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Can we save DeFi from being Centralized?

DeFi - Addressing the Limitations of Traditional Finance.

DeFi, or Decentralized Finance, aims to tackle several problems users face with traditional financial systems:

Limited Access: Traditional finance often excludes people due to factors like geographical location, credit history, or minimum balance requirements. DeFi, built on blockchain technology, offers permissionless access, meaning anyone with an internet connection can participate.

Lack of Transparency: Traditional financial systems can be opaque, with complex fee structures and hidden charges. DeFi promotes transparency through smart contracts, which automate transactions based on predetermined rules visible on a public blockchain.

Centralized Control: Traditional finance is controlled by institutions like banks and governments. DeFi empowers users by giving them control over their own assets. Users hold their funds in crypto wallets, eliminating the need for intermediaries.

Inefficiency: Traditional financial processes can be slow and cumbersome, with transactions taking days to settle. DeFi leverages blockchain technology to facilitate faster and more efficient transactions.

These limitations create problems for a broad range of users:

The Unbanked: Millions of people globally lack access to traditional banking services. DeFi offers them a secure and alternative way to manage their finances.

Underbanked Users: People with limited credit history or residing in regions with restricted financial services can benefit from DeFi's inclusive nature.

Those Seeking Transparency: Users who value clear and upfront fees and control over their assets find DeFi's focus on smart contracts and self-custody appealing

Those Frustrated with Slow Transactions: DeFi caters to users who need faster and more streamlined financial transactions.

By addressing these limitations, DeFi opens up a world of financial possibilities for a wider audience, promoting financial inclusion and user empowerment.


Regulation:

The EU’s Markets in Crypto-Assets Regulation (MiCA), which will come into full force by the end of 2024, will require DeFi protocols to adhere to the same licensing and Know Your Customer (KYC) requirements as traditional financial services firms — a burden many DeFi protocols may be unable or unwilling to bear. Only fully decentralized, local, downloaded frontends or full-KYC online frontends would be possible. This leaves DeFi protocols with a choice: Either pivot to a somewhat centralized “hybrid finance” (HyFi) model to comply with EU regulations or decentralize entirely. 

"True" DeFi is exempt from MiCA : Within the actual EU regulation, fully decentralized protocols are exempt from falling into the MiCA requirements, as mentioned in Recital 22:

“Where crypto-asset services are provided in a fully decentralized manner without any intermediary, they should not fall within the scope of this Regulation.”

The immediate question posed by this section of MiCA is what exactly is meant by “without an intermediary” and “in a fully decentralized manner”?

With MiCA set to come fully into force by the end of 2024, DeFi protocols operating in Europe will have to decide whether to fully decentralize, effectively side-stepping regulations, or apply KYC measures like any other centralized company that offers financial services.

For those that do embrace decentralization, regulation such as that MiCA in Europe will draw clearer lines in the sand. This new set of rules will provide more clarity on how to build truly decentralized applications to comply with the regulatory requirements.

Indeed, many DeFi protocols will have to take a hard look at how they do business to ensure their platforms are truly decentralized and don’t fall afoul of the law. The DeFi sector can implement several workarounds to ensure decentralization, one important one being the decentralization of website front ends. Advocates of decentralization may soon see DeFi transform into something closer to traditional finance, the very industry they set out to disrupt.

DeFi still needs to comply to attract institutional investors:

DeFi DApps need to walk a line between implementing enough AML procedures to attract TradFi liquidity and not become a target for regulatory action.

Decentralized Identities (DiDs) have the potential to revolutionize KYC/AML compliance. But DiD will require universal adoption to be practical and universal adoption might take considerable time.


ReDeFi Implementation:

 Let's discuss the difference between ReDeFi- TRIO DeFi KYC and Uniswap v4 DeFI KYC Hook. 

Uniswap v4 allows specific exchange pools to introduce KYC checks: 

This specific hook allows for a KYC procedure. So, you can add this to a pool. Now, everybody who wants to take part in a pool with this hook must undergo a KYC first. A KYC procedure is the ‘Know Your Customer’ procedure. Among others, it requires you to provide an official, government-issued ID. Currently, this hook seems ideal for US-enabled pools. It allows for KYC or a whitelist application. The latter is for users who want to join such a liquidity pool.  

From user’s perspective- this centralisation by the liquidity pool provider makes DeX no different from CeX (centralised exchange). The whole promise of DeFi is being spoofed! 

ReDeFi approach is to use TRIO utility KYC token. Its utility comes from the condition that if you own TRIO token - then your KYC was completed. Each participating DeFi app. will check the TRIO token balance of the account submitting the DeFI transaction . If the balance is positive - then the account belongs to the TRIO user , whose KYC was performed in advance. There is a compliance within the decentralising of financial app. For ReDeFi -all you need is to add a simple balance query at the DeFi smart Contract. 

The big difference is that the application remains decentralized and compliant at the same time! DeFi is saved and there is no need to use Oracles !

For more info - please contact the author.

 

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Eli Talmor

Eli Talmor

CEO

ID-Bound

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23 Nov 2016

Location

Haifa

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This post is from a series of posts in the group:

Decentralized Finance (DeFi)

A blog group to discuss the potential of decentralized finance and the obsctacles preventing the realization of this potential.


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