There’s been NFTs for original artworks, sports stars’ game highlights, and a wide variety of apes, penguins, and punks. Now an outfit called Goldfinch is creating NFTs for a potentially more impactful purpose — establishing users’ identities to satisfy Know-Your-Customer requirements.
On Nov. 1, Goldfinch, an unsecured loan protocol that lives in the Ethereum blockchain, released an offering called a Unique Identity (UID). The idea is that users can use this program to establish their bona fides with financial firms that conduct 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 is picking up momentum as a new application on Ethereum and its ilk. “Decentralized identity solutions help users, amongst other things, to control their digital identity without the input of intermediaries,” Humpty Calderon, the head of community at Ontology, wrote in The Defiant last month. “The prominence of decentralized identity solutions within and outside the blockchain and crypto industry is likely to grow exponentially in the coming years.”
Goldfinch’s offering isn’t entirely decentralized, though. The venture tapped an identity verification firm called Persona to conduct the KYC process. While users can maintain a KYC-approved identity on the blockchain, the supporting personal data resides off-chain on a conventional server.
Goldfinch provides unsecured loans that don’t require collateral, a capability currently missing from DeFi’s core offerings. The protocol allows borrowers to show their creditworthiness based on assessment of other participants in the protocol instead of their assets.
Similar to Stablecoins
Blake West, co-founder of Goldfinch, thinks the hybrid approach is a viable first step. “Similar to stablecoins in 2020, I could imagine 2022 being the year that crypto IDs start to take off,” he said. “And similar to stablecoins, I think we’re going to see a slew of different approaches, both decentralized and centralized, using different criteria for establishing identity.”
There are some parallels to leading stablecoin models — USDC is backed by US dollars in the traditional finance system, but the token exists on decentralized blockchains just like Goldfinch’s UIDs. West has stablecoin-sized ambitions for Goldfinch’s identity-proving NFTs.
“We hope that UID can become like the USDC of identity, and we’re excited to hear from other protocol developers about 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 — albeit a futures contract-based security — is stoking institutional investor interest in making bigger bets on DeFi tokens. Yet asset managers can’t make a move without making sure clients aren’t washing illicit cash on their platforms. The product may open DeFi to institutions that have stayed on the sidelines.
NFTs representing identities would also ease the onboarding process for new customers, especially on financial platforms. This could bring more accountability to airdrops. At the moment, protocols distribute tokens to wallets but they don’t know how many are owned by the same user. If a UID is connected to an individual’s identity, protocols could only airdrop to holders of the NFTs, making the system harder to game.
Digital identities will also help governance tie voting power to users instead of tokens and aid in the development of DeFi credit scores. Goldfinch’s UIDs run on the ERC-1155 standard so developers will be able to integrate the NFTs within their DeFi protocols using Goldfinch’s docs.
Goldfinch developed its UID NFTs after 33,000 people had gone through the protocol’s KYC system to become lenders. After seeing the high numbers of people willing to complete KYC, Goldfinch deployed the product with an eye on how it might contribute to the development of the overall DeFi ecosystem.
West sees the coming proliferation of blockchain-based identities as stemming from two major needs: regulatory and expanding crypto’s design space. “The Goldfinch community in particular had both regulatory and protocol design constraints, and UID solved both at the same time,” West said.