DeFi Needs More Decentralization

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Bittime  -  In recent weeks, news aboutExchange-Traded Funds ( ETFs ) has been widely discussed, but the comprehensive report on DeFi published by the US Commodity Futures Trading Commission in early January has not received enough attention.

Much of the news coverage focuses on the report's recommendations regarding identity implementation and AML practices, but there is actually a lot of interesting stuff in the report.

The report was developed by the Commission's subcommittee dealing with digital assets and blockchain technology . In this 79 page report, the risks faced by the developing decentralized financial system are explained in depth.

One of the key points of the report is an evaluation of how effectively these risks can be addressed through regulation using multiple decentralized approaches. Many argue that DeFi will need to dust itself off and accept regulation. 

However, the report appears to go further by explaining that permissionless innovation is an inherent compromise if we want to discover and exploit the broader benefits of DeFi.

DeFi founders must be ready to fully embrace the concept of decentralization in their own projects as a way to increase resilience and reduce regulatory risks. This goes against the common DeFi view that decentralized projects face the greatest regulatory risks. 

In fact, handing over control completely to a decentralized community while using infrastructure and partners that are also decentralized will demonstrate that the project is compliant with existing regulations.

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Advice for DeFi Founders

While this report is aimed at policymakers, it should also be read by all DeFi founders. This report from the CFTC proposes a framework that can assess DeFi platforms and specific risks that do not exist in traditional finance, such as code vulnerabilities or sudden withdrawals of funds.

Using the objective framework of the report, founders can analyze the extent to which their project is truly decentralized in its various aspects. 

While governance and token ownership are a well-established part of decentralization, development and operations are often more centralized, depending on just a few companies for infrastructure and development activities.

The CFTC report also provides insight into various areas where the regulator considers DeFi to pose financial risks, which could actually be considered pain points for DeFi platforms and their founders.

In conclusion, there are many dimensions to decentralization that make it difficult to draw a hard line in determining whether a project is decentralized enough or not. This is where founders and regulators face the same challenges.

However, determining where to draw the line is not simply a matter of eliminating risk. Too much regulation in DeFi can be dangerous if it risks preventing innovation, and governments will try to take a lot of the profits, which also means accepting some risks.

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Founders also need to reconsider their notions of personal and professional success as the existence of a founder who has enough control over other token holders will be an indicator of centralization. 

Additionally, decentralizing control also carries the risk that the community may decide to act against the interests of the founders or even the project itself. Hence the call for DeFi founders to build and maintain truly decentralized systems that demonstrate the power of decentralization as best as possible.

As future regulation of DeFi is likely, better cooperation between the industry and policymakers is a positive step. Fully decentralized innovation will remain a key driver of the ecosystem for the foreseeable future.

Also Read: What is DeFi: Advantages and Risks

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