Primex: The DeFi Bridge to dKYC and Margin Trading

The decentralized finance (DeFi) revolution overturns traditional centralized finance and its associated issues, but DeFi suffers from its own set of problems.

Primex contributes to solving these problems by introducing decentralized KYC (dKYC) and dynamic risk profiling. The initial goal is to facilitate undercollateralized DeFi lending across DEXes, making margin trading of cryptocurrencies — and later tokenized assets — a reality.

Eventually, concepts pioneered by Primex may bridge the gap between traditional financial services and DeFi, mainstreaming the latter and opening new worlds of finance to everyone, regardless of social position, national origin, or present location. However, in its first-implementation form, Primex focuses on enabling margin trading for DeFi.

The Roles of Primex Participants

The Primex protocol has lenders, borrowers (traders), notaries, and delegators. The lenders provide liquidity to pools (credit buckets) and earn interest and share proceeds of profitable trades. Traders are subjected to risk evaluations and dKYC, but they can then access liquidity in the credit buckets to make undercollateralized margin trades. Traders receive scores from trader notaries.

Two types of notaries exist. Bucket notaries propose credit buckets, which are defined by their risk profiles. Trader notaries have two subcategories: identity and efficiency notaries. Trader identity notaries perform the dKYC using quantitative and even qualitative methods, and the trader efficiency notaries continuously evaluate a trader’s performance and therefore risk.

Delegators incorporate the democratic-economic function of staking to elect notaries, introducing an element of globalized democratic consensus for margin lending. Stake slashing is the prevailing mechanism to prevent conflicts of interest and moral hazard for notaries and delegators (preventing the corruption like that of the Big Three ratings agencies).

Credit buckets are not a role but form a central concept tying together lenders, traders, bucket notaries, and, to a lesser degree, delegators and trader notaries. Credit buckets are liquidity pools into which lenders deposit the funds that traders leverage. A bucket notary proposes a bucket with a defined risk profile, which includes factors such as which assets are available, how collateralized a trader must be, and sometimes even which traders are allowed to use it (based on trader efficiency and dKYC). Successful buckets may pay out some dividend, including to delegators that staked for the proposing notary.

dKYC and Risk Profiles Attract Lenders

To fund the system, lenders must be enticed to fund the credit buckets. Until now, a lack of KYC and risk evaluation meant lenders were wary of undercollateralization. But with Primex, lenders can choose among myriad risk profiles to allocate their assets to risk levels as precisely as they wish. They can also assume that dKYC’ed, high-reputation traders will want to preserve their reputations, so their assets are safe with such traders.

Permitting risk profile selection implies a wider variety of interest rates, including higher ones for lenders with risk appetite. Moreover, leveraged trading means greater profits for traders. Profits flow into credit buckets, and Primex incorporates profit sharing with lenders, increasing lender returns beyond conventional interest earnings.

DEX Integration for Traders

Traders not only receive the benefit of margin trading. Primex allows for integration across DEXes, as the protocol is not limited to any one DEX. Traders using different DEXes can access the same credit buckets, and even a single trader that participates in multiple DEXes can still access liquidity through Primex for each DEX they trade on. Primex intends to integrate seamlessly in the background using a custom wallet, letting traders continue to use the familiar DEX GUIs but with the added benefit of leverage. The protocol plans to enable cross-margining as well, so excess liquidity assigned to positions on one DEX can be reassigned to positions on another DEX if necessary.

Reasons to Stake for or Contribute to Primex

There are different economic incentives for notaries and delegators to join Primex and perform KYC, host the nodes that carry out automated trader efficiency evaluation, and elect notaries.

Inflation and trader performance are the two drivers of income for notaries. All notaries receive inflation rewards based on their stake. Furthermore, bucket notaries are rewarded based on the performance of buckets. Trader notaries are similarly rewarded for the profitability of the traders they admit to the system. Using performance of traders and buckets incentivizes a symbiotic relationship between notaries and lenders, as both maintain a vested interest in profitable traders and buckets. Delegators receive part of the reward that their elected notaries generate.

Aside from lower profits, slashing serves as the main disincentive to misbehavior, and each type of notary and delegators are vulnerable to slashing for violating principles and/or unprofitable bucket and trader performance.

Mainstreaming Undercollateralized DeFi

One major obstacle holding back mainstreaming of DeFi is the lack of KYC and anti-money-laundering (AML) compliance. Primex’s trader notaries, particularly the identity subtype, can bridge the gap between regulatory compliance and the decentralized world. With compliant dKYC, institutional and professional market participants can start engaging in DeFi directly, mainstreaming DeFi margin trading.

More articles are forthcoming, explaining the mechanics of Primex, more details about the roles, credit buckets, incentives, and future initiatives.

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