DeFi 2.0 is a combination of self-regulation and regulation

Decentralized Finance (DeFi)

June 13, 2022 – 09:00

Everyone agrees on the revolutionary and innovative nature of DeFi. The real difference lies in how to approach these new decentralized digital finances, set at the heart of the cryptocurrency ecosystem. When regulators seek to (again) take control, under the guise of wanting to protect users who basically want to avoid their opaque and historical influence. Because the main functionality of DeFi is to respond to the problems caused by traditional finance. But according to researchers from the Observatory and the EU Blockchain Forum, this needs to happen through thoughtful regulation.

Although DeFi has only been around for a few years, it is already in the spotlight. Because its operating model and proposed tools completely revolutionize the historical model applied to traditional finance. With principles inherent in the cryptocurrency industry such as inclusiveness, decentralization and community-based governance.. And more recently, more institutional and sometimes governmental ambitions in this regard.

“Radical innovation” according to a recent report compiled by the Blockchain Observatory of the European Union. And whose goal, as stated on the website, is to “strengthen Europe’s position as a world leader in this new transformative technology. » This requires the issuance of “recommendations” to the bodies dealing with this burning issue. But whose scope and positive consequences are puzzling. Especially given the highly repressive intentions of the MiCA bill, which has already been rejected by some member states.

DeFi – More Regulated Version 2.0

Therefore, this is a very comprehensive report that has just been published by the European Union Blockchain Observatory. The latter soberly named “Decentralized Finance” to give a clear direction to this research. With an outline, a presentation of this digital economy based on blockchain technology. But also the ways in which the rules are applied, the measures of which must remain “fair, efficient and enforceable”. » And this is taking into account the specifics of each of its players, and not the entire sector in accordance with the current technological overarching logic.

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

European Union Blockchain Observatory

This report lists the main strengths of DeFi compared to its traditional and fiat counterparts. First of all, with the development of more security, still very theoretical at the present time. But also the greater transparency associated with blockchain technology. As well as true universal availability and increased compatibility. These are all specific and innovative criteria to which the current regulations must be adapted. Because, according to Lambis Dionisopoulos, a researcher at the University of Nicosia and a member of the EU Blockchain Observatory, “our generally accepted understanding of financial regulation just doesn’t apply to DeFi. »

DeFi is a “radical” innovation

As Lambis Dionisopoulos explains in an interview with our English-speaking colleague CoinTelegraph, the innovation represented by DeFi is “radical” and completely non-linear. A specificity that has nothing to do with traditional evolutionary processes. That is, adding certain features 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 about “making someone your own bank.” This is done in order to go beyond the current model, presented as a succession of voluntarily subdivided “fenced gardens”.

In contrast, radical innovations like DeFi are not linear, they are breaks that challenge conventional wisdom. Radical innovations rely on new technologies. They can create new markets and create new business models. For this reason, they are also associated with a high level of uncertainty, especially in the early stages.. »

Lambis Dionysopoulos

Reasons why Lambis Dionisopoulos urges regulators to consider these innovative features. This is done in order to create a legal framework that is considered necessary, but without the risk of calling into question these principles of inclusiveness and openness. Because these are the real problems of these decentralized finances. And, according to the latter, “the role of regulators should be to facilitate this” and not to ban and/or eliminate. 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-banking

However, according to Lambis Dionisopoulos, DeFi also needs to clean up its ranks. This is to practice real self-regulation, which has been very dubious until now. And put in place processes to limit the malicious power of intruders and other freedom seekers.. Because only in this way is it possible to avoid the aggressive regulation justified by this kind of repetitive excesses. But also to demonstrate the maturity of the moment in the image of his very young age: as cacophonous as it is revolutionary.

The shift to activity-based regulation makes more sense and could be facilitated by individual-level controls or DeFi ramps. That being said, there are definitely attackers who are using DeFi as an excuse to sell repackaged, only less secure and less regulated traditional financial products — or worse, outright scammers. Regulatory certainty could make it harder for them to find safe haven in DeFi.

Lambis Dionysopoulos

Decentralized Finance (DeFi)

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Finally, there comes the decisive moment of accessibility. Because DeFi “could be different” due to its status as a global financial network. But so is its inclusion principle, which allows “anyone with a rudimentary Internet connection and a smartphone access to advanced financial services. » That is why it is increasingly popular 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 flaw of the current economic system… and the biggest strength of DeFi.

Simply put, most of the world’s population is not worth their “investment”. Someone more suspicious might also add that denying people access to finances is a good way to keep them in line. And a look at the unbanked population may confirm this horrific theory.

Lambis Dionysopoulos