Roleplay of a policy maker spitballing about DeFi — PART 1
Cryptocurrencies are at the heart of the global buzz today with the meteoric rise of Bitcoin’s price, the arrival of the new kids on the block DeFi Protocols like Uniswap, SushiSwap, PanCake Swap as well as the shiny objects that attracts the normies and the celebs — NFTs. The possibility for cryptocurrencies have never looked greater until now but what about the cons ?
Cryptocurrencies have always earned a mixed response from policymakers across the globe (recently that has started to change) with the flawed take that it is the hub of terrorist financing and the payment system of criminals and hackers. Their take is to avoid it being integrated into formal society. Obviously the advent of chain analytics tools like Chainanalysis as well as the self integration of KYC/AML tools into exchanges has made it easier to be considered seriously as trad fin companies.
But concerns still abound.. Mike Green of Logica Capital in his debate with crypto influencer Anthony Pompliano at Real Vision made some key points that need to be addressed. China controls some 90% of the overall mining done at Bitcoin and major coins with PoW.
According to Green, it has become a defacto hub for conversion of crypto to dollars to countries like Iran, Russia, North Korea etc. Green also points out that the obvious lack of a direct adversarial attack on these coins which can overtake the financial system by these countries is worrisome. He believes that it is easier for them to co-opt the system and use it as a way for their own self serving means. It can be a threat to their adversaries and proponents of democracies if they integrate it blindly.
DeFi protocols have taken the crypto world by storm with functions such as yield farming dominating with over 15% plus to even 100000% in new protocols. Yield farming is the ability to combine multiple strategies and generate yields from multiple protocols. Basic banking functionalities such as lending and borrowing are seamless in protocols such as Compound, Uniswap, Aave. DeFi Protocols don’t require KYC as they rely mainly on overcollateralization for borrowing. The lack of insurance and grievance redressal systems on such protocols was a big problem especially in the case of such hacks of protocols like bzRX, COMP etc. A real permission-less system is being built right now and there is no answer about how it is going to be in tandem with the politically and situational driven nature of our formal financial system.
KYC/AML protocols are put in place to trace the financial trail of bad actors if they have used the financial system to promote unlawful activity. It also keeps out enemies of the state and terrorist activity. There’ll always be a huge question mark about how DeFi can be integrated beyond the KYC of fiat on ramps. As there’s a need for KYC to monitor every transaction, how that’ll play on for the crypto ecosystem will play a deep role. Here, the concerns are less as major exchanges indulge in strict and sophisticated measures of KYC/AML whenever they seek fiat onramps in a country. However, DeFi protocols still avoid it.
There’s also the question about how it’ll empower enemies of the state. As these protocols lack an identity layer, it becomes a great source of yield and a de facto alternate banking system for them too. With insurance protocols coming in to insure DeFi Protocols from major hacks and other issues, it turns out to be a great deal for them to ensure they stay in this system until the need for fiat arises. Look at the deal they’re getting — if you adopt this system fast enough, they can deposit money to earn yields upto 500% or even more a year. That’s far more than the ordinary 6% in developing countries like India and 0.5% in the USA and even negative interest rates in certain parts of Europe.
Criminals and the 1% will get a better deal than law abiding citizens if radical steps are not taken to overhaul our system and silo the DeFi space.