Institutional DeFi Requires Compliance Layers for Regulatory Adherence

DeFi protocols are evolving to accommodate institutional investors by incorporating compliance layers. These layers ensure that transactions adhere to regulatory standards, such as anti-money laundering (AML) and know-your-customer (KYC) requirements.

The compliance layers include identity checks, transaction screening, transfer restrictions, and audit trails. They can be implemented on-chain or off-chain, depending on the protocol's design.

Protocols are choosing from various architectural patterns to incorporate compliance layers without compromising permissionlessness and composability. Some popular patterns include:

• Permissioned pools inside public protocols
• Compliance at the token layer
• ZK-native credentials and selective disclosure
• App-chains and subnets with built-in gates