If bitcoin go towards DeFi primarily, possibility of centralization begins

[Charles-Tim]

First of all, are the centralized finances. We have discussed it in multiple threads about how KYC has not been able to solve many online illicit activities. I read a news today, this is what I found out again:

Yim explained that even in traditional finance, where KYC measures are prominent, “there is still money laundering happening every day.”

Even despite the rigorous KYC with the submission of identity card online copies, home addresses and the likes, online criminals are still able to do their work. Yet, it goes beyond that, some people can provide you with another person's identity card to be used online. Even if you are not careful, your identity documents can be used by hackers and scammers. Also how about your information that are sold or given to third party.

Although, that is not the main discussion. The main discussion is about DeFi, which some people believe are decentralized. Okay, they are decentralized, let us leave that argument for now be in little centralized or not, what about the future of DeFi as more regulations are coming?

During a panel session at the World of Web3 Summit (WOW) in Hong Kong on March 29, titled ‘Blockchain Security to Smart Compliance: AML & KYC Solutions in DeFi,’ industry leaders endorsed KYC in DeFi as a solution to tackle Anti-Money Laundering (AML) issues.

Dyma Budorin, CEO of smart contract auditing firm Hacken, warned of the prevalence of tools readily available to hackers to “launder the money” stolen from DeFi platforms, which he described as the “biggest issue” in the industry.

He explained that hackers can easily steal millions of dollars and launder the funds into various wallets – “to make clean money again” – making it difficult to track the source of the funds.

“KYC is about transparency and accountability. I don’t think it’s an issue for a majority of people. I’m sure 99% of people don’t have things to hide. I’m happy to see it as part of our world.”

This only means that you can be in control of your coins but you have to provide KYC before you can make use of those smart contract decentralized exchanges. Which means smart contract decentralized exchanges will begin to have privacy policies which is used in anything that is centralized, then becoming more centralized.

Yim cited the concept “anonymous traceable,” as an example of a balance between anonymity and compliance, as individuals can remain anonymous unless called upon by law enforcement – adding that it will protect the good people, while still getting the bad people.”

What is the meaning of that? To remain anonymous unless the government wants to know you or looking for you?

Anonymity is not like that, it has been twisted. You only remain anonymous when only you know that you are the one that is doing something, that thing can not be linked to you by anyone else. Once your identity can be linked to the government or anyone, that is no more anonymity.

How bitcoin can be involved
I hope that bitcoin developers will not created anything related to smart contract that can lead to the existence of DeFi on bitcoin blockchain, if anything like that is created, more regulations in the future can make bitcoin to be centralized just like other altcoins.

[SquirrelJulietGarden]

I hope that bitcoin developers will not created anything related to smart contract that can lead to the existence of DeFi on bitcoin blockchain, if anything like that is created, more regulations in the future can make bitcoin to be centralized just like other altcoins.

Bitcoin has its powerful decentralized network because it is based on Proof-of-Work and has highest hashrate on the network. Is Proof-of-Work is a trade mark and guarantee for decentralization, it is not.

I want to ask a question "Will Smart Contract can be existed on Proof-of-Work network and still be decentralized?"

I don't know but probably yes. In the past we have Ethereum network that is PoW and has smart contract. However it is centralized because of its pre-mined coins for their ICO.

Will Bitcoin be able to do the same because it did not have any ICO? Probably yes but it should be answered by senior Bitcoin core developers.

[BenCodie]

You've made a good analysis however I do not believe that if DeFi and smart contracts (which are already coming to life thanks to Taproot) were introduced to Bitcoin, that every single smart contract/defi application would then require KYC because regulation says so. I don't believe that it's technically possible to enforce KYC across every single decentralized application and/or smart contract by default.

Regulators and spokespeople have always said that they would introduce ridiculous measures. People have always digested the information that there is no other way outside of what they are saying...and yet, here we are. We still have privacy tools, we can still exchange and trade our coins without KYC, and there is always a counter-party who are working in the shadows to defend our freedoms. I believe that no matter what happens with Bitcoin, DeFi on Bitcoin and smart contracts, there will always be a way to maintain freedom and privacy.

[hugeblack]

I do not think that governments need reasons if they decide to put in place regulations, and therefore no matter how bitcoin tries to comply with the regulations, it will issue more stringent regulations, and therefore the concept of creating a bitcoin address without verifying identity was considered unacceptable before the creation of bitcoin, but with the continuity and decentralization of the network, no one talks about it.
Now people are talking about smart contracts and other things being bad for Bitcoin, which they are, but not because they get the attention of central authorities.

