Ethereum financial dapps
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Even those who are most suspicious of the rise of cryptocurrency will likely admit that the underlying blockchain technology and its potential uses are exciting. One use of this technology, decentralized finance, or DeFi, is on the cusp of major growth.
Regulators are aware of this growth and are moving to act accordingly. As a possible preview of the coming regulatory efforts, this past spring Treasury Secretary Janet Yellen urged regulators to accelerate their establishment of a regulatory framework for stablecoins, a rapidly growing class of digital currencies which, among other things, can be used on DeFi platforms to temper pricing volatility.
In this piece, we briefly explore the risks of DeFi as it grows, and, in turn, draws increasing scrutiny from regulators. DeFi describes blockchain-based alternative finance systems.
DeFi platforms enable users to engage in traditional financial transactions like lending and borrowing through direct peer-to-peer exchanges, eliminating the role of traditional financial intermediaries by directly mediating the transfer of value. Transactions are settled on a public blockchain, rather than through a bank or other central institution. DeFi services use a non-custodial design, meaning assets issued or managed on DeFi platforms theoretically cannot be moved or expropriated unilaterally by parties other than the account owners.
To effectuate transactions, DeFi uses open protocols 9 and decentralized applications, or DApps. DeFi has experienced fast-paced growth since mid And even that figure may only be a fraction of its future potential. Technological Risk. The technological risks implicated by DeFi are rooted in the current limitations of blockchain technology. These can lead to high network transaction fees, failed transactions, and liquidation issues.
In some cases, extreme network congestion has led DeFi apps to stop functioning altogether. In addition to scalability challenges, DeFi platforms—like other forms of financial services operations—also face major cybersecurity threats. Further, even if the smart contracts are technologically sound, hackers can target other vulnerabilities. DeFi rug pulls are a new form of exit scam where a developer abandons a project and leaves with the funds.
Given the ever-growing scale of financial transactions in this space, even minor instability or hiccups in data security could result in significant losses for individual investors.
As a result, insurance brokers are also beginning to get involved, providing users with insurance against losses due to hacks or malfunctioning software. DeFi applications are often built on the Ethereum blockchain, and the collateral pledged in DeFi transactions is typically cryptocurrency.
Given the volatility of digital assets, it is possible for the value of that collateral to decline sharply, causing associated liquidity risks. The volatility of the crypto market is well-known. For example, after Tesla CEO and crypto enthusiast Elon Musk tweeted a meme interpreted by many to mean Tesla might scale back its Bitcoin holdings, Bitcoin dropped significantly.
While panic buying results in major spikes, driving up value beyond the true underlying value, panic selling of DeFi tokens can likewise result in major crashes that would be highly unusual with fiat currency.
For example, in June , tokens including Galaxium and Crypto Village Accelerator each lost more than 60 percent over the course of 24 hours. Sophisticated investors are not immune from this volatility and associated risks. Some individuals have sought to use stablecoins, which are backed by an asset often fiat currency , to minimize this risk. Early on, DeFi apps would attract new users and deposits by offering high yields that were typically paid out in the native token of the protocol, which were typically very volatile.
Stablecoins, as the name would suggest, are designed to be more stable, in some cases thanks to being collateralized by the value of an underlying asset like U. Basing transactions on these familiar units is appealing to some investors more comfortable with traditional financial services. But with great risk comes potentially great reward. Although using stablecoins theoretically dampens volatility as compared to other tokens, their use is often associated with lower returns because of lower risk, due at least in part to their tie to fiat currencies.
Compliance Risk. DeFi is still in its infancy. Many DeFi services are offered by unincorporated entities that operate outside of regulatory structures that exist around more traditional financial products. Most of the services in the space are software programs that automate financial transactions and replace the traditional role of the bank as an intermediary. This creates several risks and results in an uncertain regulatory environment. The lack of intermediaries, the anonymity of peer-to-peer transactions, and the global reach of DeFi present potentially amplified compliance risks for participants in the space.
