Decentralized finance (DeFi) offers enormous advantages: transparency, accessibility, and freedom of transactions. However, it is precisely the openness of the blockchain that makes it a tempting target for malicious actors: from money laundering to terrorist financing. To protect legitimate projects and attract institutional participants, DeFi needs modern KYC (know your customer) solutions.
Problems without KYC in DeFi
- User pseudonymity: wallets are linked to addresses rather than identities, allowing laundered or illegal funds to be concealed.
- Legal uncertainty: the FATF and regulators view DeFi as a VASP and insist on participant identification.
- Low trust from institutional investors: Fear of regulatory fines blocks large investments in DeFi.
How on-chain KYC works
- Verification through trusted providers
The user undergoes verification (passport, AML scanning) with an external provider (TDP) and receives digital credit certificates that are stored on the blockchain (ERC-734/735).
- Certified KYC token in the wallet
After verification, the user receives an on-chain token confirming KYC completion without disclosing personal data, thus maintaining privacy.
- Certification via ZK technologies
The use of zero-knowledge proofs makes it possible to confirm KYC status without disclosing documents. Examples: PureFi, Galactica zkKYC.
- Protocol access control
DeFi protocols can restrict access to functions (staking, lending), allowing only KYC holders to be active.
Advantages of on-chain KYC
- Security and trust: verified users reduce the risk of money laundering.
- Privacy protection: only the fact of passing KYC is disclosed, not personal data.
- Institutional attraction: banks and funds are willing to participate when they see compliance with the required standards.
- Legal clarity: protocols document participants and infrastructure, reducing regulatory risks.
Real-world applications
- PureFi: dApps use smart contracts to record KYC facts on the blockchain and use ZK methods for private verification
- Galactica zkKYC: implemented on the testnet, allows on-chain KYC verification using zero-knowledge proof.
- Compliance On-Chain Framework: a hybrid solution published on June 16, 2025 — preserves privacy and supports AML/CTF compliance.
- Synaps implements on-chain KYC, opening up permissioned DeFi, tokenization of real assets, and gaming.
Balance between decentralization and identification
Critics argue that KYC destroys decentralization. But the technical implementation is only a confirmation of access rights, not centralized control. Trust is maintained through the use of ZK proofs and distributed providers.
Conclusion
On-chain KYC, especially with zero-knowledge and digital identity (DID) applications, offers a realistic path to scam-free DeFi:
- Protocols preserve anonymity but block bad actors.
- Users retain control over their data.
- Investors and regulators gain confidence.
- Trust increases and the legitimacy of the industry expands.
This is not a compromise, but a technological solution: scam-free DeFi is a reality if identifiers and identity verification are built directly into the blockchain architecture itself.