Since the release of Satoshi’s Bitcoin whitepaper in 2008, numerous key developments in the blockchain industry have evolved, altering the direction of the entire ecosystem and the broader financial market. One of these trends is decentralized finance (DeFi).
The exponential expansion of the DeFi market highlights the promise of digital currencies and decentralized platforms to provide an alternative to the traditional finance system, which has experienced persistent stagnation for decades, restricting innovation and deemphasizing financial inclusion. Within the growing digital economy, DeFi is laying the groundwork for permissionless, blockchain-based financial services.
Decentralized Finance (DeFi) enjoyed a boom in 2020, with a 14x increase that year. DeFi is already a billion-dollar market worth $80.4 billion, and experts predict much greater growth in the coming year. Matthew Roszak, an experienced crypto investor, believes that the DeFi sector would grow tenfold to become an $800 billion sector as a result of growing mainstream crypto acceptance, the worldwide search for yield, and increased inflation.
However, despite the gold rush for the sweet spots of the DeFi sector, there are several issues facing this new sector. Astra, a legal compliance and dispute resolution protocol is here to help.
Decentralized finance (DeFi) is an umbrella word for a multitude of public blockchain applications and projects aimed at disrupting the existing finance world. DeFi is defined as financial applications built on blockchain technologies, generally employing smart contracts, and is inspired by blockchain technology. Smart contracts are automated enforceable agreements that can be accessed by anybody with an internet connection and do not require middlemen to execute.
DeFi refers to applications and peer-to-peer protocols built on decentralized blockchain networks that do not require access rights for simple lending, borrowing, or exchanging of financial tools.
One of the most appealing aspects of adopting blockchain technology to reimagine banking is how the market may become permissionless and available to everybody. Another draw is the concept of composability, which means that anyone can combine any existing DeFi offering to create a new one. The modularity of such a network, which is essentially made up of interlocking blocks, also means that subsequent developments and demands in the finance space may be readily built on top of the network and integrated together, with everything governed by smart contracts.
Because smart contracts are essential to DeFi applications, the majority of DeFi projects are being developed on the Ethereum network. This is due to the widespread availability of developer capabilities to work with Ethereum’s Solidity programming language, which allows for the generation of the required smart contracts. However, several other blockchain networks, such as Solana, Polygon, and BSC, now allow DeFi applications as well.
DeFi sectors continue to thrive
Despite the fall in May, DeFi has continued to grow exponentially.
- Decentralized exchanges (DEX):
Trading volumes on DEX increased by over 8,000 percent in the first quarter of 2021 compared to the same period last year, according to Messari. Curve Finance and Uniswap are the two largest DEXs in terms of trading volume and TVL.
- Asset management:
Yearn.finance continues to dominate DeFi’s asset management sector. Yearn’s TVL has increased from around $500 million at the start of the year to nearly $4.5 billion as of today.
Stablecoins have played a significant part in DeFi, serving as a link between the burgeoning digital economy and traditional finance. USD Coin (USDC), a USD-backed digital currency developed in 2018 by Circle and Coinbase, was the fastest-growing stablecoin in both 2020 and 2021. The overall market cap of stablecoins has risen from around $25 billion in January to more than $109 billion as of June 2021.
Futures and options are the next big thing being built on decentralized exchanges. Projects such as Hegic, Perpetual Protocol, and Mirror Chain are gaining traction in the DeFi community.
Growth with risk attached
Many DeFi programs on the market today have a host of flaws. Hundreds of more projects lack the financial and regulatory safeguards and compliance requirements that are presumably required of them, rendering them vulnerable to a regulatory crackdown. Some of these projects, such as Yearn.Finance, has also been hacked and has lost millions of dollars.
Another problem associated with DeFi is that they are emerging types of products created by non-financial people. Product structuring is a sophisticated procedure that is best refined by skilled financial engineers at investment banks.
Other risks arise from smart contract failures and other human errors as a result of centralization on “DeFi” systems that are not totally decentralized due to a lack of experience in the embryonic DeFi sector.
In addition, there is no clear regulation of the world’s fragmented financial system. Most individuals do not trust the system because governments or central banks have no control over transactions. Furthermore, municipal governments in some nations may restrict cryptocurrency without prior notice. This is one of the most serious issues with DeFi technology.
The risk of criminal conduct is likewise increased due to a lack of regulation. Because the system provides anonymity, anyone can send or receive money without identifying their identities, giving crooks greater alternatives.
Furthermore, because smart contracts act as middlemen for DeFi platforms, their flaws might disrupt the operation of DeFi ecosystems. Smart contracts are programmable algorithms that simulate traditional (actual) contracts.
After the conditions are entered into it, a smart contract controls the execution of the contract between the two parties. The presence of an error or bug in the code, on the other hand, can result in the loss of funds locked in the smart contract.
Knowing all the aforementioned risks may drastically reduce trust in the DeFi sector. Billionaire crypto investor Michael Novogratz tweeted that if the risk persists, the sector may face further regulatory sanctions and legislation. He advised that DeFi developers should add a compliance layer to help mitigate these risks.
As DeFi developers and users grapple with these issues, the Astra protocol has been developed to serve as the backbone of DeFi in terms of regulation and stakeholder protection. By providing legal assurance to smart contracts, the protocol works as an on-chain dispute resolution layer.
Astra Protocol: DeFi’s compliance layer
The Astra protocol provides a legal layer that connects to any existing DeFi platform. Astra is the default mechanism for resolving any potential issues that may arise from blockchain transactions.
To be more specific, smart contracts are essential components of any decentralized system, such as DeFi. It aids in the establishment of trust in a secure investment. However, there is no regulator or oversight role in place to supervise decentralized protocols that successfully reduce doubt, potential fraud, and provide a competent dispute resolution system. All of these capabilities, in addition, would pave the way for everyone to have public, permissionless blockchains – exactly what Astra Protocol aims to provide.
To tackle all issues, Astra employs a combination of human skill and technology. This includes, if they occur, human mistakes, fraudulent transactions, and accidental payments.
As a result, all parties and transactions are completely legally protected. It is a cost-effective and expedient method of resolving any issues that may emerge, as well as adding an added layer of peace of mind to any engagement.
It is a difficult undertaking to provide a layer of assurance to decentralized finance. With so many initiatives, protocols, services, and yield farms, huge sums of money are freely flowing with huge risks. Astra provides a solution to DeFi issues by simply incorporating their protocol into the platforms.