In the absence of clear, direct guidance from regulatory agencies, DeFi platforms face potentially vast and confusing compliance and legal obligations. Their operations can implicate a host of considerations, ranging from anti-money laundering to consumer protection. To address these issues, investors, experts, and regulators alike have called for greater regulatory clarity in the realm of DeFi. All eyes are on the federal financial regulators and Congress as those groups of policymakers attempt to navigate a novel and highly complex arena and to construct a workable regulatory regime.
To date, much of the guidance provided so far on digital assets has focused on areas such as initial coin offerings, and not necessarily on DeFi. Although, if the recent public comments, enforcement interest, and stablecoin conversations among financial regulators are signs, that may change in the near-to-medium term. Several regulators have weighed in with guidance relevant to DeFi developers and users.
But the decentralized nature of DeFi makes it uniquely hard to regulate as rule makers are faced with the question of who, what, where, and how to regulate a rapidly changing space. SEC Guidance. Given the wide range of regulators that oversee various corners of traditional financial services products, creating a robust DeFi regulatory framework will likely involve a significant amount of coordination among regulators.
Warren, which directly asked for lawmakers to give the SEC more power to oversee crypto lending and DeFi platforms. Between and , the SEC brought close to 80 crypto-related enforcement actions, over half of which related to ICOs. The SEC has so far only announced one enforcement action against a DeFi platform, and that case was really focused on the platform misrepresenting to investors how the platform was operating.
CFTC Guidance. For example, the CFTC has exercised anti-fraud and anti-manipulation authority over virtual currencies that are traded as a commodity in interstate commerce or that are traded for future delivery, rather than immediate delivery.
It also has more limited regulatory oversight over virtual currency spot markets that use margin, leverage, or financing. While BitMEX was not a DeFi project per se, charges against BitMEX for weak anti-money laundering and know-your-customer policies were warning signs for the world of decentralized finance.
Earlier this summer, Commissioner Dan Berkovitz also said in a public speech that unlicensed DeFi markets may be operating illegally in the United States. Participants in the FinTech space have long had to adapt to the fast-changing nature of new developments and accompanying confusion regarding rules , and DeFi compliance is no exception.
Because decentralized tools developed as an alternative to the traditional financial system established on trust, where intermediaries are needed to hold client assets and carry out transactions, the current framework of regulation based on this traditional model will undoubtedly encounter ways it fits only awkwardly onto a new system predicated on the absence of intermediaries. DeFi application developers and other project participants should consider implementing certain steps to ensure they have the processes in place to identify and deal with risks.
First, market participants should set up a compliance department and designate responsible parties in the event something goes wrong. Developers should consider who will deal with regulators in the event they ask questions, as well as how to anticipate possible scenarios that might cause compliance issues and avoid them.
Second, compliance departments should stay up-to-date on all recent guidance related to DeFi and digital asset regulation more broadly, which could provide insight into operational risks and solutions. DeFi project developers may consider setting up proactive meetings with regulatory stakeholders to gain insight into the current landscape and regulation slated to come down the pike.
Third, participants should prioritize transparency in recording and publishing holdings, expenses, and transactions, so regulators can have access to relevant information easily, if necessary. Finally, DeFi stakeholders should take to heart the limited but concrete recent developments which might apply to their products.
Therefore, industry participants should consider the legal implications of the Howey test, and consult experienced securities law counsel, when structuring their projects. These risks will persist, even as the industry matures.
And regulatory scrutiny will only increase along with the growth of the overall industry, as we may now see accelerated in the stablecoin space. Industry participants should take stock of the existing risks and requirements, ensure they have appropriate risk-based structures in place, and then demonstrate through documentation on particularly important points that they are abiding by those structures.
Make no mistake: If a lending platform is offering securities, it also falls into SEC jurisdiction. This affects our national security, too. Further, these stablecoins also may be securities and investment companies. To the extent they are, we will apply the full investor protections of the Investment Company Act and the other federal securities laws to these products. S Sec. Warren Aug. Composability refers to the concept that multiple components can be chosen and assembled in different ways to satisfy different users.
