When DeFi encounters rights protection, how does supervision innovate?


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Supervision has always been one of the topics that cannot be avoided in the blockchain world. When supervision has not kept up, fraud crimes have increased rapidly, and the road to rights protection for rights defenders is very difficult.

Just as DeFi tokens started diving performances, the voice of rights protection gradually increased.

While DeFi destroys the traditional blockchain system, it also brings new challenges to rights protection. After losing money in DeFi investment, who do you call to defend your rights? Why do you defend your rights?

So far, no major regulatory agency has issued specific guidance or regulations on DeFi, and there are reports that the regulatory agency does not know enough about DeFi.

DeFi still belongs to the wasteland without rules and no supervision. Someone once made a judgment: The sole purpose of most DeFi projects is to regulate arbitrage.

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

Start defending rights

“There are more and more DeFi projects without audit or supervision.” Liu Qi said.

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

The good days are over, and the DeFi world is in desperation. “There are few retail investors making money, and the 28 law (always) is there”.

The bear market that began in the second half of 2018 may still be fresh in everyone’s memory: the currency price plummeted, the community fell into hibernation, and investors cried out. The big guys were silent, they sighed, teared up, and retreated.

Today, the DeFi world seems to be repeating the “spectacle” of the currency circle in 2018.

According to statistics, the cumulative decline of most DeFi tokens in September was about 50%, and the decline of senior DeFi tokens such as LINK and MKR was about 30%. The new generation of DeFi tokens, such as SAL and KIMCHI, which are mainly liquid mining models. , SUSHI generally fell more than 70%.

In addition to the sharp drop, fraudulent projects using DeFi hotspots have emerged one after another.

EOS’s previous DeFi product “Emeraldmine (Emerald)” ran off on September 9. The founder emptied the fund pool, transferred $2.5 million worth of tokens, and sold it through DeFiBox.

Other items such as bread, tuna, and roses also experienced plummet and runaway incidents. Such fraud incidents are endless.

Faced with being deceived and losing money, who should they seek to defend their rights?

If it is in the classical currency circle, 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.”

However, in the DeFi world, the above institutions may no longer exist, and anonymous project parties may only submit codes and do not participate in subsequent operations. Token Fund and proxy investment are no longer available. The collective FOMO listing of the exchange seems to be able to put aside responsibilities.

A decentralized world naturally requires decentralized rights protection-to some extent, there is no right to maintain.

On September 10th, Gate.io was suspected of increasing the total amount of Kimichi tokens, which caused the token price 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, after the police patiently understood the situation, they were unable to open the case as a fraud. Behind this may reflect a certain disconnect between DeFi development and regulation.

Except for scams that deliberately run off and tamper with parameters, who makes most of the money? It may be farmers who “dig, buy, and raise”. These farmers have already cashed out mainstream coins. Similar to the Wool Party, they are not actually responsible for the price of tokens.

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

If it follows the conventional trend, the arrival of supervision may not be ordered until a sufficient scale is formed, just like IC0 before September 4th in 2017.

But the first group of human rights defenders in the DeFI world knocked on the door to the real world. Under their call for help, will DeFi supervision come earlier than imagined?

How to regulate

For a long time, DeFi has been given a beautiful vision of inclusive finance.

“The capitalist system has been increasing through increasing people’s receipts and improving their credit, so that their self-money will be benefited in an infiltrating manner, but now this process is no longer effective, which has caused The failure of the capitalist system mechanism.” said Ray Dalio, the founder of Bridgewater Fund.

And DeFi just makes up for the shortcomings of traditional financial “system mechanism failure”. There is no need to review and open an account, even KYC is not required, and everyone can enjoy DeFi services.

However, as mentioned above, DeFi has become a “regulatory arbitrage” because of its lack of supervision.

So how should DeFi be regulated?

Perhaps DeFi can be compared to 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, over time, governments of various countries began to use the rule of codes to maintain the rule of law of the Internet and gradually expand the scope of control.

When analysing how to regulate the Internet, American scholar Lawrence Lesige elaborated on the “pessimistic point theory”, which described how to control or influence individual behavior through four different mechanisms: national statutory laws, social norms, and the laws of supply and demand derived Market power and the architecture that shapes the physical and digital world.

Are the four regulatory models of Lesge also applicable to blockchain systems?

“Regulatory Blockchain: The Rule of Code” wrote: Even the most autonomous system will be subject to specific forces and constraints, because the blockchain system must rely on a new type of intermediary system that supports the underlying blockchain network , And these systems are easily regulated.

“These systems must rely on code (or architecture), and their mode of operation ultimately depends on market forces and is subject to social norms. Laws can regulate blockchain technology by affecting these three forces.”

Laws, markets, structures, and social norms are just like the four carriages of blockchain supervision.

Take social norms as an example. After The DAO was attacked in 2016, the Ethereum community spent a month trying to figure out whether and how to remedy the loss. Finally, they decided to fork Ethereum instead of resorting to external supervision.

The DAO event demonstrated the key role of social norms in the supervision of blockchain systems.

Regulation and innovation

“The monster has run out of the bottle.” Timothy May, one of the founders of cypherpunk, said in an article that no one can stop the spread of anarchism caused by the development of encryption technology.

The DeFI protocol was designed from the very beginning to require no license. In theory, anyone in any country and region can access the DeFi protocol without regulatory and compliance barriers.

In the DeFi community, many people are opposed to 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 DeFi world at this moment is like a Shura field. Under the “three-no matter” situation, DeFi has become a “regulatory arbitrage” wool machine. Someone once made a judgment: Most DeFi projects exist for the sole purpose of regulatory arbitrage.

In the real world, Compound and Aave may require a bank license, while Nexus Mutual may require an insurance license, and yearn.finance may be regarded as an investment fund operated illegally.

Pan Chao, the 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 as insurance is a big problem.”

The reason why traditional supervision exists is to protect ordinary people and ensure that they will not be exploited in financial activities.

What’s interesting is that blockchain technology has restored the financial system to its historical starting point in many ways-Wall Street was also informal and decentralized at first. Over time, Wall Street gradually began to centralize in response to the financial crisis.

Lack of supervision also prevents DeFi from growing. Because of the lack of a proper regulatory framework, entrepreneurs and start-ups have stalled for fear of entering the restricted zone.

Shen Bo, a partner of Fenbushi Capital, said in a meeting that there are a lot of incompatibility between the current regulatory system and development finance. Financial regulatory mechanisms and open finance need to coordinate with each other to allow the latter to grow smoothly, otherwise it will always be Gray zone development.

Obviously, the rise of DeFi has been noticed by regulators. As the US SEC commissioner and “crypto mom” Hester Peirce said in an interview at the beginning of this month, although DeFi is still in its infancy, the SEC has begun to take note of this, “I think this will challenge our regulatory approach.”

The question that has always existed in financial innovation is: What kind of appropriate supervision should the financial industry be subject to without harming its role in promoting social progress?

Perhaps, DeFi will finally falter in the shaking of innovation and regulation.