Opinion by: Jason Delabays, blockchain ecosystem leading to Zama
Despite the decentralized (DEFI) recent resurrection, most of the traditional finance capital remains out of reach. Most will blame the scalability, regulation or poor UX. The real blocker is more fundamental: a lack of confidentiality. Resolve that, and the trillions will be locked.
At December 2021, the total cost of the Defi locked (TVL) struck an incredible $ 260 billion. It will be out, however, and that figure begins to feel small, especially if the global financial system moves on the trillion day -day. Only Foreign Exchange finds more than $ 7.5 trillion exchanged days, and the global bond market costs more than $ 130 trillion.
Defi has returned since the crash of 2022-2023. The lending protocols have shown staying power, and TVLs are rising again. The defi is, however, scratching only over the global capital, not because it is not measurable, but because it lacks something traditional finances will not live without.
Encryption tech pulls the highest obstruction
For most institutions and high-value players, confidentiality cannot communicate. Every deposit, loan and removal is, however, open to public blockchains. The level of transparency can thrill the purists of crypto, but for the most serious capital, it is a kdealbreaker.
That is why, for so many, the thought of unlocking Defi-Frictionless’s promise, open, institutional grade finance-they are still far away. Recent tech development, specifically to Full homomorphic encryption (FHE)It is suggested that the truth may be closer than it looks.
Having gained more basic attention, FHE is no longer just an academic curiosity.
Privacy care technology allows data to be processed without decrypting. Sensitive information remains to be denied even when used. Institutions can be brought to Defi to keep their trading and position private.
Uncollateralized lending and more
Consider the uncollateralized lending, as this may be one of the clear cases of use for FHE in Defi and glass how most credit credit works in traditional finances. While traditional finances rarely depends on overcollateralization, Defi does, locking properties to manage the risk, which limits its scope.
FHE changed the equation. Here’s how it could work: first, a user shares a air -trained credit or knows your customer’s (KYC) data with a protocol. A smart contract then reviews the data that uses FHE – for example, asking, “their credit score above 700?” – Everything has never been dedicated. If approved, the user can borrow without putting collateral and confidentiality. If they default, the lender may get the right to dedicate specific data to take legal action on Offchain.
Either way, institutions that assess the risk and release of credit may finally step into the onchain world without announcing positions or exposing client data.
This type of privacy-maintenance is made more flexible, included and aligned with traditional finances. Uncollateralized lending is just the start. One can even go to FHE, rebuilding the foundations of defi lending itself.
Let us consider getting top protocols today and rebuild them with confidential ERC-20s on the core. Now layer on the airpled credit marks, hidden loan values and maximum protection (MEV). This is not just a feature of upgrading – it’s a new primitive for lending.
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For institutions, this will lead to private collateral pools where positions remain confidential, with credit -based lending option. Retail users can access loans without collateral, with a shield from front-running and MEV bots. For lending protocols, it will offer a path to change to confidential-first systems that are finally measured by trillion without compromising selflessness.
Public blockchains are always better than private blockchains when it comes to openness and interoperability. Private chains are, however, traditionally offer stronger confidentiality, making it more attractive -institutions that need to keep data private. In FHE, public blockchains can match private chains of confidentiality without surrendering their major strengths.
Challenges to solve, but there are no reasons to give up
All of the above sounds great, but if the Defi really goes to size and bring trillions still stuck to traditional finances, more than private credit scores and confidential lending pools. A completely new foundation should be created, and there are many design challenges to deal with first, such as destruction. The scandal values are complicated by those who are the ones who are complicated. FHE supports comparisons, but notification of fluids that are careful may require -centered events or offchain relays.
Credit systems are another place of complexity. The structure of the KYC -residents and the default implementation requires legal and technical alignment; The challenge is to balance confidentiality and responsibility.
MEV protection is also required for further work. Storing transaction values is a great start, but pairing encrypted values with batching or time-lock so that the patterns may be needed to be completely defended.
Liquidness is also affected; CWeth divides from wrapped ether (weth), but yield incentives or seamless wrappers can bridge this space. From a UX point of view, decryption tools should be simple of purse.
Finally, oracles cause a unique problem. Public prices can be indicated in values, but compatible FHEs can solve it later.
None of these are dealbreakers, simple puzzles. They must be resolved before reaching Defi’s full potential. Institutions do not appear if each motion is public, and retail users do not have to give up privacy or overcollateralize to obtain credit. With developments in FHE’s rapid transition, perhaps the defi efficiency, Swiss-Bank confidentiality and onchain credit-all onchain-is almost reached.
Opinion by: Jason Delabays, blockchain ecosystem leading Zama.
This article is for general information purposes and is not intended to be and should not be done as legal or investment advice. The views, attitudes, and opinions expressed here are unique and do not necessarily reflect or represent the views and opinions of the cointelegraph.
