Safe Tokens can create permissioned pools on any permissionless protocol.
Permissioned DeFi built on Permissionless Primitives
By facilitating KYC/AML checks directly within Safe Tokens, protocols and chains are alleviated from the burden of integrating KYC/AML. This, paired with ERC20 compatibility, enables institutions to trade major DeFi protocols while maintiang KYC/AML compliance, without any integrations needed from protocols.
An important issue to address in the development of blockchain technology is where to implement permissioning. Various approaches have been explored, including creating permissioned L1s or L2s, permissioned protocols, permissioned tokens (such as Safe Tokens), and others. Each option has its own set of advantages and disadvantages that need to be carefully evaluated. Safe Tokens, for instance, offer the following benefits:
- KYC/AML compliance is standardized, ensuring the same level of enforcement across all protocols and chains
- Chains remain permissionless and do not need to integrate KYC/AML
- Protocols remain permissionless and do not need to integrate KYC/AML
Any liquidity pool that is denominated in Safe Tokens, even if the liquidity pool contracts are permissionless, are permissioned. The permissioning comes from the KYC/AML check that is required for all Safe Token transfers, irrespective of the protocol or pool it occurs on. This is because any trade with a liquidity pool (swap, deposit, withdraw, etc) calls the Safe Token contract which triggers an atomic KYC/AML check. As a result, the transfer will fail if the credential chekck requirment functionality fails.
Enforcing KYC/AML without breaking ERC20 compatibility is the key innovation of Safe Tokens. This allows Safe Tokens to create permissioned pools on nearly all DeFi protocols on the market, without any integration needed aside from creating pools denominated in Safe Tokens (which typically can be done by any user in a permissionless manner). This is possible because all credential check functionality exists directly inside of the Safe Token smart contract, which executes irrespective of the protocol.
Composability is enabled because:
- Protocols are ERC20 compatible
- Safe Tokens are ERC20 compatible
Since Safe Tokens are compatible with the ERC20 Token Standard, and protocols are compatible with the ERC20 Token Standard, all smart contract functionality that exists between different protocols persists with Safe Tokens.
For example, a leveraged yield farming protocol may source its leverage from other money markets. This protocol’s smart contracts will call the money market protocol’s smart contracts to move liquidity to and from the protocol. Complex functionality like this can continue to operate as usual even with Credential Checks in Safe Tokens. The result is a fully permissioned, interoperable leveraged yield farming product that utilizes multiple protocols to source the best liquidity and rates on the market.