[Aanuoluwatofunmi]

Why would bitcoin go under a decentralized finance when its a proof of work and a decentralized network, governments have been trying this attempts so many times but doesn't work out because bitcoin isn't a decentralized finance, these defi we are talking about aren't decentralized on a real sense because they constitute regulatory body under autonomous settings that determines the control under their regulation, that's why you can't compare bitcoin network with all forms of smart contracts, defi or solidity or whichsoever form it may appears on blockchain technology, they are entirely incomparable to bitcoin.

[buwaytress]

The usual "nothing to hide" fallacy. Whoever said this should consider whether it's okay if his personal financial transaction shown to the public.

Yup. There is that Zuckerberg trial clip that makes its round every now and then, where he's asked if he's comfortable with certain personal information (not just identification data, but who he calls, where he goes, etc.) is shared or is made available. No surprise he said no in the most certain way.

So he knew what he sanctioned wasn't even what he'd be comfortable with. I'm sure anyone who's ever said this would not jump into the same pan.

[rat03gopoh]

I want to ask a question "Will Smart Contract can be existed on Proof-of-Work network and still be decentralized?"

Yes and you've given the reference example about ETH PoW version (which imo used to be more decentralized than its PoS version), then it is possible for bitcoin too.

In the past we have Ethereum network that is PoW and has smart contract. However it is centralized because of its pre-mined coins for their ICO.

it is more aimed at monopoly and, not the cause of being centralized.

Will Bitcoin be able to do the same because it did not have any ICO? Probably yes but it should be answered by senior Bitcoin core developers.

It could be by changing the bitcoin blockchain protocol as a whole (hardfork). ICO is actually not needed at all.

[Supreemo]

regarding providing other person's verified card, there is some truth about that to a certain extent. last year when i was searching about web3 and DeFI, I accidentally came across a news containing warning to the public regarding some unknown individuals who are gathering information through emails, they called it "email farming" as far as I can remember. back then i didn't really took it seriously, but another issue came again after a few weeks regarding a scam about someone pretending to be amazon and sending emails, and the victim is too innocent that she/he provided her bank information. i guess it is also one way of gathering personal information that can be used to pretend someone.

in terms of DeFI, all the possibilities are pointing towards KYC, and worst comes to worst should be the government controlling the so called DeFi. who knows what will happen actually, i still strongly believe that they will still interfere on this idea.

[kryptqnick]

I haven't used decentralized exchanges before and managed to avoid KYC on centralized exchanges, but if the KYC doesn't really solve the issue, why enforce it? I'm generally in favour of KYC for big accounts and big transactions because big-scale money laundering is what should be the main target. If it's small transactions, does it really matter where the money is coming from and whether it was taxed? More importantly, it's not realistic and not very productive to focus on so many people when you can instead try focusing on the big guys. So an approach that requires KYC when a certain financial threshold that the majority doesn't pass is reached and/or when there is a decision of the law enforcement (as the op notes) or suspicious activity was noticed.
Bitcoin itself is safe, though. It's more about additional projects and services, which one can choose to avoid.

[el kaka22]

Just because money laundering happens in the crypto world, even with KYC in place, doesn't mean that it is not happening in the fiat world either. We all know that fiat world has money laundering schemes all in place, and we have seen many times in the movies how they do it, so we literally know the way it is being done as well.

Just watch breaking bad and how they used the car wash, they were basically purely rich and that's how they laundered the money, that was all fiat and all cash. Which is why I have to say that there is no world where crypto could ever be blamed for the money laundering that is happening in the crypto world, it's bound to happen eventually anyway.

[Supreemo]

Just because money laundering happens in the crypto world, even with KYC in place, doesn't mean that it is not happening in the fiat world either. We all know that fiat world has money laundering schemes all in place, and we have seen many times in the movies how they do it, so we literally know the way it is being done as well.

Just watch breaking bad and how they used the car wash, they were basically purely rich and that's how they laundered the money, that was all fiat and all cash. Which is why I have to say that there is no world where crypto could ever be blamed for the money laundering that is happening in the crypto world, it's bound to happen eventually anyway.

the government already has a hunch that it will happen, they are just waiting for the right timing to seize the opportunity. if laundering can happen in real world where each printed money has a serial number, how much more in crypto world right? we are all aware that crypto back then even until now has been used by black markets for transaction so it is only expected that any time sooner there will be big time issue related to laundering and other illegal activities.

