance issue with NFTs regardless of the ledger.
- Content: fully decentralised content consumption with payment and identity, i.e. consumption of media/content directly from the creator without a distribution channel. A possibility for creators to receive fair payments for their work and interact with audiences directly.
- InterPlanetary File System (IPFS) for controlled decentralised storage: SSI can be implemented to manage the data of participants and store distributed files with decentralised access control
- Payment verification: the risky nature of CeDeFi transfers has been holding back many users. There’s no way to further verify the identity of the payment receiver beyond the wallet address. It’s a problem even for low-volume retail traders, but increasingly more so on the institutional level, where large trading volumes risk being lost. Institutional participation is an influential driver for mass adoption, and the introduction of SSI of that level can result in significant growth of decentralised finance.
CeDeFi (Unizen) as the main application
Despite the multitude of SSI applications, finance remains the biggest, and potentially the most rewarding challenge. If CeFi and DeFi providers can come together to figure out a new way to ensure KYC and AML, broadening the applications of the solution is a much easier task.
In most other applications, financial challenges enter the picture only at later stages (take content creation, for instance). In finance, all transactions have risks, many of which can be solved only with SSI. This is what makes CeDeFi a perfect market for the introduction of SSI. Also, neither centralised nor decentralised finance is satisfied with current options, which is why they are highly incentivised to explore alternatives.
We, at cheqd, are building the payment rails for authentic data*. We want to make it as easy as possible to create authentic data ecosystems through customisable commercial models and governance structures, all built upon a public permissionless network with a dedicated token for payment.
We’re starting off with a focus on SSI, using commercial and governance frameworks to make it easy to stand up new ecosystems and return privacy and data control to individuals. Our team is passionate about the privacy movement as well as creating new business models and marketplaces around authentic data.
*Authentic data is where the source of that data can be proved. This is in contrast to most existing data economy solutions where the data has no lineage. For example, being able to prove passport data came from a legitimate passport issuer rather than simply reading the contents.
Core to the business model implementation is a dedicated network and token. When the user is at the centre of the ecosystem, companies will no longer have contracts with every other company they interact with. If a passport is issued in one country and then used across the world in another to open a bank/exchange/choose account, there should be a corresponding value flow. This wouldn’t be possible if contracts and fiat rails are used!
Despite the blockchain network and token underpinnings, we don’t believe any client/end-user should need to care about these. Our ultimate vision is that we establish the payment rails for identity, initially self-sovereign identity without anyone needing to worry about the underlying technology. This perfectly aligns with the CeDeFi vision of providing a spectrum of financial services without the need to worry about whether they are centralised, decentralised or what technology they are built on.
This blending of CeFi and DeFi also prevents the need for multiple, siloed identities which is exactly the problem SSI is built to solve. We need to avoid recreating siloes in any form. The greatest priority is getting to the right outcome for the individual.
The relationship of self-sovereign identity and CeDeFi is more than a symbiotic one. Not only do the two benefit from each other, in fact, each of them would also have difficulties thriving without the other:
- SSI is a necessary component of CeDeFi. Without ways to create and manage SSIs, CeDeFi will not be able to meet KYC and AML needs together with decentralisation expectations. SSIs create a bridge between traditional data-heavy interactions and an anonymous DeFi approach.
- CeDeFI will provide the financial infrastructure which is required for global SSI adoption. SSI adoption relies on the ability of SSI owners to get paid for their data and participation, as well as create entirely new business models through the blend of previously uncombined datasets. Thus, there’s a need for fast, secure, and usable technology, as well as for the legislative framework for data-asset interactions.
- CeDeFi and SSI providers should cooperate to ensure the best user experience and security of all participants. Once the SSI has proven itself on one of the riskiest applications — the financial one — it’ll easily cater to other industries.
Authors & contributors: Fraser Edwards (Chief Executive Officer, cheqd), Ankur Banerjee (Chief Technology Officer, cheqd), James Taylor (Chief Business Development Officer, Unizen), and Ghost of St. Miklos (Community Contributor, Unizen).