Vitalik discusses regulation: DeFi front-end KYC cannot stop hackers, zero-knowledge proofs can meet regulatory requirements

In recent days, discussions on regulatory issues have been heated on Crypto Twitter. FTX CEO SBF proposed his own thoughts on regulatory standards on the 20th. Vitalik, the founder of Ethereum, also elaborated on his views on mixers, privacy, and DeFi KYC on the 30th, emphasizing several times that zero-knowledge proof technology can meet regulatory goals.

Vitalik on Regulation

1. About Mixer and Privacy

Vitalik discussed his views on mixers and privacy on the Coinbase Podcast two months ago. He stated, "People don't realize that protocols can maximize benefits and minimize risks without turning the blockchain world into a dystopian surveillance hell."

Using the Tornado Cash mixer as an example, Vitalik explained that when users withdraw from the protocol, they can verify the withdrawal by proving their knowledge of a valid deposit that has not been exhausted, or through zero-knowledge proofs to show that the withdrawal is not from a specific deposit or that it is a subset of a deposit.

This way, users do not need to disclose their exact identity or affiliation to prove they are not hackers within the ecosystem.

2. About Involvement of Large Institutional Capital

Furthermore, Vitalik mentioned that people should not eagerly seek the involvement of large institutional capital.

"In fact, I'm glad many ETFs have been postponed. The ecosystem needs time to mature before we get more attention," he said.

Vitalik believes that at this current juncture, instead of letting regulatory bodies influence the internal operations of the crypto industry, it would be better to allow the industry to operate freely internally, even if it means making it harder for crypto protocols to access mainstream markets.

3. About DeFi KYC

Vitalik then discussed his views on KYC for DeFi frontends, stating, "It not only annoys users, but it's also ineffective against hackers who have written custom code to interact with contracts."

He believes that exchanges are the appropriate place for KYC, and many exchanges are already implementing it.

The primary goals of regulatory policies are "consumer protection" and "making it harder for bad actors to move large amounts of funds." However, issues related to the latter are not concentrated in DeFi but in general large-scale crypto payments. To restrict DeFi frontends, he suggests the following:

1. Leverage restrictions
2. Require transparency in auditing and security checks of contract code
3. Use knowledge-based testing instead of minimum net worth rules for rich individuals

Finally, Vitalik emphasized the use of zero-knowledge proofs as much as possible to meet requirements because they not only offer new opportunities to meet regulatory policy goals but also protect privacy simultaneously.