In the early years of Decentralized Finance (DeFi), platforms like Uniswap and Pancakeswap fueled the explosion of a field defined by a series of spectacular gold rushes followed by a painful hangover. But as the industry evolves, companies and governments alike are trying to bring order to DeFi’s Wild West.
Continue reading: Fed’s Powell: Crypto regulation needed before DeFi merges with banking
In 2020, the invention of yield farming and liquidity mining enabled fledgling DeFi projects to raise funds quickly and created a lucrative but volatile market for the associated tokens. Seemingly overnight, DeFi became one of the most talked about trends in finance, with public interest mirroring that of the broader crypto space.
Proponents of the new model have pointed to DeFi millionaires and the seemingly unstoppable growth of decentralized exchanges as a sign that space represents the future of finance. Critics, however, have warned that the bubble would eventually burst.
Learn more: CFTC lawsuit aims to rein in DeFi
When the crypto market crashed earlier this year, the DeFi world seems to have had a moment of reckoning. But instead of shutting down the industry, 2022 could actually be the year that DeFi goes mainstream.
On the way to DeFi credibility
The high-risk, unregulated environment that characterized the early years of decentralized finance has led to an institutional reluctance to platforms like Uniswap. However, a project launched earlier this year by decentralized protocol Aave is attempting to lure regulated banks and investors, adding a credibility that has been largely absent from the DeFi space until now.
Continue reading: The creativity of the Aave DeFi platform is its strength
Aave Arc promises to help institutions participate in regulation-compliant decentralized finance by removing the widespread anonymity associated with traditional DeFi and creating an “eligible liquidity pool” in which only whitelisted institutions that are on the Legal compliance has been checked.
One of the financial institutions on the project’s whitelist is Italian firm Anubi Digital, a crypto custodian for corporations, institutional investors and wealthy individuals.
This week, Anubi Digital launched its latest DeFi offering, DUO, a liquidity staking service that allows the company’s clients to participate in Uniswap liquidity pools using euros or crypto assets.
Alongside greater involvement of regulated financial institutions, another development that may lead to greater mainstream adoption of DeFi is the presence of regulatory oversight.
The Decentralized Autonomous Organizations (DAOs), which typically manage DeFi projects and platforms, consist of distributed networks of often anonymous token holders with voting rights that change hands frequently. As a result, the lack of a central governing body can make accountability a challenge.
See more: SushiSwap plans reveal the top-heavy side of DeFi governance
Aware of the difficulties this poses for regulators, the European Commission (EC) recently issued a call for investigation of Embedded Supervision of Decentralized Finance (DeFi) protocols. The project will explore the prospect of automated data collection directly from the Ethereum blockchain and will test the technological capabilities to monitor DeFi activity in real-time.
Related: Sardine raises $51M for fraud prevention solutions for FinTechs, DeFi
Such a mechanism to monitor the Ethereum network is expected to have numerous benefits for the EU, particularly in the anti-money laundering (AML) space, where companies like Elliptic are already offering crypto asset transaction monitoring services to help businesses identify risks and their tracing to support crypto transactions.
More on this: Lawsuits show crypto KYC can help offset losses
EK’s interest in the technology and its specific reference to DeFi data may indicate that European politicians have their eyes on ensuring greater scrutiny of space. It could also pave the way for a more streamlined approach to compliance, as opposed to the current system, which requires market participants to actively collect, review and report data to authorities.
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See more in: Aave, Anubi Digital, Blockchain, Cryptocurrency, Decentralized Finance, DeFi, EMEA, European Commission, News, Pancakeswap, Regulations, Uniswap
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