The early appeal of DeFi lies in its openness—permissionless and frictionless. But as real money flows in and institutions begin to explore, compliance becomes an unavoidable hurdle. Lending protocols without KYC have become hotbeds for money laundering, and fully transparent ledgers keep institutions at bay. Regulatory warnings are issued frequently. To truly bring DeFi into the mainstream, a balance must be struck between compliance and privacy, which is why some projects have been working on this direction from the very beginning.

Some projects take a remedial approach—adding compliance labels to existing DeFi platforms. Others think more deeply: building from the ground up to be compliant. For example, a layer-1 blockchain established in 2018 was created with the mission to provide infrastructure for regulated financial scenarios. Every code update and new feature revolves around the core question: "How to make institutions willing to use blockchain?"

One of the most interesting innovations is privacy smart contracts. Traditional smart contracts are like glass houses—everything about the code and data is visible to the world. This is obviously unacceptable in finance. By leveraging zero-knowledge proof technology, it becomes possible to verify contract results while keeping the process and data fully confidential. Only authorized regulators or auditors can see the necessary information.

As a result, a fully private lending market becomes feasible: user identities pass KYC verification, interest rates and collateral ratios are public on-chain, but details like who borrowed what and from whom are completely hidden. For institutions, this meets compliance requirements while protecting commercial privacy—this is what truly makes DeFi attractive to institutions.