What is Decentralized KYC and why Polkadex is implementing it

As a truly innovative DEX, Polkadex is even decentralizing the KYC process… but what does that mean, exactly?

KYC (Know Your Customer) guidelines have caused a headache for financial service providers and users since way before cryptocurrency even existed. However, with the rise of crypto in the last decade and DeFi in the last few years, those headaches have almost turned into migraines, especially for centralized exchange (CEX) users. With the recent growth of the decentralized exchange (DEX) space, it seemed like the KYC issue was finally solved, only for it to reveal the limitations of the space. While there are many issues with the ways it is currently being conducted, KYC is still a necessary process to guarantee the ecosystem is as diversified and efficient as possible. At Polkadex, we’ve been hard at combining the best of CEXes and DEXes into one fully decentralized exchange and KYC is no different.

Currently, CEX users have to tediously submit their identity documents to almost every exchange they have an account on if they surpass even the smallest trading limits. Not only is this an inefficient and annoying process to have to repeat, but it also has led to a potentially huge privacy time-bomb where dozens of exchanges are all storing copies of your identification documents or credentials in a centralized manner and it’s only a matter of time before one of them is hacked and your personal data is compromised. Something needs to change.

DEXes could be the solution as no KYC is required to use many popular DEXes like Uniswap, PancakeSwap, etc. However, having no KYC processes in place limits the ability of DEXes to attract institutional players to DeFi as they are regulated institutions that need to abide by current regulations.

Polkadex has partnered with KILT Protocol and Fractal on a Decentralized KYC process to solve the user experience and privacy problems caused by CEX KYC requirements, address the lack of institutional money that comes with the no KYC on DEXes, and continue to create a ‘best of both worlds’ decentralized exchange. Polkadex CEO Gautham J was joined by Ingo Rübe, CEO of KILT, and Julian Leitloff, CEO of Fractal, in a Web3 founder chat that focused on the Polkadex solution and on KILT’s SocialKYC.

This innovative Decentralized KYC solution allows Polkadex to combine the security of a decentralized blockchain with the benefits that come from enabling traditional financial institutions to participate in the protocol in a fully compliant manner, thus creating a fully decentralized, minimum-spread orderbook.

Why decentralized KYC benefits DeFi industry

Decentralized KYC swings open the doors for institutional liquidity, which in turn contributes to the growth of the Web3 ecosystem and fosters innovation. Implementing KYC also strengthens the reputation and stability of decentralized exchange as it prevents fraudulent or malicious actors from operating in a harmful way and thus protects the users of the DEX. Finally, we thought of adding Decentralized KYC to Polkadex to allow fiat support which further reduces the entry barriers for users of traditional finance who want to switch to DeFi.

What does decentralized KYC mean for Polkadex users?

Firstly, both individual and institutional Polkadex users will still be able to use most of the features on Polkadex, including swaps, staking, governance, and more, without having to go through KYC. The only time any user will need to go through Decentralized KYC will be if their trade goes over $5,000.

Secondly, Decentralized KYC allows Polkadex users to verify their identity while keeping their personal data and documents private. This means that Polkadex (or any other decentralized application you choose for proof of authentication) never has access to your personal details as they always remain stored in your wallet. It also means that you only go through the KYC process once and then can just use your wallet for automatic verification on multiple Web3 platforms that also use KILT Protocol. Cryptographic magic ✨

So what will Polkadex’s Decentralized KYC process be like?

From a user experience, the process won’t be too different from the KYC processes on existing centralized exchanges, with the small difference of having to do so through your KILT Wallet. Once Fractal attests to the authenticity of your credentials, your wallet will then automatically tell Polkadex (or any other platform that implements Decentralized KYC in the future) that you are verified, which means you won’t have to ever upload any documents to Polkadex itself. In other words, the process will be as smooth as existing KYC processes but will not compromise your personal data, and will not force you to redo the verification every time you use a new exchange or platform.

How secure will your personal data be?

As secure as your money is if it is in a decentralized wallet. Basically, as long as you are able to protect your private key, your data will be safe.

How will the process collect, verify and store the proof?

Essentially, the proof shows that an attester was verified, which means they signed with their keys into the KILT blockchain. Polkadex verifies whether the attester has attested or verified the credentials provided by the user. This is how KILT verifies credentials without sharing the actual data on the blockchain.

In the case of a Polkadex user, their credentials will be verified by Fractal. Fractal will then “attest” to the user’s credentials on-chain. Polkadex in turn will verify Fractal’s attestation without the need or ability to see the user’s actual credentials. As Fractal’s CEO Julian Leitloff puts it, “If you go into a club after you turn 18, the bouncer does not have to call the government to see if your ID is authentic.” In a similar way, Polkadex users do not need to re-prove their credentials with Polkadex (or any other future DApp that uses KILT Protocol for decentralized KYC, for that matter) as the blockchain will show that Fractal has already attested to the authenticity of their credentials.

SocialKYC: The future of Decentralized KYC?

SocialKYC, presented by KILT Protocol, was another interesting innovation discussed during the talk that will enhance the decentralized trading experience on Polkadex. SocialKYC will allow its users to manage, store and present their personal credentials, enabling them to select which elements of their private information they want to use for verification.

In the case of Polkadex, SocialKYC will be an opt-in service that will enable users to publicly tag themselves with different credentials that make up their identity, all while retaining their right to privacy and keeping the control of their data in their hands. For example, users will be able to attach their Twitter or Reddit usernames to their Polkadex wallet address. SocialKYC will also allow users to recover their funds with the help of their friends if they ever lose their keys. It will also enrich the Polkadex governance ecosystem, helping map out council members and increasing transparency. SocialKYC will make Polkadex even more convenient for users and will also improve the customer support experience.

Final thoughts

While KYC may still be a touchy subject in crypto, we believe decentralized KYC is essential for the future of Web3. The Polkadex Decentralized KYC solution enables us to create a uniquely efficient orderbook-based decentralized exchange while giving users control of their data, identity and destiny.