DeFi 2.0 – A combination of self-regulation and regulation

Decentralized Finance (DeFi)

June 13, 2022 – 09:00

Everyone agrees with the revolutionary and innovative nature of DeFi. The real difference is how to approach this new decentralized digital financing at the heart of the cryptocurrency ecosystem. With regulators seeking to (restore) control, under the guise of wanting to protect users who largely want to avoid their opaque and historical influence. Because the main functionality of DeFi is to respond to problems caused by traditional finance. But researchers at the EU Blockchain Observatory and Forum say this should be done through smart regulation.

Despite the fact that DeFi appeared only a few years later, DeFi is already in the spotlight. Because its operating model and proposed tools completely revolutionize the historical model applied to traditional finance. With the principles inherent in the cryptocurrency industry, such as inclusion, decentralization and community-based governance. And lately, there are more institutional and sometimes governmental ambitions in this regard.

“Radical innovation”, according to a recent report by the European Union’s Blockchain Observatory. And whose goal, reflected on its website, is to “strengthen Europe’s position as a world leader in this new transformational technology. » To do this, it is necessary to issue “recommendations” to the bodies dealing with this acute issue. But whose scale and positive consequences are puzzling. Especially in view of the extremely repressive intentions demonstrated by the MiCA bill, which has already been rejected by some member states.

DeFi is a more regulated version 2.0

Therefore, this is a very comprehensive report, just published by the Blockchain Observatory of the European Union. The latter soberly called “Decentralized Finance” to give a clear direction to this study. With an essay, a presentation of this digital economy based on blockchain technology. But also the ways in which regulations are applied, the measures of which must remain “fair, effective and applicable. » And this is taking into account the characteristics of each of its players, not the entire sector, according to current technological logic.

As with any regulation, measures must be fair, effective and enforceable. The combination of self-regulation and supervised regulation will gradually lead to more regulated DeFi 2.0. The emerging model of the current DeFi 1.0 ecosystem.

European Union Blockchain Observatory

This report lists the main advantages of DeFi over its traditional and Fiat versions. First of all, the development of greater security, which currently remains very theoretical. But also greater transparency associated with blockchain technology. As well as true universal availability and increased compatibility. These are all specific and innovative criteria to which existing regulations will need to be adapted. Because, according to Lambis Dionisopoulos, a researcher at the University of Nicosia and a member of the EU Blockchain Observatory, “our common opinion on financial regulation simply does not apply to DeFi. »

DeFi is a “radical” innovation

As Lambis Dionisopoulos explains in an interview with our English-speaking colleague CoinTelegraph, the innovation presented by DeFi is “radical” and completely non-linear. Specifics that have nothing to do with traditional evolutionary processes. That is, adding specific functions to existing models. And this is in order to respond to the request of its users or commercial desire. Whereas in this case it is a matter of “making anyone your own bank. This is to go beyond the current model, presented as a sequence of voluntarily divided “gardens with walls”.

On the contrary, radical innovations such as DeFi are not linear, they are gaps that contradict conventional wisdom. Radical innovations are based on new technologies. They can create new markets and create new business models. For this reason, they are also associated with high levels of uncertainty, especially in the early stages.. »

Iambis Dionisopoulos

Reasons Lambis Dionisopoulos urges regulators to take these innovative features into account. This is done in order to create the legal framework they deem necessary, but without risking calling into question these principles of inclusiveness and openness. Because these are the real challenges of these decentralized finances. And, according to the latter, “The role of regulators should be to facilitate this” and not to prohibit and / or destroy it. Even if this strategy involves a complete overhaul of current models, some of which are clearly outdated.


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DeFi is a tool for non-banks

However, according to Lambis Dionisopoulos, DeFi still needs to put its ranks in order. This is in order to practice real self-regulation, which has been very questionable so far. And introduce processes to limit the harmful power of criminals and other freedom seekers. Because only in this way will he probably be able to avoid the aggressive regulation justified by such repeated excesses. But also to demonstrate maturity at the moment in the image of his very young age: jacophonic, just as revolutionary.

The transition to activity-based regulation makes more sense and can be simplified by individual control or increasing DeFi. Given this, there are certainly bad actors who use DeFi as an excuse to sell repackaged, less secure and less regulated traditional financial products – or, worse, outright scams. Regular certainty can make it difficult for them to seek refuge in DeFi.

Iambis Dionisopoulos

Decentralized Finance (DeFi)

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Finally comes the crucial moment of availability. Because DeFi “has the potential to be different” due to its global financial network status. But also the principle of inclusion, which allows “everyone who has basic access to the Internet and a smartphone, to access advanced financial services. » That is why he is becoming more successful among people excluded from the current banking system. Because the latter considers its users only in terms of costs and benefits, never taking into account the principle of “service. And this, according to Lambis Dionisopoulos, is the main drawback of the current economic system … and the biggest strength of DeFi.

Simply put, much of the world’s population is not worth its “investment.” Someone more suspicious may also add that denying individuals access to finance is a good way to keep them subordinate. And looking at the population without banks can confirm this terrible theory.

Iambis Dionisopoulos