Reviewing the Major Upgrades of Four DeFi Protocols: What Key Capabilities is DeFi Enhancing from Trading Privacy to Asset Compliance?

Author: Jae, PANews

In the past month, the DeFi space has seen a number of noteworthy new products and infrastructure upgrades.

From privacy trading to RWA compliance, from fixed-rate lending to on-chain trading experiences, several leading protocols are exploring critical aspects of on-chain financial development, attempting to address the core issues that have long constrained the scalability of DeFi.

All these evolutions point towards a common trend: the focus of DeFi competition is gradually shifting from the early growth model centered around liquidity and yield to the long-term construction of financial infrastructure capabilities.

This article will review the latest developments of four major DeFi protocols: Zama, Uniswap, Morpho, and Jito, and analyze the industry significance and potential challenges behind their product innovations.

Zama Confidential RFQ: FHE Exploring "Dark Pools" for On-Chain Large Transactions

Transparency is one of the most commendable features of blockchain, but it is also a double-edged sword. Publicly accessible ledgers ensure credibility but also expose large transactions. As soon as a large order is posted on a public chain, it can be targeted by MEV (Maximum Extractable Value) bots, leading to front-running and sandwich attacks that eat away most of the trading profits and even expose trading strategies.

Traditional financial markets have dark pools to address such issues, but there has always been a lack of truly trustless privacy trading solutions on-chain.

On July 24, the privacy computing protocol Zama announced the launch of the Confidential RFQ (Request for Quote) based on Fully Homomorphic Encryption (FHE), providing a solution for on-chain large transactions similar to traditional financial dark pools.

This protocol adopts the ERC-7984 ciphertext token standard, allowing institutions and professional market makers to conduct large on-chain transactions through a "Sealed-bid Auction" method. Throughout the inquiry and matching process, the transaction size, buy/sell direction, asset type, and even slippage settings remain in ciphertext, preventing all network nodes and trading counterparties from knowing the complete parameters of the order before quoting.

The secret lies in FHE, which allows mathematical computations on ciphertext without decryption to verify the validity of transactions. This means that on-chain transactions may be able to simultaneously ensure privacy protection and verifiability in the future, allowing large orders from institutions to be securely executed on-chain.

However, FHE still has two major hurdles to overcome before large-scale application.

• Performance Bottleneck: The computational overhead of FHE ciphertext operations is far higher than that of plaintext transactions. Even after years of algorithm optimization, the computational latency and gas consumption on the Ethereum mainnet remain significantly higher than ordinary transactions, making it uncertain whether it can support large-scale high-frequency inquiries.

• Regulatory Game: Traditional financial dark pools are already under close regulatory scrutiny, and the emergence of on-chain dark pools may trigger scrutiny from financial regulatory agencies in various countries regarding anti-money laundering and market manipulation.

Therefore, finding a balance between on-chain privacy protection and regulatory transparency requirements will remain a continuous challenge in the large-scale application of privacy computing in the future.

Uniswap V4 Permissioned Pools: Exploring Compliance Pathways for RWA to Enter AMM

The tokenization of Real World Assets (RWA) is widely regarded as the next high-growth market in the crypto industry, but compliant assets such as U.S. Treasuries, U.S. stocks, and institutional funds have been in an awkward position of "having assets but low liquidity" on-chain. One important reason is that traditional financial assets need to meet KYC/AML compliance requirements, while DeFi AMMs (Automated Market Makers) inherently emphasize "permissionless and anonymity."

On July 23, the decentralized exchange Uniswap, in collaboration with Securitize, Superstate, and Dowgo, launched a new Hook standard on Uniswap V4: Permissioned Pools, attempting to pave the way for the trading of tokenized U.S. Treasuries, U.S. stocks, and funds on AMMs while balancing DeFi's composability with TradFi's compliance and security.

Hook is the most significant innovation of Uniswap V4, allowing developers to insert custom logic at various nodes of trade execution. The essence of permissioned pools is that the whitelist verification logic is embedded in the underlying contract: asset issuers hold the whitelist control, and when users initiate transactions or provide liquidity, Hook will automatically verify the compliance qualifications of the wallet address. Addresses that do not pass certification will not be able to interact on-chain.

This means that compliance regulations have shifted from "frontend prompts" to "code constraints." In the past, compliance often relied on frontend web settings for KYC thresholds, but any technically savvy hacker could bypass the frontend and directly call the underlying smart contracts. Now, the regulatory legal risks brought about by bypassing the frontend will be eliminated, allowing traditional financial assets to gain a compliant pathway into the on-chain composable ecosystem.

On the flip side, this represents a concession in liquidity depth and the native spirit of DeFi.

• Liquidity Fragmentation: Permissioned pools are completely isolated from public permissionless pools, and funds cannot share depth across pools, leading to new liquidity islands.

• Centralization Risks: The control of the whitelist is in the hands of issuers or third-party compliance service providers, forming a de facto single point of control. If the compliance node is attacked or frozen by regulators, the liquidity of funds within the pool will be directly affected.

In the process of RWA moving towards large-scale implementation, every player needs to make trade-offs and balances between compliance and decentralization.

