The Importance of Regulated DeFi

For DeFi to be widely accepted and adopted, we must move from the wild west markets to a regulated one. Regulation can help to protect users, prevent market manipulation, and promote financial stability. Without regulation, DeFi could pose a risk to users, markets, and the financial system as a whole. In this blog, let’s explore this topic and understand why “regulated DeFi” is the core working philosophy behind Concordex and the Concordium blockchain.

DeFi and The Wild West

Beosin, a blockchain security firm, recently released a report which has some startling and depressing claims.

Apparently, the losses resulting from “rug pulls” and “exit scams” in the cryptocurrency realm have surpassed the amount stolen from decentralized finance (DeFi) projects in May.

• Rugpulls led to total losses exceeding $45 million across six incidents. The biggest one was Fintoch which absconded with $32 million.
• DeFi attacks resulted in a comparatively lower sum of $19.7 million in ten instances. This is also a significant 80% decline from the previous month.

Basically, the lion’s share of DeFi hacks is a result of dishonest protocol creators.

So, what’s the solution here?

Paul Brody and Rodney Ramcharan bring up an interesting point in their Coindesk column.

Before the establishment of the Federal Reserve, the banking system in the United States operated much like DeFi operates today. In that unregulated landscape, banks faced the risk of contagion, as a crisis at one bank could quickly spread to others. The catalyst for the creation of the Federal Reserve was a crisis triggered by a highly leveraged short squeeze gone awry, causing illiquidity for the Knickerbocker Trust, a financing company. This collapse had far-reaching consequences, including a significant stock market decline and a wave of bank runs.

To safeguard the market, the US Federal Reserve was established in 1913. Back then, people argued that regulatory insight could ruin banks, and bank crises — while painful — served as a form of market discipline. Do these arguments sound familiar to you? Unfortunately, we insist on repeating history without learning anything from the past.

The Advantages Of Regulated DeFi

• Protecting users: DeFi is a relatively new and unregulated space, which makes it perfect for scammers and hackers. Regulation could help to protect users from these scams by requiring DeFi platforms to implement security measures and by providing users with recourse if they are scammed.
• Prevent market manipulation: DeFi needs liquidity. When markets become illiquid, they are vulnerable to manipulation. Regulation could help prevent market manipulation by requiring DeFi platforms to disclose information about their trading activity and allowing regulators to investigate and punish market manipulators.
• Promote financial stability: The absence of regulation in the DeFi sector carries potential risks for financial stability. For example, a major DeFi hack or system collapse could result in a loss of trust in the entire DeFi ecosystem and even impact traditional financial markets. Introducing regulatory measures could play a crucial role in minimizing these risks. Regulations can mitigate potential negative consequences by enforcing capital reserve requirements and compelling DeFi platforms to adhere to specific risk management standards.

Concordium: The Ideal Meeting Point Between Innovation and Regulation

Combining DeFi and Traditional Finance is the ideal platform and meeting point for innovation and regulation. This article by Coindesk talks about creating an “Internet financial system,” or IFS. There are two things that one must note about IFS.

• Regulation: The long-term success of this space relies heavily on regulatory acceptance. The DeFi community must constructively engage with policy makers and work on practical solutions to address illicit finance concerns, such as utilizing technology to identify and prevent fraudulent activities.
• Privacy-Preserving Identity: Compliance must not come at the expense of user privacy, even if it adheres to strict know-your-customer rules. For instance, smart contracts must not intake or expose personal data on an immutable blockchain.

Concordex is built on the Concordium blockchain which fulfills both these criteria.

• Regulation: Concordium has a built-in ID layer, a crucial aspect for numerous use cases requiring regulatory compliance. This unique feature ensures built-in regulatory readiness and compliance by providing participants with a blockchain-based identity credential that adheres to KYC and AML regulations.
• Privacy-Preserving Identity: Concordium prioritizes individual privacy and ensures compliance with GDPR. It achieves this through zero-knowledge proofs (ZKP), granting users complete control over their personal data while enabling selective sharing with others. User privacy is safeguarded as personal data is never stored on the blockchain unless explicitly chosen to be made public. However, user identities can be disclosed to the authorities under a court order in cases involving suspected fraudulent activities such as money laundering. It is important to note that such disclosures are solely accessible to the authorities and remain confidential to other parties.

Concordex: Poised To Be A Leader In Regulated DeFi

Concordex is dedicated to meeting the growing demand from users, institutions, and regulators for decentralized services that are compliant, secure, and regulatory-friendly. The platform is committed to building precisely that, addressing the need for a trusted and compliant decentralized ecosystem. For DeFi to expand and reach mainstream usage, it needs to work with regulators without compromising the ideals of decentralization. Concordex has been built to deliver exactly that.