Potential of Permissioned DEXes
When you start going down the rabbit holes of crypto, you begin to understand that there is a modern renaissance taking place. To name a few of the topics involved, there is cryptography, finance, technology, anthropology, art, psychology, game theory, economics, anti-censorship, video games, fashion, venture capital, all sorts of biases, and new forms of governance.
Institutions know this. They see the progress being made in DeFi and want to become involved but have been legally restricted from doing so. Many institutions like pension funds and university endowments are confined to assets that meet specific criteria. First and foremost, these assets need to be well vetted in terms of where they come from.
Due to the pseudonymous nature of DeFi and permissionless DEXes, institutions have had to sit on the sidelines, until now.
Most marketplaces are permissioned. When you open a securities brokerage account like Fidelity or Robinhood, you have to submit various identification documents that will prove you are who you say you are. This can include addresses, utility bills, driver’s licenses, and even pay stubs to verify your income level. From there, every transaction you make is tied to your identity. The primary reason these regulations are in place is to protect against money laundering and terrorist financing.
Public blockchains operate a bit differently. Rather than having transactions settle through the use of centralized intermediaries, they simultaneously settle publicly across all the network’s nodes so everyone has access to the details of the transaction. This doesn’t require any form of identification other than the associated wallet addresses involved in the transaction. As each transaction immediately becomes a part of the public record, your wallet address becomes your public identity.
It’s not anonymous. It’s pseudonymous.
Individuals and institutions can now publicly operate as a wallet address.
Individuals are generally free to do what they want with their capital. Institutions, on the other hand, have strict regulations and investor policy statements (IPS) that need to be adhered to. A looming aspect of this is to not be involved in transactions that may infringe on anti-money laundering (AML), know your customer (KYC), or anti-terrorist financing regulations.
Many of the bulge bracket banks have been caught being involved in money laundering and terrorist financing because they know they can get away with it. At worst, they pay a fine and receive a slap on the wrist. This is the result of letting financial service companies get too big to fail. Most institutions, though, are not too big to fail and need to take these regulations very seriously.
Decentralized finance has not only introduced new forms of money, but also new forms of transactions. Anyone can pseudonymously provide liquidity to a liquidity pool that enables further pseudonymous trading. This eradicates the need for market makers, bootstraps liquidity for markets that may otherwise be illiquid, and introduces novel ways to generate yield on digital assets.
But who are you providing liquidity to? That’s the question regulated institutions need an answer to before they can begin participating.
It could theoretically be terrorist money laundering. Users who are trading against someone on the sanctioned list can get up to 20 years of prison time and up to tens of millions in fines. Multiple institutions have had to pay penalties in the hundreds of millions or even billions because they transacted with, or enabled the transactions of, the wrong counterparties.
Cue Solrise’s DEX Pro
Finance has been centralized since its inception although the benefits of decentralized finance are staggering. The convoluted systems, jargon, and potentially untrustworthy humans are replaced with computer code. Automated Market Makers (AMMs) arguably enable more natural price action than traditional market makers due to the fact that the AMM is not taking a position against traders. It is simply providing a protocol for decentralized exchanges (DEXes) to operate. Barriers to entry are being wiped out and now anyone can make a market.
Solrise noticed this. Solrise is building a decentralized investment management protocol on Solana that will enable anyone to invest in anyone else’s trading strategies. Think of these strategies as decentralized hedge funds.
To onboard institutional investors to the benefits of DEX trading, Solrise is implementing the world’s first Permissioned DEX (pDEX).
This permissioned DEX is the first part of our future ecosystem of permissioned protocols. These are kept entirely separate from Solrise core, which will always remain permissionless and not require any form of mandatory KYC. You can read the official press release here. We’re seeing the capacity and capabilities of decentralized exchanges come along in leaps and bounds while centralized exchanges are in retreat.
“This is our way of bridging the world of institutions to DeFi without resorting to centralization, thanks to Civic. With Solana already being the most familiar DeFi ecosystem for traditional finance, we expect to become one of the primary hubs for institutions that wish to jump into the ecosystem.” – Filip Dragoslavic, Co-founder of Solrise.
The identity verification process, conforming to the AML/KYC requirements listed above will be handled by Civic, a leading innovator in digital identity solutions.
DeFi is only a few years old and its implications are massive. The structures being built today are paving pathways for future innovations to disrupt the intermediaries and rent seekers presently controlling the world’s economy. Institutions need access to these innovations.
As the industry grows, regulatory scrutiny is likely to increase, so these access issues will only get more complicated as time goes by. The Financial Action Task Force (FATF)’s latest guidance in their updated Virtual Asset (VA) and Virtual Asset Service Provider (VASP) report outlines a risk-based approach to this burgeoning world of digital assets.
While strictly adhering to the best practices regarding AML, KYC, and anti-terrorist financing policies as well as international law, Solrise’s DEX Pro will bridge the gap between DeFi and traditional finance by serving as a global hub for institutions to join the Solana ecosystem and DeFi space as a whole
When writing about innovations in the crypto industry, it is easy to speak in hyperbole and get carried away with a product’s potential. Many of these products with the potential to disrupt industries don’t obtain adequate adoption metrics, are never released or are simply overhyped.
Solrise’s DEX Pro is not hype. It is already a live product and is part of the Solrise / Solflare ecosystem of products that have garnered massive adoption metrics. With Solana’s low transaction costs and high throughput that scales with computing power, there is no better place for institutional investors to onboard institutional money.
Institutions have been patiently waiting to get directly involved in DeFi – the wait is over.