DeFi, a blockchain-based form of digital finance that eliminates the need for third parties, parties, and intermediaries, has grown into a massive multi-billion dollar industry in the past 2 years.
Consumers do not need a government-provided ID, social security number, address registration, or similar official documents to access financial products on public, decentralized blockchain networks. This is the basis for the interest in DeFi.
Another important benefit of DeFi is that it reduces costs for users. It reduces the need for many of the traditional intermediaries in financial transactions. This eliminates most of the fees involved in every step of a financial transaction.
As the adoption of decentralized finance (DeFi) technology grows rapidly, we have reached a critical juncture where governments and regulators are taking action. It is a realistic and important mindset for regulators to accept that DeFi is here to stay. This attitude will play an important role in determining how successful organizations will be in the future.
An important question with DeFi is who takes responsibility for any errors that occur during a transaction. Because we know that it is almost impossible to change transactions committed to the blockchain. In addition, we have all witnessed times when the smart contracts of projects have been compromised. Due to security issues in the DeFi market, cyber hackers can steal assets locked into projects. At the moment, it is difficult to hold individuals or organizations responsible.
DeFi is currently governed under existing regulatory laws. However, these regulations were in place long before the structures associated with a decentralized economy emerged.
While the DeFi industry is growing rapidly, in many ways it is still in its infancy. One of the barriers to regulation that could help solve problems in DeFi is that DeFi transactions tend to take place globally. Global cooperation and coordination is difficult to achieve, especially given the varying levels of sophistication and awareness of financial regulators in many countries.
Regulators around the world are taking steps to become even more closely involved. But there are doubts about how they will deal with DeFi and how they will fill the legal gaps. DeFi does not fit the practical and regulatory model used for traditional financial transactions.
Will Regulations Strengthen DeFi?
This may have a bit to do with the size and stringency of regulations. For DeFi to make a difference (e.g. increasing transparency and financial inclusion), it must have enough room to breathe. Regulators have a significant opportunity to do this. Unfortunately, there are now more and more statements from regulators that can stifle innovation and growth.
What needs to be recognized is that DeFi shares many of the same goals as financial regulators – overhauling inflexible processes, wider access, cheaper prices and greater stability. The main difference is decentralization. It is counter to the nature of a decentralized structure to overwhelm it with regulation.
In the short term, basic regulation can reassure users. Therefore, it is important for DeFi’s development and innovation that investors reinvest in DeFi projects. Increased investment could increase the popularity and price of DeFi tokens. However, in the long run, it should not be ruled out that strict regulations may bore and frustrate users, and in a scenario where DeFi is no different from centralized finance, investors may move away from this sector.