[UchihaSarada]

We have discussed it in multiple threads about how KYC has not been able to solve many online illicit activities.

Why KYC is extremely dangerous – and useless.

KYC is claimed to control and prevent illicit activities but it fails to complete it. Illicit activities can not be proactively controlled and prevented by KYC that is only give supplementary information for authorities when they already are aware of those activities and want to hunt for operators.

For good people, KYC is dangerous and useless. It is more harmful than helpful with data leak, identity leak and no authority or people will give you enough compensation.

[YUriy1991]

I think, That while there are concerns about possible centralization if Bitcoin switches to DeFi, the important point is that not all DeFi apps require KYC due to regulations. Enforcing KYC in every decentralized application and smart contract is also technically challenging. Despite regulators' threats to impose forceful action, there will always be countermeasures to defend our privacy and freedoms. There will always be ways to maintain financial freedom and privacy, even with the introduction of DeFi and smart contracts to Bitcoin.

[franky1]

using examples

years ago "localbitcoins" was popular as a aggregation service to advertise individuals wanting to do trades with each other

however over the years a few things occurred
in 2014 bitcoin was ratified into being a legit currency meaning currency laws applied. this meant that people doing trades were deemed as money service businesses.

banks would notice people who were not businesses doing alot of random wire transfers were flagged as operating a money service business without a licence. and thus requested account holders to set up a business and get a licence to move to a business account . or have their account suspended.
...
also scammer using local bitcoins would buy bitcoins and then tell their bank that (falsely) someone hacked their account and spent their money. this is called chargeback scamming whereby scammers got to keep the coin and get a refund by claiming the seller was a fraudster/hacker/thief.. thus again sellers became red flagged and required to start KYCing buyer to ensure the buyer at the keyboard was also the account holder to avoid shameless chargebacks

due to this localbitcoins dropped in popularity due to individuals needing to KYC each other.

de-fi will see this same scenario repeat, de-fi is just at the start of the story
.....

other networks such as lightning is deemed as AEC (anonymity enhanced currency) which means regulators are on the watch out and has guidance for regulated services to monitor or avoid utility of it
"routers" on lightning are designated as money services businesses due to their role in personally and direct involvement in processing payments on behalf of other users for a commission. so those offering up their channels for routing will be scrutinised and monitored too

i say all this because although regulators cannot stop bitcoin transactions. they can stop the individuals real life efforts and business activity

the more people try to seek anonymity the more regulations put those on watch lists and require much more from those who service them

[karmamiu]

I think, That while there are concerns about possible centralization if Bitcoin switches to DeFi, the important point is that not all DeFi apps require KYC due to regulations. Enforcing KYC in every decentralized application and smart contract is also technically challenging. Despite regulators' threats to impose forceful action, there will always be countermeasures to defend our privacy and freedoms. There will always be ways to maintain financial freedom and privacy, even with the introduction of DeFi and smart contracts to Bitcoin.

Same old story as how it is Crypto vs Government. I don't think achieving total privacy is possible considering some other countries requires you to provide KYC for their very own service providers (wallets), just like the case here in my country. Yes, we have freedom in terms of doing transactions outside our wallets, but once it goes inside our own wallet provided locally, the whole story changes. Whether we like it or not, we couldn't take our money outside or transfer it not unless we provide personal information for verification, the worst part is that, now it has been slowly implemented that whenever you try to transfer crypto from external sources, they will ask you for what purpose, where it came from and how much you are going to send/receive.

I'm not totally against being verified and doing KYC since I am not doing something illegal, but that's the whole point of someone who's against KYC.

[thecodebear]

Right now DeFi is just GambleFi. It's just people/companies coming up with new tokenized schemes to allow people to gamble. The ability to make tokens on Ethereum (and other L1's) has turned the whole smart contract industry into a gambling endeavor. I don't ever see this coming to Bitcoin, at least not on-chain. The fact that Bitcoin doesn't have tokens shields Bitcoin from all this crap. The ability to make tokens is kind of ruining the smart contract world. If it was just making apps with ETH that would be interesting, but every app is now just a token scheme which turns into a pump and dump. Apps and tokens and such things will remain on Bitcoin as side chains and other layers. Bitcoin's on-chain programmability will continue to increase I think but I don't think it'll ever get to the point of Turing completeness to allow anything to be built on-chain.

