What Compliance Means for Lumina

And why we’re working with etonec for KYC and pool permissions

Some excerpts of this blog post originally appeared in the Lumina litepaper, which can be viewed in full here: https://docsend.com/view/5tviuhs8cqditskh

Accelerating blockchain adoption for institutional and retail users requires a novel approach to privacy, compliance and scalability. The pseudonymity of major blockchains is incompatible with most traditional financial markets and Web2 businesses that require KYC or privacy, creating a need for permissioned solutions that protect user identity and trade information. Lumina is excited to be collaborating with etonec to bring this solution to market.

Lumina intro

Lumina is built to power the next wave of retail and institutional blockchain use cases. The hybrid permissionless and permissioned exchange architecture is designed to accommodate the unique requirements of both decentralized utility tokens and centralized security tokens including real-world assets. Lumina will enable users to complete KYC attestations that can be verified on chain in order to access permissioned liquidity pools.

etonec intro

etonec builds blockchain-based financial solutions at the intersection of payments, banking, and digital assets. What makes etonec unique is that it combines decades of global experience in payments and traditional finance, e.g., from working for PayPal, with insights in emerging technologies and concepts gleaned from working for leading crypto projects, such as the Libra/Diem Association.

Doing KYC, Permissions and Compliance in a Decentralized Manner

One of the primary areas of focus for Lumina is building a KYC-compliant DEX with full trade privacy, to support large institutional actors, while being able to bypass maximal extractable value (MEV) issues like front-running. We take inspiration from traditional financial markets where permissioned, private trading venues allow institutional investors to trade large blocks of assets without having to reveal their intent ahead of time. By employing zero-knowledge (ZK) cryptography, Lumina can provide the same functionality without counterparty risk, while still facilitating any auditability requirements. More generally, compliant privacy is useful for many types of institutions adopting blockchain to grow their business and user base.

zkp-ID, a solution currently being built and accelerated by etonec, combines elements of ZK proofs, which ensures data integrity and privacy without exposing confidential information with elements of SSI that allow for issuing, managing and securely storing of identity credentials that ensures adherence to compliance rules as well as a better user experience. The identity attestations are only available to the user who has a private key or to a competent authority who has a legitimate reason to query a transaction.

The product has three core components;

1. The Compliance Engine / Orchestrator that checks which compliance rules apply based on variables like transaction amount, digital assets, which jurisdictions are involved, etc
2. The Identity Verification Service verifies identity information via KYC/KYB or AML providers.
3. The Storage Exchange Service securely stores attestations and audit trails for competent authorities using ZK proof technology.

The Role of Permissioned Pool Operators

Lumina is KYC agnostic, meaning all KYC and compliance responsibilities reside with the pool creators, operator(s) and KYC providers who are integrated with the platform. The KYC flow for permissioned pool operators dictates the individual user KYC requirements. The objective is to ensure full compliance for all liquidity pools in a decentralized manner.

Pool operators can create a permissioned liquidity pool for swapping and sending, and set or update KYC requirements via governance. If the compliance requirements for a pool change, any affected users in the existing pool would enter wind down mode, meaning they are able to withdraw their tokens, but not swap, send, or deposit new tokens. The pool operator’s locked stake can be slashed by the global community via governance if the pool is non-compliant. A permissionless pool (which doesn’t require pool operators or KYC to create) can be removed from the Lumina front-end through a governance vote if it is deemed to be non-compliant.

A few scenarios that demonstrate the decentralized compliance guardrails in practice:

• A security token is listed in a permissionless pool, resulting in the front-end delisting
• Deficient KYC for a permissioned pool, resulting in wind down mode
• KYC status of a pool participant expires, resulting in wind down mode until updated

You can stay up to date with Lumina’s progress using the following links:

Lumina Twitter | Lumina Telegram | Lumina Website | Lumina Blog

Disclaimer: DeFi is a new technology that comes with risk of loss. Statements may be forward-looking and are not intended as guarantees of future performance.