JP Morgan executed its first on-chain trade on a public blockchain using DeFi, Tokenized Deposits and Verifiable Credentials as part of the Monetary Authority of Singapore (MAS) Project Guardian. JP Morgan, along with DBS and SBI Digital Asset Group, executed this live trade which involved tokenized Japanese Yen (JPY) and Singapore Dollar (SGD) deposits. The trade, carried out on the Polygon Blockchain, was part of a tokenized experiment that used DeFi for foreign exchange and government bond transactions, powered by a modified version of the Aave protocol.
This event is significant in several ways, but the main focus is what this move could mean for the future of Decentralized Finance (DeFi) as traditional finance adopts the opportunities which the former provides and takes advantage of blockchain technology.
Traditional Finance is Adopting Public Blockchains
It is worth mentioning that JPMorgan maintains three private blockchains which are utilized by its businesses and clients. However, it seems to be open to the idea of building financial products and solutions for permissionless blockchains rather than focusing only on those private blockchains hosted on the bank’s servers. That is proof that JPMorgan among other institutions are realizing the power of these public blockchains and how they could be the key to scaling the finance industry in the near future. We have already seen this with the tokenized deposits.
Interestingly, this is not the first time a bank is adopting a public blockchain for its transaction. In April 2021, the European Investment Bank issued its first-ever digital bond on a public blockchain. It deployed blockchain technology to register and settle digital bonds, in collaboration with Goldman Sachs, Santander and Societe Generale. That same month, Societe Generale also took the initiative and issued the first structured product as a security token directly registered on the Tezos public blockchain.
There is no doubt that as time passes by, more traditional finance activities will take place on public blockchains. However, scalability, security and privacy still remain a big issue in the space.
Ethereum Has a Major Role to Play
Ethereum has for a long time played a major role in the growth of the DeFi industry and it looks like it would be key as traditional finance adopts blockchain technology. For this particular trade, the head of blockchain launch at JPMorgan categorically stated they used Polygon, a sidechain for Ethereum, for the trade because of their preference for the Ethereum blockchain. They would have used Ethereum directly but needed cheap gas fees for some expensive operations around identity verification and using the Ethereum Layer-1 would have defeated that purpose because of the large fees on the network.
The preference for Ethereum, however, is proof that these financial institutions value how secured the Ethereum network is. On the other hand, it highlights a major issue that traditional finance may encounter when deploying these trades on the Layer-1 network directly. As such, it is safe to say that Ethereum rollups and sidechains are a better alternative if there is the need to save cost and cut down the money spent on gas fees.
What Are Verifiable Credentials?
JPMorgan deployed the use of Verifiable Credentials for this trade, which may sound counterintuitive considering what the whole essence of DeFi is about. However, this mechanism is to be expected from such institutions. In case you are wondering, Verifiable Credentials are simply cryptographically secured versions of a training, experience, background or as in this case, an identity. JPMorgan built on-chain verification of verifiable credentials to fulfill compliance checks needed to access the Aave protocol. Basically, Verifiable Credentials alerts issuers of compliance without revealing any sensitive information. It is believed that this mechanism could eliminate the need for DeFi front ends to carry out know-your-customer (KYC) checks which aims to make decentralized protocols more secure.
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