Morpho Midnight: Adding "Fixed Rates" to DeFi Lending

In traditional financial markets, fixed-rate bonds are one of the largest foundational assets. In the DeFi market, however, dynamic interest rate models based on utilization rates have always dominated. For institutional investors, treasury managers, and arbitrage traders who need precise calculations of funding costs, the unpredictability of interest rates has always been a significant barrier to entry. This not only increases the difficulty of capital management but also limits the further expansion of DeFi lending products.

On July 21, the lending protocol Morpho announced the launch of the fixed-rate lending product Morpho Midnight on the Base chain, as a complement to its floating-rate pool Morpho Blue, specifically designed for fixed-term, fixed-rate credit markets, attempting to fill the long-missing key puzzle in the DeFi credit market.

Midnight neither adopts the dynamic interest rate mechanism nor imposes fixed rates on the frontend or liquidity pool, but rather builds a matching system based on "intent" and discounted bonds: lenders and borrowers complete matching through tradeable credit/debt units. Essentially, these units are zero-coupon bonds on-chain, and at the moment of transaction, both parties lock in their expected returns and repayment obligations, providing institutional investors, corporate treasury management, and arbitrage traders with predictable funding costs and yield expectations.

This design also addresses the common issue of low capital efficiency in fixed-rate agreements. Previous similar products often required funds to be locked in advance waiting for matching, leaving unexecuted funds idle. Midnight adopts a limit order model, allowing lenders' funds to continue earning returns in the floating-rate pool until matched, effectively allowing them to "earn on-demand returns while waiting for fixed-rate execution," significantly enhancing capital efficiency. Additionally, deploying on the low gas-consuming Base network further reduces the secondary transfer costs of lending units, allowing users to close positions at any time based on market conditions without holding until maturity.

However, fixed-rate lending also faces challenges on its path to becoming mainstream financial infrastructure.

• Liquidity Fragmentation: Markets with different maturities and collateral types are isolated from each other. During the protocol's cold start phase, if the order depth in each segmented market is insufficient, it may lead to wider bid-ask spreads, thereby increasing trading costs.

• Higher Cognitive Barriers: The understanding threshold for the product is higher than that of traditional lending pools. Users need to grasp the logic of bond discounts/premiums, implied annual yield calculations, and secondary market liquidation rules, requiring users to have a higher level of financial literacy.

This means that Midnight is more of a tool aimed at professional players rather than a simple lending product for ordinary users. In the longer term, it represents an attempt for the DeFi credit market to evolve towards a more mature financial system.

Jito JTX: Bringing CEX into Self-Custody Wallets

In recent years, Jito has established an important position in the ecosystem of Solana with the largest LSD (Liquid Staking Derivative) protocol and MEV infrastructure. Now, it has chosen to extend downstream, turning its attention to the battlefield of trading terminals.

Jito has launched a self-custody trading platform JTX designed for professional traders, with the selling point being: a CEX (Centralized Exchange) level operational experience with the security of self-custodied assets on-chain.

The real competitive advantage lies in the underlying technology. Jito injects its accumulated technical capabilities in Solana block construction (Block Engine) and MEV pipelines into the trading frontend. This means that orders on JTX will receive better trade ordering, lower failure rates, and significantly reduce common pain points such as sandwich attacks, excessive slippage, and trades being stuck that are prevalent on ordinary DEXs. If this model succeeds, on-chain trading may further narrow the experiential gap with CEX.

Notably, its tokenomics design: 80% of platform trading fees will be used to buy back and burn JTO, creating sustainable cash flow and deflationary support for the token, enhancing the value capture ability of the protocol token.

However, JTX faces challenges in breaking through the trading terminal space.

• Red Ocean Competition: On the Solana chain, Jupiter occupies the vast majority of traffic due to its aggregator advantage, while products like Photon and Axiom have their own followers, and pump.fun along with various Telegram trading bots also capture a significant amount of retail investors. Transitioning from infrastructure to frontend products, JTX faces severe challenges in user acquisition and retention.

• Network Stability Concerns: Solana has historically experienced multiple instances of network congestion and outages. In extreme market conditions, whether JTX's trading system can maintain execution quality remains to be seen.

Therefore, the significance of JTX may not just be to launch a new trading entry, but to explore a new paradigm of on-chain trading, that is, whether infrastructure providers can further evolve towards user terminals.

Conclusion

It is evident that a series of recent developments in the DeFi space are covering multiple critical aspects of on-chain financial development. This means that the future focus of DeFi competition will no longer be just higher yields, larger liquidity scales, or shorter-term market incentives, but will revolve around the capabilities of financial infrastructure.

Privacy protection determines whether funds are willing to enter the on-chain environment, compliance capabilities determine whether traditional assets can achieve scalable liquidity, interest rate certainty affects institutional capital allocation efficiency, and trading experience determines whether users are willing to stay on-chain long-term.

Of course, the evolution of DeFi infrastructure still faces many challenges. Technical performance, regulatory requirements, liquidity dispersion, and user habits will all become limiting factors in the next stage of development.

However, it is undeniable that DeFi is gradually breaking away from the positioning of early financial experiments and continuing to evolve towards a more mature and complete on-chain financial infrastructure.

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