When DeFi meets rights protection, how can supervision innovate?

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, Author: Durant, reproduced by Odaily with authorization.

Just as DeFi tokens started diving performances one after another, the voices of rights protection gradually increased.

So far, no major regulatory agency has issued specific guidance or regulations on DeFi, and reports have pointed out that regulators do not know enough about DeFi.

DeFi still belongs to a wild area where there are no rules and no supervision. Someone once judged that the sole purpose of most DeFi projects is regulatory arbitrage.

When will the sword of Damocles above DeFi fall? Where will it fall?

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start rights protection

"There are more and more DeFi projects without audit and supervision." Liu Qi said.

Since last weekend, just like the weather in Beijing, the DeFi temperature has plummeted. "Several project groups that were in full swing before have become rights protection groups." Liu Qi said.

The good days are over, and the DeFi world is in a state of horror, "few retail investors are making money, and the law of 28 (always) is there."

The bear market that started in the second half of 2018 may still be fresh in everyone's memory: currency prices plummeted, the community fell into hibernation, and investors had nowhere to cry. The bosses were silent, they sighed, ripped X, and quit the circle.

Today, the DeFi world seems to be repeating the "grand occasion" of the currency circle in 2018.

According to statistics, most DeFi tokens fell by about 50% in September. Senior DeFi tokens such as LINK and MKR dropped by about 30%. The new generation of DeFi tokens that focus on liquidity mining, such as SAL and KIMCHI , SUSHI generally fell by more than 70%.

In addition to the sharp drop, fraudulent projects that took advantage of DeFi hotspots have emerged one after another.

The DeFi product “Emeraldmine”, once ranked No. 1 on EOS, ran away on September 9. The founder emptied the fund pool, transferred tokens worth $2.5 million, and sold them through DeFiBox.

Other items such as bread, tuna, and roses also plummeted and ran away. Such fraud incidents are endless.

If it is in the classical currency circle, rights defenders may find project parties, Token Funds, proxy investment agencies and even digital currency exchanges. They are active in the field of vision and are regarded as public "scythes".

A decentralized world naturally needs decentralized rights protection—to some extent, there is no rights to maintain.

On September 10, Gate.io was suspected of increasing the total amount of Kimichi tokens issued, which caused the price of the tokens to plummet. Finally, investors called the police to defend their rights.

However, due to the concealment of the case and the limitations of the current law, the police were unable to file a fraudulent case after patiently understanding the situation. Behind this may reflect a certain disconnect between DeFi development and regulation.

In addition to deliberate scams of running away and tampering with parameters, who made most of the money? It may be the farmers who "dig and buy", these farmers have already cashed out the mainstream currency, similar to the Wool Party, and do not pay actual responsibility for the price of the token.

The rules of the game are written at the beginning. On the other hand, most rights defenders are actually retail investors who take orders in the secondary market, because they are destined to pay for the risk when they take orders.

If the normal trend is followed, the arrival of supervision may not be banned until a sufficient scale is formed, just like the IC0 before September 4th in 2017.

But the first group of defenders in the DeFi world knocked on the door to the real world. With their calls for help, will the supervision of DeFi come earlier than imagined?

how to supervise

DeFi has always been endowed with a beautiful vision of inclusive finance.

“Increasing capitalism has been funneling money from the top down to workers by increasing their incomes and improving their credit, but this process is no longer working. The failure of the mechanism of the capitalist system.” said Ray Dalio, founder of Bridgewater Fund.

And DeFi just makes up for the shortcomings of traditional financial "system mechanism failure". There is no need for review and account opening here, and even KYC is not required, and everyone can enjoy DeFi services.

However, as mentioned above, due to the lack of supervision, DeFi has become a speculative field for "regulatory arbitrage".

So how should DeFi be regulated?

Perhaps DeFi can be compared with the development of the Internet. In the early days of the Internet, some legal scholars believed that code rules would eventually rule the Internet. However, with the passage of time, governments of various countries began to use the rule of code to maintain the rule of law on the Internet and gradually expand the scope of control.

When analyzing how to regulate the Internet, American scholar Lawrence Lessig expounded the "Pain Point Theory", which describes how to control or influence individual behavior through four different mechanisms: national statutes, social norms, and derivatives of the law of supply and demand market forces and the structures that shape the physical and digital world.

Are Lessig's four regulatory models also applicable to blockchain systems?

In "Regulatory Blockchain: Reign of Code", it is written that even the most autonomous systems are subject to certain forces and constraints, because blockchain systems must rely on new intermediary systems that provide support for the underlying blockchain network , and these systems are easily regulated.

"These systems must rely on code (or architecture), and how they operate is ultimately determined by market forces and subject to social norms. The law can regulate blockchain technology by affecting these three forces."

Laws, markets, structures, and social norms are like the quartet of blockchain regulation.

Take social norms as an example. In 2016, after The DAO was attacked, the Ethereum community spent a month planning a proposal on whether and how to remedy the loss. Finally, they decided to fork Ethereum instead of resorting to external supervision.

The DAO incident demonstrated the critical role of social norms in the regulation of blockchain systems.

Regulation and Innovation

"The monster has come out of the bottle." Timothy May, one of the founders of cypherpunk, said in an article that no one has any power to stop the spread of anarchism caused by the development of encryption technology.

DeFI protocols have been designed from the ground up to be permissionless. In theory, anyone in any country can access DeFi protocols without regulatory and compliance barriers.

In the DeFi community, many people oppose accepting any regulation and laws. They believe in anarchism and want to create their own utopia on DeFi.

Is anarchism a good thing?

Lawrence Lessig once warned: "When the government disappears, it is not necessarily Paradise that will replace it; when the government is gone, other interest groups will take its place."

The current DeFi world is like a Shura field. Under the "three no-regards" situation, DeFi has become a wool machine for "regulatory arbitrage". Someone once made a judgment: the only purpose of most DeFi projects is regulatory arbitrage.

In the real world, Compound and Aave might need a banking license, while Nexus Mutual might need an insurance license, and yearn.finance might be considered an investment fund operating illegally.

Pan Chao, head of MakerDAO China, said on social platforms recently that Yield Farming has entered the third chapter, from offshore dollars to unregulated securities, and now into highly leveraged derivatives. "Calling unregulated CDS insurance is very problematic."

A large part of the reason why traditional regulation exists is to protect ordinary people and ensure that they will not be exploited in financial activities.

Interestingly, blockchain technology has in many ways restored the financial system to its historical starting point—Wall Street was also informal and decentralized to begin with. Over time, Wall Street gradually began to centralize in response to the financial crisis.

Lack of regulation also prevents DeFi from growing. Entrepreneurs and start-ups are held back for fear of stepping into restricted areas due to the lack of a proper regulatory framework.

Shen Bo, a partner of Fenbushi Capital, said in a meeting that there are a lot of incompatibilities between the current regulatory system and open finance. The financial regulatory mechanism and open finance need to be coordinated with each other to allow the latter to grow smoothly, otherwise it will always be in the Gray area development.

Clearly, the rise of DeFi has been noticed by regulators. As the US SEC commissioner and "encryption mother" Hester Peirce said in an interview at the beginning of the month, although DeFi is still in its infancy, the SEC has begun to notice this, "I think this will challenge our way of supervision."

Perhaps, DeFi will end up staggering in the wobbles of innovation and regulation.

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