The realm of decentralized finance is very much appreciated by the people who take risks.
The ecosystem cannot resolve disagreements transparently, despite its potential future. If you unintentionally send them to the wrong wallet address, your money will probably be gone forever.
Decentralized finance, DeFi, or Open Finance leverages smart contracts on blockchains. Since blockchain information is unchanged, and cannot be altered without an agreement, it can be trusted. It enables any user to store digital assets as collateral on blockchains and provide services such as credit or liquidity without the participation of a typical financial middleman, such as banks or exchanges.
There are massive gains made, but at the same time, DeFi investors lose money, because DeFi is only driven by smart contracts, is not regulated, monitored, intermediated, or approved by a central body.
Therefore, customers have no solution if an intelligent contract fails or is attacked.
In fact, DeFi protocols have lost approximately 285 million dollars since 2019 for breaches and hacks. As experts have said, most hacks are caused by the incompetence of the developer and errors in coding. This is important when the industry is completely code-dependent.
Regulators Finding Their Footing
Although DeFi is growing quickly, its open-source ecosystem is capable of democratizing banking and finance, and its potential efficiency, substantial risks have to be considered by industry participants.
The volatile assets are not the only issue, but also protocols and services. For instance, a poorly coded smart contract could lead to hacking and theft of funds. More often than not, when such an incident happens, users will not have their money returned to them.
Jacob Yunger, FINRA’s Director of Financial Innovation, which oversees American broker-dealers, argued that enforcement is unlikely as DeFi is not monolithic.
Although much of DeFi’s services are more like banking in nature (i.e., a large part of the current activity focuses on borrowing, lending, and insurance) it involves certain characteristics which could put DeFi under the jurisdiction of SEC.
The U.S. Securities and Exchange Commission’s Hester Peirce said in an interview with Forkast.News about DeFi back in February: “It’s going to be challenging to us because most of the way we regulate is through intermediaries, and when you really build something that’s decentralized, there’s no intermediary. It’s great for the resilience of a system. But it’s much harder for us when we’re trying to go in and regulate to figure out how to do that.”
Berkovitz, the commissioner to the CFTC, said in a recent speech that the fully automated derivatives trading software program was in breach of the Commodities Exchange Act which requires future trade agreements through regulated bodies and prevents individuals from entering into swap contracts for less than $10 million of assets invested.
“I’m totally open to having certain applications that can be done more efficiently without intermediaries,” Berkovitz said, “But the intermediaries in many respects do serve an important function, and we can hold them accountable.”
A recent review by the London School of Economics and Political Science of 16 leading exchange platforms showed that only four were subject to significant trade-related regulations, therefore there is a clear divide.
The basic difficulty is to discover the correct time to regulate in an open-source environment where projects have an average compound growth rate of 20 percent per year, where consumers are safeguarded from danger but innovation is not hindered. Some governments have attempted to achieve the balance by sandbox regulatory measures, including Britain, Bermuda, India, South Korea, Mauritius, Australia, Papua New Guinea, and Singapore). Others have gone for legislation (San Marino, Bermuda, Malta, Liechtenstein).
The SEC filed its first lawsuit against a DeFi, Blockchain startup called Credit Partners, and two men who ran it earlier in August.
In return for a portion of income-generating car loans, the project attracted investors to contribute their digital assets. It should be decentralized since a distinct “governance” token gives owners the right to decide on the firm and participate in the earnings of the company.
In breach of investors’ protection laws, the SEC stated founders of the project tricked investors and sold $30 million of digital tokens.
With the aforementioned, it appears that the road to legislation on DeFi might be far off. There seems to be no coherent approach to the subject among regulators. Though this is expected, it’s traceable to the very basis of decentralization. Moreover, whether laws will be detrimental to the industry is not evident. It could turn out that tighter regulation could assist the DeFi business continue to become a mainstream industry and make its products more appreciated for adoption by major financial institutions.
As regulators battle this proposition, Astra protocol has been developed to be the backbone of DeFi when it comes to regulation and the protection of stakeholders. The protocol serves as a layer of on-chain dispute resolution by adding legal assurance to smart contracts.
Astra As A Regulator And Dispute Resolution Mechanism
Astra protocol provides a legal layer that connects on public blockchains to any existing DeFi platform. Astra is the default mechanism to resolve all potential disputes arising from a particular transaction.
In order that decentralized platforms comply with legislation and remain true to their decentralized nature, Astra technology can check the credentials of the intended DeFi users.
Confidence and transparency could further strengthen the derivative market while retaining the frictionless environment that supports the immense potential of the DeFi derivatives market.
In addition to its compliance, Astra will provide the ecosystem of crypto derivatives with a full legal layer to eliminate any questions or fraud and deal transparently with disputes.
Its advantages include ensuring that funds are securely addressed at the right wallet to resolve difficulties and restore money in the event of an incident. All this is achieved by introducing a dispute clause. If both parties agree to use Astra, the smart contract includes the dispute clause.
To resolve all problems, Astra uses a combination of human knowledge and technology. This includes human mistakes, accidental payments, and fraudulent transactions.
This innovation is predicated on a Proof of Trust system, which delivers peace of mind in commercial transactions and contracts via an extra-judicial and extra-jurisdictional dispute resolution method.
The PoT system aids in the rapid resolution of inadvertent or fraudulent transactions, hence protecting stakeholders.
DeFi application developers and other project participants should consider taking specific efforts to guarantee they have processes in place to detect and manage risks. Regulators are gradually entering the DeFi space. It’s expected that as more and more users enter the ecosystem, there would more growing concerns for regulators. Astra seems to be the perfect risk mitigator and regulator for the DeFi ecosystem.