Get ready, kids! It's a whole new world - a financial system without intermediaries that anyone can use 24 hours a day with just a mobile phone and a wallet! As Julien Bouteloup puts it:
“In DeFi, what we are building is completely decentralized technology, completely transparent, run by algorithms. No one can beat that.”
He continued: "We're taking papers, building on 40 years of research, fundamental research, discrete mathematics, and putting them on-chain, and nobody's going beyond that. It doesn't get any better than that. GitHub at The 90s didn’t exist yet. First of all, we’re moving at the speed of light because everything is open source and everyone can participate.”
Novum Insights noted in an August report that the DeFi market has grown 40-fold since 2020, when the total value locked in DeFi was around $61 billion (compared to a current TVL of around $165 billion). The market value of stablecoins, an important part of DeFi, has grown to $112 billion in the first half of 2021.
While achieving huge growth, investors in DeFi are also losing money, because DeFi is not regulated, mediated, escrowed or verified by a central authority, and is only driven by smart contracts. Therefore, if a smart contract fails or is attacked, consumers have no remedy. Loretta Joseph, a global digital asset regulation expert, said: "Regulators protect consumers and investors. In DeFi, there is no intermediary to regulate, so it is completely P2P (peer-to-peer). The question is how to regulate in the future. People will be cheated. When people start being scammed, the first thing they do is complain to the regulator."
In fact, since 2019, DeFi protocols have lost around $285 million due to hacks and other exploits. As experts say, most hacks are due to developer incompetence and coding errors. This is very important when the industry is completely dependent on code.
regulatory challenges
In February of this year, Hester Peirce of the US Securities and Exchange Commission (SEC) said in an interview with Forkast.News about DeFi: "This will be challenging for us because most of the way we regulate is through intermediaries. Institutions, and when you're really building something decentralized, there's no intermediary. That's great for the resilience of the system. But when we're trying to step in and regulate, it's hard to figure out how to do that too much."
Regulatory concerns often revolve around the volatility of crypto markets, the risk of money laundering and terrorism financing, the unregulated nature of the market, and the lack of recourse for financial losses compared to government-backed fiat currencies. Non-fungible tokens are exploding, causing excitement, confusion, legal issues, and huge gains. The NFT market is also attracting a lot of crypto trading, which could bother regulators, who may view the huge movement of funds in NFT transactions as money laundering. At a macro level, the fragmentation of the financial system and the ability to manage economic stability and protect consumer interests pose further challenges for regulators.
DeFi decentralized autonomous organizations (DAOs) are popular as a way to transfer cryptocurrencies between different blockchains. This supports crypto lending and liquidity mining. According to conservative estimates, the funds overseen by The DAO exceed $543 million. In a DAO, IT governance and corporate governance are the same thing. The organization is governed and operated by smart contracts, which are monitored and enforced by algorithms. Code is governed and executed simultaneously. If the algorithm fails, then who is responsible?
In a joint paper titled "Regulating Blockchain, DLT and Smart Contracts: a technology regulator's perspective," a group of researchers outlines some of the Key points: (1) Identify the importance of central points where regulation can be implemented, such as miners, core software developers, and end users. They may even increase the likelihood that governments or regulators will be potential players; (2) the question of accountability – should core software developers be held accountable? (3) The challenges of the immutability of smart contracts and the lack of update capabilities; (4) the need for quality assurance and technical audit processes.
Exchanges and wallet providers are expected to be in the spotlight of regulators. Decentralized exchanges allow users to trade directly from their wallets in a P2P manner without the need for a middleman. The Financial Action Task Force (FATF), the global anti-money laundering watchdog, is also keeping an eye on exchanges. Christopher Harding, chief compliance officer at Civic, pointed out that the guidelines proposed by the FATF indicate that DApps will need to comply with country-specific laws that implement FATF, anti-money laundering and anti-terrorist financing requirements.
A recent review of 16 leading trading platforms by the London School of Economics and Political Science found that only four exchanges were heavily regulated related to trading, so there is a glaring gap. Audits are now required for a project to be listed on any major exchange, but meaningful security goes beyond that. Novum Insights CEO Toby Lewis noted:
“Also, keep in mind that smart contracts can be hacked. Even if they pass audits, there’s no guarantee they won’t be vulnerable. Do your own research before you start participating.”
In an open source environment where projects are growing at an average compound growth rate of 20% per year, finding the right timing for regulation that keeps people safe from risk but unlimited innovation is a typical problem that needs to be addressed. Some governments have achieved this balance through the use of regulatory sandboxes (UK, Bermuda, India, South Korea, Mauritius, Australia, Papua New Guinea, and Singapore), while others have gone directly to legislation (San Marino, Bermuda, Malta, Liechtenstein) to accomplish.
Far from resisting regulation, leaders in the DeFi field see it as part of the maturing of the industry. In an interview with Cointelegraph, Stani Kulechov, founder of DeFi lending platform Aave, said that peer review will be the trend of the future: “Auditors are not here to guarantee the security of the protocol, but to help discover things that the team itself is not aware of. Ultimately, This is about peer review, and we need to as a community find the incentive to miss out and get more security experts into the field.” In the same post, Emeliano Bonassi talks about ReviewsDAO, a platform that connects security experts with review-seeking A peer-review forum for linking projects together. Bonassi sees the potential for this to be a learning opportunity where someone with expertise can contribute to improving the security of the DeFi ecosystem.
Vemanti Group CEO Tan Tran said: “In the future, I will really see accelerated adoption of platforms with permissionless financial products and services that can be used by anyone, anywhere, but each platform will be regulated by a regulated party. governance and centralized control to ensure accountability and compliance. It’s not about preventing innovation. It’s more about stopping bad actors from taking advantage of inexperienced consumers.” Brendan Blumer, CEO of Block.one on DeFi Cointelegraph provided expert opinion, which concluded: “The real winners in the digital economy will be those who think long-term and take the time to ensure their products meet regulatory and professional service requirements.”
Clearly, exchanges and software developers could be targeted by regulators. We expect that regulators will look for ways to improve technical quality assurance processes and DeFi governance, which can only be done jointly with the industry. Mark Taylor emphasized that regulators need to continue to work with crypto industry players to protect consumers.
Julien Bouteluop explained: "In DeFi, we are actually building everything that traditional finance has, but faster, stronger, more transparent, and more accessible to everyone. It is really different. It means that the world's Anyone can use technology, you don't need anyone's permission. I think there is a need to drive innovation and build a better world."
Who, what and how do we regulate in this global 24/7, borderless marketplace? This is a whole new game. Regulators and industry will need to work together.
Cointelegraph Chinese is a blockchain news information platform, and the information provided only represents the author's personal opinion, has nothing to do with the position of the Cointelegraph Chinese platform, and does not constitute any investment and financial advice. Readers are requested to establish correct currency concepts and investment concepts, and earnestly raise risk awareness. In view of the fact that China has not yet issued policies and regulations related to digital assets, users in mainland China are advised to be cautious in digital currency investment.
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