Individual consumers and businesses are becoming increasingly aware of the fast-paced development of the blockchain and cryptocurrency industry. Many people might also know about the nascent decentralized finance (DeFi) ecosystem, which has grown exponentially during the past 18 months. In fact, the entire DeFi market was valued at only $1 billion in February 2020, but has now reached a market cap of over $95 billion, at the time of writing, according to available data.
While DeFi seems quite promising, because it can enable greater financial inclusion by providing seamless lending, borrowing, and other critical services to the unbanked, regulators are conscious of the types of transactions being carried out in the emerging space.
US Securities and Commission (SEC) Chair Gary Gensler has referred to crypto and DeFi as the “Wild West” because of its loosely regulated environment. There are also many issues with smart contracts and problems with the way flash loans are being issued. Despite these challenges, the dramatic rise of DeFi has continued in 2021, and nothing appears to discourage venture capital investors from making substantial investments in this experimental space.
Bitcoin is undoubtedly the most notable effort when it comes to bypassing traditional financial institutions, however, the DeFi space has introduced a large number of use-cases such as accessible insurance services, lending, commodities trading, and savings accounts. These are all applications that extend far beyond those outlined in the Bitcoin whitepaper, which only covered the implementation of a peer-to-peer electronic cash system.
Although crypto-assets were initially created as a legitimate alternative to fiat currencies, DeFi is based on the goal or mission of completely replacing the legacy financial services sector.
Consumer Behavior Changes Lead to Increased Use of Digital Services
As Web 3.0 and other parts of the decentralized ecosystem become more widely adopted, many have started using DeFi platforms because it provides (arguably) better digital financial services.
The changes seen in consumer behavior, which is often linked to the COVID-19 crisis, has also resulted in many people engaging in digital transactions. With the increased usage of online or virtual platforms, people are also investing substantially more in Bitcoin (BTC), Ethereum (ETH), and other decentralized crypto-assets. These assets are no longer considered merely speculative financial instruments, as Bitcoin is starting to displace gold as a safe haven asset.
Meanwhile, DeFi developers are responsible for writing the software and then leaving the project to enable it to operate without a centralized entity. These development teams say that this type of decentralization should help with eliminating the need for traditional regulatory frameworks. According to many crypto industry participants, certain digital currencies, like Bitcoin (BTC) and Ether (ETH) are decentralized enough to prevent them from being regulated (at least in the conventional manner).
DeFi’s Growing Use-Cases
DeFi is basically an alternative set of financial products and services that harness the power of blockchain technology. DeFi platforms enable users to access modern financial services, like lending and issuing loans, which can be done via peer-to-peer exchanges or by directly mediating value transfer. This approach helps with eliminating the need for intermediaries.
Transactions are carried out on a public (permissionless) blockchain, and not by a centralized banking institution or any other central party. Real DeFi services are non-custodial, by design, which means that the digital assets being managed on these platforms cannot be taken from the parties and are in the possession of the rightful owners of the account.
DeFi is based on open-source protocols and decentralized applications (dApps) are used to perform digital transactions. Smart contracts, which are a type of automated business logic, are designed to work automatically when certain criteria are met. These types of contracts are deployed using blockchain networks like Ethereum and Solana. These so-called intelligent contracts aim to replace the traditional financial institutions’ intermediate role in a blockchain by using self-executing lines of code.
Regulations Needed to Ensure Development of Cryptocurrency-based FInancial Services
Proponents of cryptocurrency have disapproved of early attempts to regulate the software’s underlying source-code and protocols. The crypto industry participants have noted that open source projects must be protected like free speech. However, DeFi poses significant risks to the end-users which makes it critical for decentralization to be provided in a compliant manner (if that’s possible).
Many DeFi protocols, including the largest ones by market cap and adoption, have been deployed on Ethereum. DeFi’s growing user base has led to a considerable increase in attacks, bugs, as well as network congestion.
Ethereum’s public blockchain architecture is clearly not perfect, which means there are really high transaction costs, unsuccessful transactions, and issues with settlement. While these issues may sort themselves out, because of regular updates being made to Ethereum, there’s clearly a need for a proper legal technology or LegalTech layer for the crypto space
Astra Protocol: Regulation, Protection, Compliance
Smart contracts used for automating a decentralized decision-making system are a key component of all sufficiently decentralized projects. According to the developers of the Astra Protocol, it is a critical part of any decentralized system, including DeFi, as it helps with establishing confidence in the project as a secure investment.
But a regulatory protocol should be created with the goal to eliminate ambiguities, prevent fraudulent activities, effectively resolve disputes, while ensuring that the public blockchains are secure enough for all users.
The Astra Protocol has been specifically designed to give decentralized organizations an innovative means to comply with applicable guidelines and regulatory frameworks while remaining sufficiently decentralized. At an important time-period in which there’s so much questionable activity, Astra aims to offer the confidence needed by newcomers to enter the crypto and blockchain industry.
Astra plans to provide the legal layer for crypto that may be connected to any existing DeFi platform. Funds should always reach the intended recipient(s) safely through Astra. And if there’s any issue, then the team may address it and return the funds in a frictionless manner. Any problems may be resolved amicably with the integration of a conflict clause – referred to as proof of trust – to the platform and associated smart contract.
This approach is based on a Proof of Trust system, which is described as a built-in protection mechanism that aims to offer peace of mind in monetary transactions and contracts via an extra-judicial and extra-jurisdictional dispute resolution system.
To learn more about this project, you may visit their official website.