The Trading Tools Institutions Need to Enter DeFi

This post is part of Consensus Magazine’s Trading Week, sponsored by CME. Antoni Zolciak is the co-founder of Aleph Zero.

There’s good reason for institutions to shy away from DeFi — regulatory uncertainty.

While ultimately desirable, many features native to decentralized finance (DeFi) — permissionless markets, pseudonymity, censorship-resistance — can also be considered gray areas for institutions who want to stay on the right side of the law (or preemptively clear future regulations).

For DeFi to thrive and attract a wider pool of capital it needs to strike the right balance between privacy and transparency through a proactive approach to compliance.

Transparency and compliance

Certain crypto verticals downplay or disregard the importance of regulatory compliance, including standard regulatory disclosures meant to increase transparency. This view is rooted in the industry’s philosophical origins (including a commitment to privacy) and technical foundations (blockchains are transparent by default). For the most part, DeFi has leaned towards this viewpoint.

However, crypto and privacy are not synonymous. They never have been. But privacy and transparency are also not mutually exclusive — a mistaken view that comes from a binary understanding of what privacy is. Instead, privacy has always existed on a spectrum.

DeFi and Web3 create new ways to navigate this spectrum. This has big implications for individual traders and entire industries, can help return privacy to its rightful place as an actual business prerogative, and ultimately something to be negotiated under flexible terms.

A lot of the research that is happening in zero knowledge technology, secure multi-party computation and other areas in advanced cryptography are creating a world where traders can maintain their privacy and businesses (or protocols) can deploy compliant fraud-prevention mechanisms.

Many of the solutions that would soothe the valid institutional and regulatory concerns with crypto are demanding. On-chain intellectual property protection and anti-money laundering (AML) analytics are not simple implementations, but require tools that work in real-time.

Protections for proprietary trading

DeFi needs to be more usable than simple swaps. Let’s introduce blazing-fast order book exchanges that remain…