Fireblocks ‘Whitelists’ 30 Trading Firms for Aave’s Institutional DeFi Debut

In a zero-interest environment in traditional markets, banks may have a new friend in decentralized finance (DeFi) – or a version of which they can at least compliantly participate in.

This is what institution-friendly DeFi initiative Aave Arc is offering, having now officially launched with the help of cryptocurrency custody firm Fireblocks, plus a “whitelist” of 30 licensed trading firms.

The lending and borrowing of cryptocurrency that happens in DeFi is normally done in a purely pseudonymous manner; users are known by nothing more than long strings of numbers and letters. This stands in stark contrast to the way traditional finance operates, where counterparties to a trade are clearly identified by a know-your-customer (KYC) process.

As such, today’s DeFi market, which boasts over $250 billion in total locked value, has largely remained untapped by institutions because of the aforementioned KYC and anti-money laundering (AML) requirements. Enabling institutional access to DeFi could unlock a trillion-dollar opportunity over the next half decade, according to some estimates.

The 30 licensed financial institutions approved by multi-party computation (MPC) specialist Fireblocks include Anubi Digital, Bluefire Capital (acquired by Galaxy Digital), Canvas Digital, Celsius, CoinShares, GSR, Hidden Road, Ribbit Capital, Covario and Wintermute.

Parallel universe

The creation of permissioned DeFi pools with regulated entities in mind was proposed back in September of last year. However, Aave Arc started out as “more of an experiment that became an actual new protocol,” according to Aave CEO Stani Kulechov.

Looking ahead, Kulechov predicts permissioned and unpermissioned DeFi will likely exist in parallel.

“We might even see permissioned markets like trading facilities in DeFi, that are just private because they want to concentrate liquidity, or have some other benefits,” said Kulechov in an interview, adding that there’s been “enormous” interest in Aave Arc from institutions, including banks.

“What’s fascinating about those financial institutions is how diverse they are,” Kulechov said. “There are financial institutions that are participating in crypto, there are financial institutions such as hedge funds who are just looking to park their cash reserves into the Aave Arc market to earn yield.”

Permissioned pools

As it stands, Fireblocks has around 250 clients who are using DeFi the way you’d expect (permissionless pools), done via the custody tech firm’s wallet connect or browser extension. As far as Aave Arc goes, any information about whitelisted institutions trading in permissioned DeFi pools is only known to Fireblocks, and remains unknown to Aave and other firms, Fireblocks CEO Michael Shaulov pointed out.

“This is not very different from the situation today because they’re using our wallet, so that information is known to us,” Shaulov said in an interview. “But besides that they are anonymous. The only thing being provided is the fact that they all passed through KYC.”

Using the machinery Aave developed, there was an obvious opportunity to create whitelisted pools, where institutions have all gone through AML screening, thus making DeFi palatable for regulated entities, Shaulov said.

“If you’re using a permissionless pool, and you are from the U.S., how can you prove that the person that you’re trading with on the other side of the pool is not, for instance, an Iranian entity?” said Shaulov in an interview.

DeFi forever

The idea that permissioned pools go against the whole principle of DeFi is a question that Shaulov and Kulechov get asked from time to time.

“The simple answer is that it does,” Shaulov said. “But it’s a necessary step, or an overcorrection, for the industry to get to a different state over an 18- to 24-month horizon. Coming next will be a kind of soft KYC, where you have a KYC token, or on-chain KYC. But in order to get there, we need to take a slightly more aggressive approach.”

Aave’s Kulechov likened Web 3 and DeFi to the oceans of the world. Infrastructure software is like those international waters that are not owned by anyone specifically and anyone can travel through, he said. But once you go to a port, then you step into regulation, and financial institutions are the ports for that ocean, he added.

“I think DeFi will be forever permissionless and accessible to everyone as long as these networks – public blockchains like Ethereum, Polygon, Avalanche – are decentralized,” Kulechov said.