Permissionless & Private: A Model for P2P On/Off-ramps?

Creating a framework for sustainable P2P on- and off-ramps could armor what is potentially DeFi’s most glaring chink.

With centralized entities acting as the primary gatekeepers for those onboarding into DeFi, there will always be looming concerns around crypto ecosystem accessibility and stability.

Developing ramps around blockchain’s core features - security and privacy - could end the cycle of shady exchanges herding through the majority of crypto’s inflow.

But, is it that simple? Will it ever be?

As we wave off a crypto P2P stalwart, and watch trust vaporize further for CEXs, let's take a dive into Web3’s vanguard concepts and projects aiming to finally piece together that elusive permissionless fiat-crypto bridge.

RIP LocalBitcoins

A year feels like a lifetime in blockchain and for LocalBitcoins to exist for over a decade is an exceptional feat. Moreso, it should be lauded as an example of early crypto coordination.

The peer-to-peer exchange was the most efficient avenue for getting bitcoin privately when there were few comparable options and where mega CEXs dominate.

Now that there is a void of decentralized choices, and as we leave behind a year underscored by CEX controversy, it’s clear that the need to innovate this model is overdue.

Base(d)?

Out with the old, in with the new. It only makes sense to mention Base right now.

Only weeks after LocalBitcoins shut its digital doors did Coinbase announce its own L2 built on the Bedrock release of the OP stack. Alongside promises of scalability and security, the corporate marketing blurb was riddled with grand visions of providing on-ramps for developers.

And, it is a riddle. It’s easy to get drawn into the slew of carefully scripted buzzwords - Layer 2, Decentralization, and On-ramps - but it is highly unlikely that the CEX will aim to do anything other than funnel more customers through its doors.

They’ve simply created the illusion of a bright, open space for free-range ideas, and then built a big, blue wall around it.

The State of Web3 P2P

The LocalBitcoins typical user flow was fraught with friction despite the overall concept being effective. Bank transfer options aside, meeting people in coffee shops to trade in-person now feels like a degen’s worst nightmare.

It is only natural then that Web3 iterations have begun to appear which aim to automate and decentralize shifting from crypto to fiat, and vice versa.

Note: the following solutions are not live and this is in no way an endorsement.

ARX

ARX is a hybrid escrow system that uses a network of witness nodes to verify fiat transactions. The aim is to remove the reliance on any third-party moderators as much as possible.

The off-ramping process works as follows:

• Market makers submit a read-only API for their chosen payment system
• This is encrypted and stored by the witness network
• A crypto user sends a deal request with their CeFi payment information
• The user’s crypto funds are sent to a secure escrow contract
• The witness network screen the market makers’ API to confirm the transaction
• Once confirmed, the escrowed crypto is released to the market maker

For trades where an API hasn’t been submitted the protocol uses a game theory-based mechanic to settle disputes. Both parties are required to submit 25% of the deal total to the escrow smart contract, which is slashed in the event that an agreement cannot be reached before a certain time.

Joint Protocol

Joint is a decentralized escrow trading protocol that shares a similar transaction flow to traditional P2P solutions. It allows anyone to create any market for trading between crypto and off-chain stores of value, such as fiat, gift cards, and stocks.

The process relies heavily on both parties being trusted to confirm when a transaction has been received. Mediators act as governing entities within the protocol to assess evidence and make a decision on the outcome of any dispute. In order to take on the role each mediator must stake a security deposit.

The Joint Protocol interface itself is open-source and developed to allow new protocols to be built on top of it that can flex to regulatory demands, integrate new KYC tools, and experiment with means to trade off-chain assets.

A Design to Defy Fiat

The solutions above represent the current peak of decentralized P2P ramps that aim to solve the core tenets of privacy, immutability, and dispute resolution. But they still arguably skirt the same regulatory gray areas as LocalBitcoins.

By combining concepts from other areas of Web3, such as coordination and identity management, there is the potential for ideas like ARX to become more than quasi-DeFi back alleys into crypto.

Permissionless Proponents

Embedding a Web3 framework into P2P ramps could not only enhance usability at a basic level but, with meaningful development and coordination, enable DeFi to begin deciding how and where fiat enters.

Bake governance into such a ramp protocol and it becomes uniquely positioned to act as a pro-decentralization gatekeeper for crypto. Those with vision and voting power could begin to design attractive reward mechanisms that encourage profit to be funneled back into DeFi, or set safeguards to limit the entry of bad actors, and so on.

Flexible Privacy

Identity (or lack of it) is king in DeFi and it’s likely that the writing was on the wall for LocalBitcoins when it lost its USP: largely-unregulated access to trading crypto.

Striking a balance between ensuring that capital from responsible, legitimate sources is utilized, while preserving user anonymity, is a critical issue yet to be tackled. And one with crypto-wide implications.

The choice of Web3 identity solutions being developed that allow users to share proofs of personal information, all while keeping the original data private, could be a simple, ready-made integration to buffer any broad regulatory criticisms around KYC/AML, while also satisfying DeFi’s strict privacy standards.

CEX-ual Healing?

Iterating on forms of decentralization rarely takes place at the most outer edge of DeFi, where fiat enters the ecosystem.

With the punishing FTX fallout, and now LocalBitcoins being ground down into redundancy by regulation, the need for decentralized P2P crypto-fiat exchange streams has never been more clear.

While the lego money pieces exist to develop a core P2P framework - one that is private and permissionless - a bigger question eventually arises: will DeFi ever escape fiat’s clutches? 

Follow the thread back through almost any crypto user’s journey to date and it almost certainly begins with centralized, regulated fiat - and that isn’t set to change any time soon. Despite the dichotomy between the two forms of value, there currently isn’t a plausible DeFi design that doesn’t skim CeFi in some way.

It could be argued that the best strategy for Web3 right now is to draw a firm boundary between itself and fiat, and begin to dictate how it enters and exits the ecosystem.

And while this form of mediation could, at least in part, allow Web3 to manage its own risks, it inevitably raises philosophical questions about the implementation of regulation from within the space, even if it’s at the expense of DeFi downstream.