DeFi (and the Canadian crypto community, especially) woke up yesterday to a pretty terrible headline. We learned that “Sifu,” who goes by the handle @
DeFi (and the Canadian crypto community, especially) woke up yesterday to a pretty terrible headline. We learned that “Sifu,” who goes by the handle @OxSifu, a core member and CFO of DeFi protocol Wonderland, was Michael Patryn (also known sometimes as Omar Dhanani), an apparent co-founder of failed, infamous (to put it lightly) Canadian exchange QuadrigaCX.
This discovery was equally shocking to me. As a young upstart in Canadian crypto circles in 2010, I was exposed to Patryn, an experience I was quoted on in an investigative piece in Vanity Fair in 2019. Following yesterday’s news, where an anonymous team member of a leading DeFi protocol was outed as a career criminal, I find myself thinking deeply on the topic of anonymity, reputation, and trust in DeFi, an industry where so much blind faith is put into one’s personal history, motives, and ideals.
Joseph Weinberg was an early investor in Bitcoin in 2010 and director at Coinsetter until its acquisition by Kraken in 2016. Currently, Weinberg is the co-founder of Shyft Network, the blockchain-based trust network that reclaims trust, credibility and identity. This article is part of CoinDesk’s Privacy Week series.
As someone who was there for Canadian crypto’s early days, I can tell you that we were operating truly in the unknown in those first years. In that environment, actors emerged that today our space wouldn’t tolerate. I won’t speak or reveal more on Michael/Omar for personal security reasons, but the point isn’t about him; it’s about the moral compass we must demand and a requirement to fight for the betterment of our ecosystem – and humanity.
Is total anonymity practical in a space where bad actors inevitably exist? When we deanonymize founders, does DeFi adoption suffer? How do we move forward when situations like Wonderland bring back memories of what we’ve fought so hard to change since 2013? These are all questions I’m asking myself right now. Below, I also want to share what I think could become some answers – and a path forward for improving trust in DeFi.
The risks of anonymity in DeFi
I’m not going to argue against anonymity in DeFi, but rather share some ways in which pseudo-anonymity – and reputation – can protect against bad actors like Patryn being given the keys to users’ funds. While Quadriga was a centralized exchange (sole ownership), Wonderland’s treasury is still in the hands of core key signers – a situation of pseudo-custody, where risk becomes a factor. Smart contracts may be self-executing, but individuals controlling funds are independent actors.
It’s here where human intervention becomes an issue. The community puts its faith in the idea that those in contact with their money will do the right thing. Most of the time, it works. Until it doesn’t. Would you want to invest in a project with Chef Nomi of SushiSwap, the infamous co-founder who suddenly liquidated his holdings and caused the token to crash?
Read more: ‘I F**ked Up’: SushiSwap Creator Chef Nomi Returns $14M Dev Fund
Anonymous teams are not subject to background checks, credit checks, or a variety of security checks that ensure individuals don’t have criminal records or are on sanctioned watch lists. As DeFi grows and the ecosystem seeks institutional adoption and a wider set of market participants, with great power comes great responsibility.
In Bitcoin and Ethereum, where automatic rule enforcement is based on consensus, individuals themselves don’t matter as much – they don’t have the extra abilities to do something bad.
It’s no surprise, therefore, that recent guidance from the Financial Action Task Force (FATF) focused so much on DeFi. FATF made the argument that key signers are in control of funds, essentially making them regulated entities, whereas decentralized autonomous organizations (DAOs) can (and probably will) be categorized as virtual asset service providers (VASPs) to some degree over the coming years.
Read more: What FATF’s Latest Guidance Means for DeFi, Stablecoins and Self-Hosted Wallets
This guidance was intentionally left open-ended and broad so regulators can choose how they approach these topics. If we allow bad actors to hold power in DeFi protocols anonymously, growing regulation would raise many red flags and taint asset pools and institutional confidence.
The power of attested reputation
What we must do as a community is think through some of these issues along the lines of social reputation and trust. We know people are not keen on giving up their identities, and we are here fighting for freedom and openness after all. Instead, again, we put faith in people. In the case of Patryn, that’s what happened. We let recent actions speak louder than overall reputation. This is a failure of trust and our social responsibility as an industry.
The future I would like to see for DeFi, and the road toward mass adoption of Institutional DeFi, would replace total anonymity with pseudo-anonymity based on the power and utility of…
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