DeFi
Decentralized finance (DeFi) is an emerging financial technology that challenges the current centralized banking system. DeFi attempts to eliminate the fees that banks and other financial service companies charge while promoting peer-to-peer transactions.
- Decentralized Finace DeFi
Without cryptocurrency, DeFi would be impossible.
Summarized comparison:
Cryptocurrencies are digital securities that operate on decentralized ledgers while DeFi represents all financial platforms that run on top of existing blockchains.
Cryptocurrency coins are primarily used as a medium of exchange and are created to reward miners or validators for adding transactions into a blockchain network.
Cryptocurrency tokens are created by decentralized applications or dApps and can be used as a means of payment, voting, and incentives to participate in a protocol.
DeFi represents all decentralized finance-related protocols (say applications) that operate under a blockchain network. DeFi platforms include staking dApps, borrowing and lending dApps, decentralized exchange dApps, and derivative dApps.
CBN, Governments Fighting Back
Cryptocurrency like Bitcoin and Ethereum and other coins have practically promoted the goals of DeFi for some time, eliminating the need for the regulations of Government-backed Central banks. But we must note that this arrangement is disadvantageous to the government as:
1. Control by government is removed
2. Revenues are lost by government
3. Power wielded by government is limited or removed
4. Government cannot act to protect investors in such products.
Whatever the incentives, the CBN/Governments are fighting back. How? See examples:
1. The US government have been cracking down on the largest crypto exchanges Binance and Coinbase, using litigations.
2. Not until recently, countries like Nigeria outrightly banned transactions in cryptocurrency from being done using the banking sector. However, recently, the Tinubu-led administration has lifted the ban.
For countries like Nigeria to lift the ban, it must mean something: Either...
1. The government is sure of having sufficient transparency or control now, or
2. The initial fears of crypto anonymity of transactions have been removed, in any way used.
Whatever the case, all these are working against the idea of Decentralized Finance, DeFi.
REGULATORY FIGHTS
However, the DeFi sector is currently facing regulatory challenges. In particular, there is a risk that regulations could stifle innovation in the space and prevent DeFi projects from reaching their full potential.
Regulators are justified when what we call DeCrimes happen, like when a major exchange like FTX crashes and people lose money.
There is a debate raging within the DeFi community about whether regulations will ultimately kill or save the sector. On one side, there are those who believe that regulations are necessary to protect investors and ensure the stability of the space. Regulators, on the other hand, are viewed as a hindrance to innovation and the full development of DeFi, according to some.
Is DeFi Failing? I Think, Yes?
To correctly answer this question, let us examine the goals of DeFi:
Goals of Decentralized Finance
Peer-to-peer (P2P) financial transactions are one of the core premises behind DeFi, where two parties agree to exchange cryptocurrency for goods or services without a third party involved.
Using DeFi allows for:
Accessibility: Anyone with an internet connection can access a DeFi platform, and transactions occur without geographic restrictions.
Low fees and high-interest rates: DeFi enables any two parties to negotiate interest rates directly and lend cryptocurrency or money via DeFi networks.
Security and Transparency: Smart contracts published on a blockchain and records of completed transactions are available for anyone to review but do not reveal your identity. Blockchains are immutable, meaning they cannot be changed.
Autonomy: DeFi platforms don't rely on centralized financial institutions. The decentralized nature of DeFi protocols mitigates the need for and costs of administering financial services.
You will agree that more and more government control of DeFi product cryptocurrency like Bitcoin prices is going to work against the core goals of DeFi.
IMPACTS OF GOVERNMENT REGULATION
One benefit exists: better control to protect investors, DeFi products like cryptocurrency are very volatile and are prone to scandals and crime. With proper regulation, the ecosystem can be made safer for everyone.
- Crypto regulation
The biggest drawback of too many regulations is that people may give out too much of the control of crypto to centralized institutions — destroying the whole purpose of DeFi.
Now, with SEC looking to consider the approval of #BitcoinETF, the US government will definitely demand more control and oversight into the cryptocurrency system and especially pricing.
We will look out to the future as things evolve. But I fee many people would miss the real anonymity that used to accompany crypto transactions.
THE OUTLOOK
DeFi, like the blockchains and cryptocurrencies it supports, is still in its infancy. Significant hurdles must be overcome before it can replace the existing financial system, which has its own issues that are difficult to resolve. Lastly, financial service companies and banks are not going to be replaced without a fight—if there is a way for them to profit from the transition to a blockchain-based financial system, they will find it and make sure they are part of it.
If excessive regulation is allowed, DeFi will be denatured, and no mission would be accomplished. Could DeFi system find a way to block the loopholes without much centralized regulations - the same thing it was trying to remove? The govt and CBNs won't renege these powers without a fight. the fight is on.
I see BTC falling off the radar soon, while true cryptos will live on. Time to go for Ethereum.
NOTE: These are my opinions and I stand to be corrected if contrary views are raised. Feel free to comment below.
