There have been NFTs for original artwork, game highlights from sports stars, and a wide variety of monkeys, penguins, and punks. Now, a company called Goldfinch is creating NFTs for a rather prosaic but potentially more impactful purpose – to establish user identities to meet Know-Your-Customer requirements.
On November 1, Goldfinch, a unsecured loan protocol which lives in the Ethereum blockchain, has released an offering called Unique Identity (UID). The idea is that users can use this program to establish their good faith with financial companies that perform so-called KYC and anti-money laundering checks. These measures are de rigueur in traditional finance and are becoming more prevalent in DeFi as the space matures.
The move comes as decentralized identification gains momentum as a new application on Ethereum and its ilk. “Decentralized identity solutions help users and other things to control their digital identity without the intervention of intermediaries,” Humpty Calderon, Community Manager at Ontology, written in The Defiant last month. “The importance of decentralized identity solutions inside and outside the blockchain and crypto industry is likely to grow exponentially in the years to come.”
Goldfinch’s offering is not, however, fully decentralized. The company hired an identity verification company called Persona to conduct the KYC process. While users can maintain a KYC-approved identity on the blockchain, supporting personal data resides off-chain on a conventional server.
Goldfinch provides unsecured loans that do not require collateral, a capability currently absent from DeFi’s core offerings. The protocol allows borrowers to show their creditworthiness based on the valuation of other protocol participants instead of their assets.
Similar to Stablecoins
Blake West, co-founder of Goldfinch, believes the hybrid approach is a viable first step. “Similar to stablecoins in 2020, I could imagine 2022 being the year when crypto IDs start to take off,” he said. “And like with stable coins, I think we’re going to see a multitude of different approaches, both decentralized and centralized, using different criteria to establish identity.”
There are parallels to the main stablecoin models – USDC is backed by US dollars in the traditional financial system, but the token exists on decentralized blockchains, just like Goldfinch’s UIDs. West has coin-sized ambitions for Goldfinch’s NFTs that prove identity.
“We hope the UID can become like the USDC of Identity, and we’re excited to hear from other protocol developers on what they need,” he said.
Offering Ethereum-based KYC and AML could be a promising strategy. The rollout of the first Bitcoin ETF last month – despite being a futures-based security – is sparking interest from institutional investors to make bigger bets on DeFi tokens. Yet asset managers can’t act without making sure clients aren’t washing illicit money on their platforms. The product can open DeFi to institutions that have been left on the sidelines.
NFTs representing identities would also facilitate the process of onboarding new customers, especially on financial platforms. This could bring more responsibility to airdrops. Right now, protocols distribute tokens to wallets, but they don’t know how many belong to the same user. If a UID is connected to an individual’s identity, the protocols can only be parachuted to NFT holders, which makes the system more difficult to play.
Digital identities will also help governance tie voting power to users instead of tokens and aid in the development of DeFi credit scores. Goldfinch UIDs run on the ERC-1155 standard developers will therefore be able to integrate NFTs into their DeFi protocols using Goldfinch documents.
Goldfinch developed its NFT UIDs after 33,000 people went through the protocol’s KYC system to become lenders. After seeing the high number of people willing to complete KYC, Goldfinch rolled out the product keeping an eye out for how it could help develop the overall DeFi ecosystem.
West sees the upcoming proliferation of blockchain-based identities as a result of two major needs: regulation and the expansion of the crypto design space. “The Goldfinch community in particular had both regulatory and protocol design constraints, and the UID addressed both at the same time,” West said.
Read the original post on The defiant.