Roads sometimes become bumpy as decentralized finance continues its victorious march, but some important questions remain about its nature. How can I protect my DeFi application from getting stuck under extreme stress? If some individuals have far more governance tokens than others, is it really decentralized? Does anonymity undermine its transparency?
A recent report from the EU Blockchain Observatory and Forum details these questions and many other questions about DeFi. It has eight sections that cover topics ranging from the basic definition of DeFi to technical, financial, and procedural risks. This report, carried out by an international team of researchers, summarizes some important conclusions in the hope that it will reach the eyes and ears of legislators.
Researchers emphasize the potential of DeFi to improve the security, efficiency, transparency, accessibility, openness and interoperability of financial services compared to traditional financial systems, and take a new approach to regulation. I am proposing. Than their shared technical status. The report states:
“Like any other regulation, the measures must be fair, efficient, effective and enforceable. The combination of self-regulation and supervisory regulation is the current early DeFi 1.0 ecosystem. The more regulated DeFi 2.0 that emerges from is gradually born. “
Cointelegraph spoke with one of the authors of the report, Lambis Dionysopoulos, a researcher at the University of Nicosia and a member of the EU Blockchain Observatory and Forum, to learn more about the most interesting parts of the document.
Cointelegraph: How should regulatory agencies address information asymmetry between professionals and retail users?
Lambis Dionysopoulos: I argue that no regulatory intervention is needed for that. Blockchain is a unique technology that can be provided to anyone for free at the level of transparency and complexity of information. The trade-offs for achieving that level of transparency are often important as long as decentralized blockchain is often criticized for being inefficient or redundant. But this is necessary to provide an alternative to the existing financial system, where opacity is the source of many evils.
Traditional finance gives this opacity. Daily savers, charitable donors, or voters, whether their funds are faithfully managed by banks, support their preferred objectives, or who sponsored their politicians, and which There is no way to know if it is just. DeFi opens the door to economic magic by encoding every transaction in a universally accessible ledger.
Recently: The story of different energies of Bitcoin and banks is a matter of perspective
Today, tools such as Blockchain Explorer allow anyone to track the flow of money in the blockchain economy, get information about the apps and services they use in space, and make informed decisions. increase. Certainly, those with financial resources and advanced knowledge can make better use of this system. However, as the DeFi ecosystem expands, we are optimistic that new tools will emerge that will make more advanced insights available to everyone. My optimism is based on two factors. For one, it’s relatively easy to build such a tool with DeFi. And second, inclusiveness and openness are the spirit of DeFi space. The role of regulatory agencies is to facilitate this.
CT: In the report, DeFi is categorized as “fundamental innovation,” but FinTech is generally “maintaining innovation.” Can you explain these definitions and their differences?
LD: Sustainable or gradual innovation is an improvement on an existing product or procedure aimed at providing better service to the same customer, often with higher profits. Fintech is a prime example. This shows that through electronic banking, customers can open accounts faster, initiate online transactions, and access electronic statements, reports, and management tools.
Revolut and Venmo make it easy to split invoices and charge pocket money. All of these conveniences are often welcomed and demanded not only by consumers, but also by businesses that can find ways to monetize them. At the heart of sustaining innovation is the concept of linearity and certainty. In other words, it means a modest change that will moderately improve the way things are done and the added value.
On the contrary, fundamental innovations such as DeFi are non-linear and discontinuities that challenge conventional knowledge. Fundamental innovations are based on new technologies, creating new markets and enabling new business models. Therefore, it also means high uncertainty, especially in the early stages. The idea that anyone can become their own bank and that openness and configurableness can overcome the walled garden is an example of how DeFi is perceived as a fundamental innovation.
CT: Is there any data confirming the hypothesis that DeFi can help those who do not have a bank account and those who have a shortage of bank accounts? DeFi seems to be the first to be popular among tech-savvy individuals in developed countries.
LD: The idea that DeFi is popular with banks and tech-savvy individuals is true and short-sighted. For traditional financial service providers, making services available to individuals is a cost-effectiveness issue. Simply put, most of the planet is not worth their “investment.” More suspicious people may also add that depriving individuals of access to finance is a good way to subordinate them — seeing who is not in the bank is this horrifying theory. May support.
