Linking TradFi and DeFi is like forcing a square peg into a round hole. Soda Labs’ garbled circuits offer a means of connecting centralized and decentralized services, without demanding undue compromises of either.

Bitcoin arose as a reaction to the perceived shortcomings of the existing global financial system. Encoded in the Genesis Block is a newspaper headline from the 2009 financial crisis, which serves both as a timestamp to prove the blockchain was initialized on or after this date, and as a justification for why a peer-to-peer currency is required:

“The Times 03/Jan/2009 Chancellor on brink of second bailout for banks”

The alternative financial systems that have evolved from Bitcoin operate on a completely different paradigm to traditional financial services and Web2 systems.

TradFi:

• Centralized infrastructure and management
• Single points of failure
• Permissioned, with trusted gatekeepers
• Opaque

DeFi: 

• Decentralized infrastructure and no centralized control
• No single points of failure
• Permissionless and trustless – anyone can use
• Transparent

These two paradigms are like oil and water. As things stand, it is impossible to merge them. For a long time, no real effort was made to enable interoperability between TradFi and DeFi. Banks and the conventional financial system either ignored crypto or actively avoided working with crypto platforms. Today, things are very different – but fundamental challenges still exist. 

Soda Labs’ garbled circuits-based MPC network offers an effective way to bridge the gap between TradFi and DeFi without introducing unacceptable compromises to either.

Adaptation vs. Interoperability 

The challenge is not to force one system to adapt to the other – making TradFi more like DeFi, or vice versa. It is to enable interactions between the two while keeping the unique properties of each system intact. The goal is to move information and money between TradFi and DeFi without undermining the core values of one or both.

This is not merely a narrow regulatory or technical issue. It is simple (in practical terms) to remove KYC from crypto exchanges and create more private on- and off-ramps. This is how the earliest crypto exchanges like MtGox initially operated, before regulators caught up with them. It is also possible to create centralized and permissioned blockchains on which transactions can only be validated by approved parties, and may be reversed. CBDCs are an example of this. 

In practice, such adaptation always means compromising some aspect of one or other system – and each system has the properties it does for a reason. (We may disagree with those properties, or the reasons for them, but we can assume at this point that they are non-negotiable.)

Instead, the need is for an approach that can bridge the two and enable them to interact as seamlessly as possible, while maintaining the functionality of each. Soda Labs’ decentralized confidential computation (DeCC), which is based on Garbled Circuits cryptography, achieves this efficiently and securely for important financial activities such as permissioning and identity verification.

Garbled Circuits: Compliant Privacy As Standard

A major difficulty to overcome is the permissioned/permissionless nature of TradFi/DeFi. Anyone can make a transfer between two crypto addresses. No identity documents or centralized services are required to set up an account, to transfer funds, or even to arrange a loan – not even an email address. The opposite is true for TradFi. Every account owner is identity-verified, and every transaction is inspected and authorized by a centralized regulated entity. 

To allow transactions from crypto to TradFi, some form of identity verification, and therefore permissioning of access, must be carried out. This requires use of centralized services, which introduce single points of failure, risking many sorts of data breaches (for example, a database may be compromised by an external entity or by an insider).

Many Web3 users are uncomfortable with this centralization due to the loss of privacy it can entail, and for good reason. Identity verification systems represent a single point of failure that can be and have been exploited. In May 2025 Coinbase admitted that cyber criminals had bribed support agents to steal the personal data of 70,000 customers, including names and addresses, government ids, account balances and history, and more. Affected customers are at increased risk of social engineering and even physical attacks. 

Garbled circuits offer general purpose computation on encrypted data to protect users’ privacy and maintain end-to-end confidentiality. This solution has the potential to revolutionize the way TradFi interfaces with DeFi, without compromising regulatory requirements.

Example: Exchange KYC

Garbled circuits make it possible to carry out identity verification without revealing sensitive information, even to the party responsible for compliance. For example, it is possible to establish a user’s age without knowing their date of birth, or their jurisdiction without knowing their address.

A crypto exchange may use a garbled circuit to check if a user’s identity information (name, date of birth, id number, etc) matches the record in a trusted authority’s database, like a government or third-party provider. The exchange’s employees do not gain access to the raw information itself.

In practice, the user would extract the necessary data from their passport’s MRZ (machine-readable zone) or embedded chip, using a custom app. This information is encrypted using a key, and used as the input to a garbled circuit set up with the same key. 

The garbled circuit confirms, or otherwise, the validity of the user’s id – for example, ensuring that they are over 18, that they live in an approved jurisdiction, and so on. The exchange can also carry out additional checks, such as ensuring the passport hasn’t been reported as stolen, by querying a public database like Interpol’s stolen passport list, without revealing the passport number itself. The user is granted access to trading services based on the output of the garbled circuit, which may simply be “TRUE”. Further selective disclosure of data may be required for audits. 

GCs: Making Web2 And Web3 Safer

As well as making permissioned crypto services like exchanges safer for Web3 users, this offers a new approach for Web2 services.

Use of garbled circuits allows providers of all kinds to avoid creating honeypots of personal data, since plaintext passport information never leaves the user’s device. In a world where mass data leaks have become routine, there are security benefits to cryptographically confirming identity without making any personal data available to third parties without good reason.

To find out more about Soda Labs’ work on garbled circuits, explore our documentation, join the gcEVM Vanguards Telegram group, or stay up to date with the latest developments by following the project on X.