Posts

Decentralised Finance – Innovation versus Compliance!

Zero to $1.27 bn in a week – too good to be true?

Yes – because SushiSwap founder ‘Chef Nomi’ cashed in and disappeared causing his innovative new proposition to collapse in value. All this within a week – Zero to $1.27 bn back to (near) zero. But how is that possible? I hear you ask.

Well I would like to introduce Decentralised Finance (DeFi). DeFi is a revolutionary and innovative application of blockchain technology. We tokenise assets in the real world, and manage them in a digital world. With blockchain this can be done in a decentralised manner without a central authority.

DeFi has been around for a while but has seen an enormous rise in capital inflow and media attention following the launch of a number of initiatives aimed at providing Decentralised, peer-to-peer trading exchanges (DEX), Digital Asset Management, Lending and Payment solutions.

DeFi Prime lists a range of current projects which are positioned in different segments of the financial services spectrum.

 

The development of new DeFi infrastructure and tooling is also progressing with many projects in this area.

Some recent DeFi initiatives have received investments in the order of $bns in a matter of weeks – particularly over the summer of 2020, with DeFi Pulse estimating the assets under management rising from $5bn in July to around $80bn in September 2020.

Notable initiatives include UniSwap (transparent, censorship-resistant financial infrastructure for Ethereum) and other competing exchanges such as Balancer, Bancor and Kyber.

 

But back to Sushi! SushiSwap was listed in Binance on 1 September and received value “under lock” of $1.27bn in a week – only to become the focus of exit-scam speculation after the initiator (known only by pseudonym Chef Nomi) sold his stake and exited the venture – within 1.5 weeks of launching…

Those 4.500 of you who have been through our blockchain training know how we view blockchain applications – we address three key aspects of any initiative and we apply this to DeFi:

  1. Business Model
    DeFi is a fantastic innovation which can improve speed, transparency and reliability of many transactions due to the combination of information, financial and ownership exchange on a single platform.  It may also enable better market liquidity due to automated market making (AMM) by paying interest on invested tokens. There is a valid business case here!
  2. Technology
    DeFi currently mainly builds upon Ethereum tokens which are tried and tested on a worldwide blockchain with smart contracts. Leveraging the features of blockchain (decentralisation, non mutability) and smart contracts (programmable tokens) it is possible to build fully decentralised solutions which offer individuals the functionality of an exchange or lending service using smart contracts, pooling and peer-to-peer transactions.  This infrastructure does not require a centralised party to operate.So far so good…
  3. Governance, Risk and Compliance
    And here we hit the problems! In Europe we have introduced regulations which safeguard consumers and investors from malafide parties and ensure the prudent operation of financial infrastructure.  One such set of regulations is known as MiFID5 which came into force in early 2020.  Under this regulation, blockchain platforms offering crypto wallets, custodial services and transactions had to apply regulations including identifying parties involved and screening for criminal activity.This may seem cumbersome to fast paced innovative entrepreneurs, but it prevents the type of scam for which SushiSwap is now considered an example.  It also ensures that investors, both consumers and professionals, have recourse to legal action when a malafide player deliberately misleads or even breaks the law.We have created regulations for a reason! For DeFi to succeed, and I sincerely believe it will, we need to take Governance, Risk and Compliance seriously within the world of blockchain.  This means moving on from the libertarian and machiavellian roots of this wonderful technology and accepting that it too should respect the law.

This will enable DeFi to blossom as opposed to becoming Sushi!

To learn more about Decentralised Finance, follow our Blockchain learning paths.

Three smart contract misconceptions

Besides cryptocurrencies, one of the most promising developments on blockchain is the use of smart contracts.

Read more