On June 12, a significant disruption caused by Google Cloud affected more than 70 services worldwide, impacting major platforms such as OpenAI (notably, ChatGPT experienced its longest downtime ever), Cloudflare, Spotify, Discord, Snapchat, UPS, DoorDash, and others. This incident highlights our reliance on centralized systems for critical infrastructure, a situation that goes beyond traditional Web2 concerns and extends into the decentralized finance (DeFi) realm. Just two days earlier, on June 10, another outage occurred within the crypto sector when TRM Labs, a prominent blockchain compliance provider, faced nearly 12 hours of downtime due to a Salesforce-related issue. For those utilizing TRM for transaction screening, their compliance mechanisms were rendered inoperative. However, users of Predicate, a competing service, were able to switch providers seamlessly and continue their operations.
Understanding Predicate
Predicate is developing a programmable enforcement layer for compliance within DeFi ecosystems. It functions similarly to an operating system that ensures adherence to pre-transaction regulations. In a recent white paper co-authored with Paxos and Uniswap, Predicate detailed how Uniswap v4 can implement asset-specific guidelines prior to executing swaps or adding liquidity. These guidelines may include geographic restrictions based on jurisdiction, market behavior regulations, or requirements for investor accreditation, as explained by Predicate CEO Nikhil Raghuveera. He elaborated, “You might have a pool that enforces different rules for different users based on their IP address, accreditation, or other entity statuses.” This can encompass both on-chain and off-chain data.
Regulatory Nuances in DeFi
The situation becomes particularly complex with Paxos, which offers the USDL stablecoin that is yield-bearing and rebasing. U.S. regulators may classify such instruments as money market funds, necessitating that Paxos International, which issues USDL from Abu Dhabi, restrict access from U.S. users. By employing Predicate, the Paxos liquidity pool on Uniswap can enforce tailored policies through frontend IP restrictions or on-chain confirmations. Additionally, a secondary mechanism converts USDL into a non-rebasing token in the background, allowing it to function within Uniswap’s accounting framework. This approach enables Paxos to adhere to regulatory requirements while maintaining composability.
A Modular Approach to Compliance
Reflecting on the outage challenges, Predicate’s fallback design stands out. Compliance “verdicts” (for instance, “This wallet has passed TRM’s screening”) are generated by off-chain operators and verified on-chain via Uniswap hooks. Should one provider like TRM experience issues, alternatives such as Elliptic or Crystal can easily step in, all without requiring modifications to the smart contracts. This modularity aligns with trends in decentralized artificial intelligence, where entities like Venice AI utilize decentralized networks such as Akash to circumvent centralized GPU limitations. Raghuveera stated, “Policy is critical infrastructure because it dictates whether a transaction can proceed.” He emphasized the necessity for a comprehensive array of components to ensure reliability during outages.
Composable Policy in Institutional DeFi
As we have dedicated years to making smart contracts composable, Predicate underscores the importance of having policies that are also composable—resilient to disruptions, easily upgradable without the need for liquidity migration, and adaptable to varied regulatory contexts. The scalability of institutional DeFi cannot rely on a uniform KYC (Know Your Customer) approach. However, the potential for programmable, source-agnostic compliance enforcement may offer an effective solution while still appealing to the principles of cypherpunk advocates.
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