Louis Feb. The proposed safe harbor, which she said she intends to raise to SEC Chairman Gensler and her fellow commissioners, would create a sandbox that would allow for token sales to occur without fear of direct regulation. Commissioner Peirce first proposed the three-year grace period for developers and companies in the DeFi space to build and launch their networks last year, but this proposal failed to be adopted by the other commissioners.
SEC Guidance Given the wide range of regulators that oversee various corners of traditional financial services products, creating a robust DeFi regulatory framework will likely involve a significant amount of coordination among regulators. Send Print Report. Ana Daily. Matthew Hanson. Katherine Kirkpatrick.
Thomas Spiegler. Published In: Bitcoin. Decentralized Finance DeFi. Securities Act of Sign Up Log in.
Company Filings. Commissioner Caroline A. For those readers not already familiar with DeFi, unsurprisingly, definitions also vary. In general, though, it is an effort to replicate functions of our traditional finance systems through the use of blockchain-based smart contracts that are composable, interoperable, and open source. DeFi presents a panoply of opportunities. However, it also poses important risks and challenges for regulators, investors, and the financial markets.
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ARIES FINANCIAL dApp
Decentralized finance DeFi is one of the hottest trends to emerge out of the crypto markets. DeFi refers to financial services built on the blockchain, mainly on the Ethereum network, that allows anyone to access financial products and services online in a decentralized and borderless manner. Today, DeFi users can borrow, lend, trade, invest, and make payments without the need for a financial institution as an intermediary. Instead, the role of financial institutions is replaced by decentralized smart contract protocols. Maker is the most notable DeFi application in the market today.
Securely connect smart contracts with off-chain data and services
ApexDao, a decentralized asset management protocol based on the ethereum blockchain, has gone operational. The protocol enables DeFi investors to take complete control of their digital assets and at the same time exposing them to the best investment options available in the DeFi ecosystem. Decentralized finance DeFi has grown over the last two years into a range of platforms on the Ethereum blockchain. This allows lenders, borrowers, and investors to manage bank-related transactions without the need for banks acting as a mediator. DeFi operates on accounts that can be accessed by anyone around the globe with just an internet connection.
High-performance blockchain infrastructure that scales and connects the financial Internet. Join our newsletter now! Meter is the fastest, most decentralized and scalable ethereum sidechain Build Now Get Coins. Censorship and Frontrunning Resistant Ethereum Scaling: Meter SDK is built on top of the state of the art HotStuff consensus, scalable to thousands of consensus nodes while supporting thousands of transactions per chain. Become a Validator Learn More. Interoperability: Meter Passport is an N way blockchain router that allows both assets and smart contracts to travel across heterogeneous blockchain networks.
Throughout history, money is often moulded to benefit autocratic regimes. But in light of recurrent issues like debasement and rising inflation — alternatives such as decentralized finance, or DeFi, have emerged as an effort to re-establish sovereignty and power to the everyday person. In short: DeFi is a global, open alternative to the current financial system.
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Ethereum DeFi Ecosystem
In the Indian context, Ethereum has also become a popular topic in the mainstream media for a myriad of reasons. What is Ethereum? While both let you make digital payments to banks and payment partners, Ethereum is programmable and acts as a marketplace for financial services, games, and other apps without being censored. Let's understand why it is gaining popularity and how it will shape our "digital future. Ethereum can be termed as Linux, but for blockchain-based applications, offering a wide array of use cases, opening up a plethora of opportunities.
UNISWAP ECOSYSTEM →
Consumers use apps for sending email, paying for parking, finding dates and myriad other use cases. Under conventional models of control and ownership, consumers usually hand over personal data to the company providing the service. With a decentralized app, users theoretically gain more control over their finances and personal data since they don't have to trust anyone else to store and secure the information. However, some experts are skeptical this will work in practice.