DeFi can be different. Its global availability does not depend on the decisions of the board — it is how the system is built. Anyone with rudimentary internet access and a smartphone can access state-of-the-art financial services. Immutability and resistance to censorship are also central to DeFi. You cannot block transactions from or to a particular area or with an individual. Finally, DeFi is free from the intent behind sending and receiving information. As long as someone sends and receives valid information, he is a first-class citizen from a network perspective, regardless of other social status or other characteristics.
DeFi is popular with individuals who are proficient in banking technology for two main reasons. First, as an early technique, it requires some degree of technical sophistication and therefore attracts users with the luxury of acquiring this knowledge. However, aggressive steps are being taken to reduce barriers to entry. Social recovery and UX design advances are just two such examples.
Second, and perhaps most importantly, DeFi can be profitable. Early adopters are rewarded with high yields, distributions (airdrops), and rising prices in the early stages of wildlife experiments. This has brought together tech-savvy financial natives who want to improve their return on investment. Market shakeouts (such as recent events in UST / LUNA) continue to separate wheat from rice husks, unsustainable high yields eventually subside, and individuals (and only them) attracted to them. Seeks profits elsewhere.
CT: The report highlights a problematic aspect of DeFi’s Kana culture. What are the future compromises between DeFi’s core principles and user security?
LD: DeFi is not perfectly homogeneous. In other words, we can offer different services and different trade-offs for different people. Just as blockchains need to compromise either security or decentralization to be more efficient, DeFi applications have different needs, choosing between decentralization and efficiency, or privacy and compliance. Can be supported.
There are already some compliant DeFi attempts, collectively referred to as CeDeFi (Centralized Decentralized Finance), such as stablecoins in custody, programmable central bank digital currencies, and securities settlements using blockchain. .. Trade-offs are explicitly included in the name. Products with different trade-offs will continue to exist to meet the needs of consumers. But I hope this interview is the basis for decentralization and security, even if it means challenging practices.
CT: According to the report, DeFi has so far had minimal impact on the real economy and its use cases are limited to the crypto market. What use cases do you see outside of these markets?
LD: DeFi can have a direct and indirect impact on the real world. Starting with the former and making complex technologies more accessible, the entire suite of DeFi tools will be available to everyone. International payments and remittances are the first unmanageable achievement. The borderless nature of blockchain, combined with relatively low fees and reasonable transaction confirmation times, makes it a competitor for international payments.
With advances such as Layer 2, transaction throughput can rival the throughput of large financial providers such as Visa and Mastercard, making cryptocurrencies an attractive alternative to everyday transactions. What may follow are basic financial services such as savings accounts, loans, borrowings and derivative transactions. Blockchain-backed microfinance and rehabilitation finance are also attracting attention. Similarly, DAO can introduce new ways to organize communities. NFTs can also be more attractive to the wider market.
At the same time, the idea of using the concepts developed in the DeFi space to increase the efficiency of traditional financial systems has taken hold. Such use cases include smart contracts and programmable money, as well as blockchain fraud prevention and the use of transparent properties for monitoring financial activity and implementing more effective monetary policy. However, it is not limited to these.
Recently: Bare Market: Some crypto companies are cutting jobs and others are aiming for sustainable growth
Each of these individual components is unique and important, but it is also part of the larger migration to Web3. In that respect, the real question is not how much crypto can affect the “real” economy, but how much the line between what we consider to be the “real” economy and the “real” economy. Is it ambiguous?
CT: The report makes reserved recommendations for regulating DeFi actors by activity, rather than using an entity-based approach. How does this regulatory structure work?
LD: In the world of DeFi, entities look very different from what we’re used to. They are not a strictly defined structure. Instead, it consists of individuals (and also entities) who gather in Decentralized Autonomous Organizations to vote on suggestions on how “entities” are involved. Their activities are not clearly defined. They often resemble banks, bill exchanges, public squares, charities, casinos, and at the same time all. In DeFi, there is no single entity to be held accountable. Due to its global nature, it is also impossible to apply the laws of a single country.
For this reason, our traditional knowledge of financial regulation does not apply to DeFi. The transition to activity-based regulation makes more sense and can be facilitated by regulation at the individual level and DeFi on-ramp. That said, there are definitely malicious people using DeFi as an excuse to sell repackaged traditional financial products, which are either inadequately secure or regulated, or worse. It’s a complete scam. Regulatory certainty can make it difficult to seek asylum with DeFi.
