Decentralized finance (DeFi) is a growing market popular with experienced crypto users. However, there are some roadblocks regarding mass adoption when it comes to the average non-technical investor.
DeFi is a blockchain-based approach to delivering financial services that don’t rely on centralized intermediaries but instead use automated programs. These automated programs are known as smart contracts, enabling users to automatically trade and move assets on the blockchain.
Protocols in the DeFi space include decentralized exchanges (DEXs), lending and borrowing platforms and yield farms. Since there are no centralized intermediaries, it’s easier for users to get involved in the DeFi ecosystem, but there are also increased risks. These risks include vulnerabilities in a protocol’s codebase, hacking attempts and malicious protocols. Combined with the high volatility of the crypto market in general, these risks can make it harder for DeFi to reach wide adoption with average users.
However, workarounds and advancements in the blockchain space can address these concerns.
Regulatory concerns with DeFi
Regulation can benefit the DeFi space, but it also conflicts with the core principles of decentralization. Decentralization means a protocol, organization or application has no central authority or owner. Instead, a protocol is built with smart contracts executing its main functions while multiple users interact with the protocol.
For example, smart contracts take care of the staking and swaps with a DEX, while users provide liquidity for the trading pairs. What can regulators do to prevent an anonymous team from pumping up a token’s value before withdrawing liquidity from DEXs, otherwise known as rug pulling? Due to the decentralized nature of the DeFi ecosystem, regulators will face challenges when trying to maintain a certain level of control within the space.
Despite the challenges, regulation isn’t completely out of the picture regarding decentralized finance. In Q4 2021, the Financial Action Task Force released an updated version of their guidance to virtual assets document. The update outlined how developers of DeFi protocols could be held accountable in a crisis. While the protocol may be automated and decentralized, the founders and developers could be called virtual asset service providers (VASPs). According to the state where they are based, they may also need to be regulated.
Regarding regulation within DeFi, platforms can also build…
Click Here to Read the Full Original Article at Cointelegraph.com News…
