Buterin and HashKey Group CEO Discuss Maturing Low-Risk DeFi and ZKID's Potential for New Financing Models

Executive Summary

Ethereum co-founder Vitalik Buterin and HashKey Group CEO Xiao Feng addressed the Global On-chain Asset Summit at TOKEN2049 in Singapore, emphasizing the progress of low-risk decentralized finance (DeFi) and the emerging role of Zero-Knowledge Identity (ZKID). The discussion underscored a notable reduction in DeFi-related losses and the potential for ZKID to foster innovative financing structures within the Web3 ecosystem.

The Event in Detail

At TOKEN2049, Buterin and Feng detailed advancements in DeFi, particularly its evolution towards reduced risk. They noted a significant decrease in hack-related losses, plummeting from 5% of Total Value Locked (TVL) in 2019 to 0.02% currently, positioning DeFi as a viable avenue for stable returns. Data from 2025 indicates that DeFi losses dropped to approximately $1.1 billion, partly due to stronger protocol-level defenses. Audited protocols in 2025 experienced 94% fewer hacks, underscoring the effectiveness of third-party code reviews. User trust is growing, with average user deposits reaching $2,800 and global DeFi lending users surpassing 7.8 million in 2025, marking a 26% year-on-year growth.

The discussion also focused on ZKID as a transformative innovation. Buterin and Feng proposed that ZKID could facilitate new financing models, such as undercollateralized loans, by enabling identity proof without revealing sensitive personal data. Buterin further highlighted the blurring lines between B2B and B2C applications in blockchain and the necessity of decentralization guarantees, even within partially centralized Layer 2 solutions.

Financial Mechanics of Innovation

The proposed ZKID model leverages zero-knowledge proofs to allow individuals to verify specific attributes of their identity without disclosing underlying personal information. This mechanism can enable KYC-compliant onboarding in DeFi by allowing users to prove jurisdictional or regulatory requirements without submitting full documents to every platform. This technological advancement supports privacy while adhering to compliance standards, potentially fostering new financial instruments like undercollateralized loans where creditworthiness can be attested privately. Examples of ZK credentials in Web3 include gated access to token-gated communities, privacy-preserving DAO voting, and fair airdrops where eligibility is verified without doxxing users.

The maturation of low-risk DeFi is also supported by enhanced security frameworks, integrating formal verification and automated auditing to improve smart contract resilience. These include AI-Augmented Formal Verification, probabilistic verification, and real-time on-chain monitoring, which collectively reduce exploit risks and enhance developer confidence.

Business Strategy & Market Positioning

The convergence of AI, Crypto, and ZKID was posited as a catalyst for a "new financial revolution," potentially creating alternatives to traditional venture capital. This strategy aligns with a broader trend in Web3 where decentralized identity systems are gaining traction, aiming to replace traditional ID systems. Projects like World ID and government initiatives in Taiwan and the EU are adopting ZK-wrapped digital ID solutions to protect privacy while enabling verification. In 2025, Decentralized Identity (DID) is being tested as a compliance tool that respects user privacy while satisfying legal requirements.

From a strategic standpoint, the emphasis on robust Layer 2 solutions and improved security aligns with Ethereum's roadmap for scaling, simplicity, privacy, and interoperability, as outlined by Vitalik Buterin. His commitment to endorsing only Stage 1+ Layer 2 projects starting in 2025 reflects a push for greater decentralization and cryptographic trust, signaling a maturing ecosystem where security and verifiable decentralization are paramount.

Broader Market Implications

The insights from TOKEN2049 suggest a shift towards a more secure and privacy-centric Web3 ecosystem. Short-term implications include increased investor interest in projects focusing on low-risk DeFi strategies and ZKID solutions. Long-term, the widespread adoption of ZKID could fundamentally reshape how individuals and projects access capital, potentially democratizing finance and creating new funding mechanisms beyond traditional venture capital.

Regulatory scrutiny surrounding blockchain privacy, particularly concerning decentralized identity systems and on-chain credentials, is increasing. Lawmakers are focusing on defining legal responsibilities and liability within Decentralized Autonomous Organizations (DAOs). However, the development of ZK-based KYC and privacy-enhancing tools is seen as a way to navigate these challenges, offering a balance between privacy and transparency and potentially influencing crypto policy trends in regions like the EU, US, and UK. The emergence of DID as a compliance tool, as seen with initiatives like Ethiopia's FaydaPass, further illustrates its growing significance in satisfying legal requirements while respecting user privacy.