5 Reasons Why DeFi Platforms Must Be Allowed On a Moderate Leash

  • October 1, 2021
  • Jennifer Moore

Anxiety, life on hold, work from home, online shopping, and extended presence on social media have made it impossible for one to remain unperturbed by the noise emanating from the digital asset quarters. This has also caused polarization among the masses blessed with the cognizance, mild to in-depth, into supporters and the suspicious. Irrespective of their approach towards DeFi and digital assets, the greater portion of this population would admit that the capabilities of the underlying technology are exciting and its applications infinite.

Simplifying DeFi

At present, DeFi or Decentralized finance offers alternative finance options to the world – one which is free-floating and ungoverned. The ‘ungoverned’ part of it is the most attractive. It is inviting for common people- with the high return projections and also the non-responsibility of declaring the earnings. Government bodies recognizing its rising popularity and sensing a drift of economic power are looking for ways to tame it by means of taxation and regulation.

DeFi platforms platter the alternative for the users to engage in traditional financial transactions like lending and borrowing via direct peer-to-peer exchanges, removing the role of traditional financial intermediaries by directly processing the transfer of value. Transactions are squared-off on a public blockchain, instead of a bank or other central institution. DeFi services implement a non-custodial design, implying assets issued or managed on DeFi platforms theoretically cannot be moved or expropriated unilaterally by entities except the account owners.

To put transactions in motion, DeFi utilizes open protocols and decentralized applications, or DApps. The said protocols and DApps are powered by smart contracts—programs that automatically run when certain conditions are met, which are generally built on existing blockchains such as Ethereum. Smart contracts substitute the intermediary role of centralized financial institutions. 

Also Read: Game-Changing DeFi Trends for 2021

DeFi Regulations

Financial authorities, aware of this stupendous growth possibility are moving to act accordingly. Instances of regulatory measures surface in the Treasury Secretary Janet Yellen urging regulators to pace their effort to constitute a regulatory framework for stablecoins, a rapidly growing variety of digital currencies which are pegged to the value of a fiat. These regulations find uses on DeFi platforms for controlling price volatility.

However, DeFi, as with all other blockchain applications, should get a chance to flourish and establish long-fought-for control over our own money with minimal or no say from the regulatory bodies. This, however, is not above the chances of severe losses and no intervention from regulatory bodies implies no protection for the investors. Therefore, cautious investment of sums that you may afford to lose is strongly recommended even by DeFi companies.

Also Read: PayBito to Offer DeFi Payment Solutions to a USA-Based Organization

The Need for Regulation

Reasons why the DeFi should be allowed on a mildly regulated run; neither tightly regulated nor allowed a free reign:

  • For an optimized ROI, with controlled risks.

DeFi platforms present an opportunity to invest in a product assuring substantial returns, in any case, higher than other financial instruments and spanning the globe in their reach.

  • Heavy impositions stifle the innovation edges of the applications.

While it is not healthy to allow the DeFi platforms to function like hedge funds, they need not be excessively regulated. The specialty of decentralized products is likely to lose its edges under excessive impositions by financial authorities.

  • Moderate regulations, on the other hand, should act as a buffer against losses.

Regulations, on the other hand, are important as this prevents people from following the lure of high returns; often going overboard and losing their entire fortune in the process.

  • A mild leash should open alternative financial territories to all categories of investors.

Exercising a mild control over the investment enables investors of varying capacities to participate on those platforms; thus paving the way for financial inclusion furthering into the often-discussed ‘equitable wealth distribution’.

  • Moderately regulated platforms are more likely to adapt to the changing needs of people in the financial market. 

DeFi platforms witness moderate regulation. The applications still retain their capacities of up-scaling and may adapt to the frequently changing needs of the world.

Also Read: DeFi in 2021: An Outlook in Undercollateralized Lending

Conclusion

The DeFi space has had to adapt to the quick-changing nature of markets and compliance is no exception. Decentralized tools present an alternative to the traditional financial system established by institutions commanding faith. Here intermediaries are necessary for holding client assets and operate transactions. The current framework of regulation based on this traditional model will undoubtedly encounter ways it fits only awkwardly onto a new system predicated on the absence of intermediaries. 

While the authorities intend to protect the interest of common investors. It may regulate by imposing a percentage ceiling on investors’ total worth beyond which they cannot invest in the alternate financial instruments.

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