03/11/2022
-J.P. Morgan just executed its first trade on-chain. What could this mean for DeFi's future?
1/ This morning JP Morgan, along with DBS Bank and SBI Digital Asset Holdings, executed a currency trade involving tokenized Japanese Yen (JPY) and Singapore Dollar (SGD) deposits.
2/ The trade was carried out on Polygon Technology utilizing a modified fork of Aave Arc so that the interest rates and FX rates could be manually set.
Here is the liquidity pool they utilized.
https://polygonscan.com/address/0x06f6650D61f40418d6013f6dDb49581f860D96Bc
3/ Why is this important?
There are three major points:
- Banks are joining DeFi
- Ethereum Preference
- Verifiable Credentials
4/ Banks are joining DeFi
Rather than building solutions on a private, permissioned blockchain hosted on JPM servers, they are choosing to explicitly build products for permissionless blockchains, specifically looking to develop "DeFi legos" with their tokenized deposits.
5/ Ethereum Preference
Tyrone Lobban of JPM explicitly expressed the desire to use Ethereum.
While the trade was carried out on Polygon, a sidechain for Ethereum, this was done because the gas costs of the Ethereum L1 would have been too large.
6/
This shows that large institutional capital JPM's size value the inherent security guarantees that Ethereum provides, but also expresses the challenges with deploying on the L1 itself.
We can then expect that they will continue to deploy on Ethereum rollups and sidechains.
7/ Verifiable Credentials
One mechanism used in this transaction is Verifiable Credentials (VCs), which allow users to present necessary compliance information to third-party verifiers, which can then let issuers know of compliance without revealing any sensitive data.
8/
This opens the door for similar mechanisms, in which compliance checks can be done without DeFi protocols needing to implement anything new, and could replace any concerns around the current debate regarding front-ends requiring KYC.
9/
While these are great, I know many that are crypto native are going to have a hard time accepting or adopting the practices and assets of big banks, as DeFi was meant to offer an alternate system that doesn't require any compliance but rather is permissionless for all to use.
10/
However, more adoption from big institutions that are capitulating to building on public and open-source smart contract platforms like Ethereum and not the creation of their own chain or stablecoin should be beneficial in the long-run as more start to compete in this realm.