[Z-tight]

How bitcoin can be involved
I hope that bitcoin developers will not created anything related to smart contract that can lead to the existence of DeFi on bitcoin blockchain, if anything like that is created, more regulations in the future can make bitcoin to be centralized just like other altcoins.

What would be the reason for integrating any of the recent defi protocols in the BTC network, when BTC is already decentralized, and was so first, years before all of these decentralized finance protocols, dapps & smart contract on eth blockchain and others even became popularized. BTC is called the "only true decentralized network" for a reason.

I know BTC does not have features like yield farming, staking, smart contracts, lending platforms, etc, but it does not need it, its algorithm is pow, and some of these features are only better on pos networks, maybe that is part of the reasons why eth moved to a pos network. Many of these dapps leave their network open for hackers and scammers, so BTC does not need them, there are good decentralized exchanges like Bisq and the pow algorithm has provided enough security for the BTC network, so i don't believe any of these 'defi' protocols will be added to BTC's network.

[Faisal2202]

You said, BTC should not come up with DeFi as I know Defi And Decentralization has a different meaning but have some similarities too. Both tend to provide total anonymity but which is more trustable and old? is BTC. Just like Ethereum is based on POS and any app or technology of finance based on it has finally met regulatory authorities to prove their identities and i think that is good for BTC until BTC is not being used as a base to launch coins on it. which i think is becoming possible with the new technologies of taproot like these.

Now if we talk about the users of BTC who are making trades in it like the ones who buys and sells it. Do they care about doing KYC in order to perform transactional activities on BTC? like from the stats I can see not, the trading volume of 408 decentralized crypto exchanges is $2.43 Billion while the trading volume on Centralized exchange is $56 Billion. As these numbers are showing that, people do not care about doing KYC or hiding their identities.

Now if new coins are going to use the BTC blockchain then what will the impact of tokens based on POW consensus make on coins based on POS consensus? if BTC goes towards DeFi, it will become centralized (like will be criticized) well, it is decentralized and it is being criticized by authorities but authorities are using loopholes just like a political person, they try to target people using the hacks, events of money laundering, etc. to scare them from the use of BTC. overall, the decentralization of BTC depends on proof of work, like until anyone joins the mining of BTC with anonymity then it's safe. But the question is does the identity of BTC miners are safe? I don't think so.

From my perspective, I can say if BTC approaches towards DeFi then people are not going to care about the KYC problem if it happens then we are going to see too many regulatory bans as the authorities are implementing currently on DeFi technologies and still they say BTC is the root problem.

[death69]

Indeed, I concur that KYC protocols, in isolation, may not thwart cyber maleficence. While KYC assists in authenticating identity and tracing transactions, it fails to impede miscreants exploiting stolen identities or counterfeit documents. Consequently, decentralized systems demand supplementary measures, such as untraceable tracking.

DeFi's potential centralization necessitates addressing regulation. True, regulations offer user protection and hinder criminal activities, but excessive control undermines decentralization and privacy - DeFi's fundamental tenets. Striking equilibrium between compliance and anonymity is imperative to shield both virtuous and nefarious actors.

Bitcoin's potential DeFi integration, though feasible via smart contracts on its blockchain, mandates developers preserve its decentralized essence. Through meticulous strategizing and implementation, secure and regulatory-compliant decentralized financial systems can emerge.

[YUriy1991]

Although, that is not the main discussion. The main discussion is about DeFi, which some people believe are decentralized. Okay, they are decentralized, let us leave that argument for now be in little centralized or not, what about the future of DeFi as more regulations are coming?

While there is debate around the degree of decentralization in DeFi, it is clear that the technology is disrupting traditional financial systems and providing new opportunities for innovation and investment. However, with increasing mainstream adoption and attention comes the possibility of regulation, which could have a significant impact on the future of DeFi.

From one perspective, regulation can help legitimize and stabilize markets, leading to greater investment and adoption. It can also provide a framework for addressing issues around scams, scams, and other risks associated with DeFi. On the other hand, excessive regulation can stifle innovation and limit the potential benefits of decentralized finance. It could also lead to a shift towards a more centralized structure, undermining core DeFi principles.

I think it is important here to approach problems with an open mind and a willingness to adapt to changing circumstances.