Unlocking Trillions in DeFi: The Role of Confidential Lending
Despite the recent resurgence of decentralized finance (DeFi), most traditional financial capital remains out of reach. While scalability, regulation, and poor user experience are often cited as major hurdles, the real blocker is far more fundamental: lack of confidentiality. According to Jason Delabays, Blockchain ecosystem lead at Zama, solving this issue could unlock trillions of dollars in traditional finance. In this article, we will explore the current state of DeFi, the limitations of public blockchains, and the potential of confidential lending to bring in institutional capital.
The Current State of DeFi
At its peak in December 2021, DeFi’s total value locked (TVL) reached an impressive $260 billion. However, in the context of the global financial system, which moves trillions of dollars every day, this number feels relatively small. The foreign exchange market, for example, trades over $7.5 trillion daily, while the global bond market is worth over $130 trillion. DeFi has shown signs of revival since the fall of 2022-2023, with lending protocols demonstrating resilience and TVL on the rise again. Nevertheless, DeFi only scratches the surface of global capital, not because it cannot scale, but because it lacks the confidentiality that traditional finance requires.
The Limitations of Public Blockchains
For most institutions and high-net-worth individuals, confidentiality is non-negotiable. However, every deposit, loan, and payout on public blockchains is open for all to see. While this level of transparency may inspire crypto purists, it is a deal-breaker for serious capital. Recent technical developments, particularly in fully homomorphic encryption (FHE), suggest that this reality may be closer than it appears. FHE enables the processing of data without ever decrypting it, allowing sensitive information to remain encrypted during use. This technology has the potential to bring institutions to DeFi, enabling them to keep their shops and positions private.
Uncollateralized Loans and Beyond
Consider uncollateralized lending, one of the clearest applications for FHE in DeFi, which reflects how most loans work in traditional finance. While traditional finance rarely relies on over-collateralization, DeFi requires assets to manage risk, restricting its scope. FHE changes the equation, enabling users to share encrypted credit or know-your-customer (KYC) data with a protocol, which can then check this data without ever decrypting it. If approved, users can borrow without creating collateral, maintaining confidentiality. If they default, lenders can obtain the right to decrypt certain data to take legal action. This type of privacy-preserving lending makes DeFi more flexible, inclusive, and similar to traditional finance.
Solving Challenges, Not Sacrificing Principles
While FHE offers tremendous potential, there are several design challenges to address before DeFi can fully realize its potential. These include liquidations, credit systems, MEV protection, liquidity, and oracle issues. For instance, encrypted values make trigger events difficult, requiring discrete notifications or off-chain relays. Credit systems require structuring encrypted KYC and standard enforcement requirements, which demand legal and technical orientation. MEV protection necessitates further work, such as hiding transaction quantities or pairing encrypted amounts with batches or time lockers. None of these challenges are insurmountable, but they must be solved before DeFi can achieve its full potential.
According to Delabays, “Institutions won’t participate when every step is public, and retail users shouldn’t have to give up privacy or over-collateralize to receive loans.” With developments in FHE and other technologies moving quickly, DeFi efficiency, confidentiality, and real lending all on-chain, fast, and secure are within reach. As the DeFi landscape continues to evolve, it is essential to prioritize confidentiality, scalability, and user experience to unlock the trillions of dollars in traditional finance. For more information, visit https://cointelegraph.com/news/confidential-lending-ions-in-defi.
