There is now a battle between centralized finance and DeFi in the blockchain industry. DeFi's idealists insist on providing specific functions in the financial sector in a completely decentralized, different currency-linked, and trader-anonymous way. However, I believe that the insistence on doing financial business in this way cannot be done, and can only be limited to a small market on the edge. If DeFi is to be the most effective in the market, it must meet the basic requirements of financial market regulation, and gradually use it for compliant financial institutions, so that it can be truly applied to real financial activities.
Before discussing why DeFi must be compliant, it is first necessary to clarify a basic concept. The difference between centralized finance and DeFi is not black and white, and competition is either one or the other. The difference between centralized finance and DeFi is actually in a continuum of patterns. The existing mainstream centralization finance is at one end of this continuum, with full DeFi at the other end of the continuum. The most typical representative of DeFi is bitcoin. But even Bitcoin is not 100% fully decentralized to run automatically. After all, there are some core developers who have mastered the bitcoin code upgrade. The DeFi project after Bitcoin is trying to develop DeFi applications in the way of bitcoin. However, just a simple analysis will reveal that the factors of human management in the existing DeFi projects in the market are still very heavy. Even with so-called community voting decisions, voting tokens are still in the minority. So now the DeFi projects in the market are decentralized, and actually there is no more than Bitcoin. In addition, this pursuit is neither necessary nor difficult to grow into a solution that is generally accepted in the market.
First of all, this model of DeFi is not a brand new model. This model has been widely accepted in the market and a consensus has been reached that this model will bring about fundamental changes in the financial industry. This is completely different from the original situation of Bitcoin. Since its appearance in early 2009, Bitcoin has been considered a geek toy and has little value. This situation has continued to develop into 2016. It can be said that the emergence of R3 is a sign of the financial industry's true recognition of the application value of blockchain and distributed finance. So it can be said that Bitcoin has been developed on its own for 7 years and can therefore build a strong user base. But in the current era, as all parties in the market are fully aware of the value of DeFi, they are trying to replicate the success of the Bitcoin model. This has led to a more intense competition for DeFi projects in every segment. With the support of capital, a dedicated development team is developing applications in every financial segment. Every project strives to bring products to market in the shortest possible time. Therefore, every project will not be as luxurious as Bitcoin. In the absence of competition, it will be promoted in the market alone for six or seven years.
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The second factor limiting the development of the DeFi project is that the volume of existing encrypted digital assets is too small. The DeFi project is just focused on encrypting financial business between digital assets. This aspect is its advantage, on the one hand it is also its great disadvantage. The advantage is that it does not involve financial services based on legal currency, so it can develop freely without any relevant regulatory restrictions. It can develop various types of financial applications within the scope of today's accepted encrypted digital currency, applying the encrypted digital currency to actually test the feasibility of these applications. After such testing by the market, it is possible to actually extend this application to a wider range of financial sectors. However, if the DeFi product is only limited to the current range of encrypted digital currency, the volume of the existing encrypted digital currency market will certainly limit the development of these applications.
The biggest factor limiting the development of DeFi is regulatory restrictions. In order to protect the interests of investors and protect the stability of financial markets, any financial supervisory jurisdiction has certain basic requirements, such as the true identity of financial participants, the true and comprehensive disclosure of some financial information, and the clear and independent functions of professional institutions. Operating and so on. If the DeFi project does not meet these basic requirements of financial market regulation (not to mention the more regulatory requirements of different jurisdictions), then such a DeFi project will be difficult to promote and apply within the scope of financial regulation. Since most of the funds and assets in real financial activities are within the jurisdiction of the regulatory body and the financial institutions, these DeFi projects cannot reach most of the funds and assets in society, so they cannot It has been promoted and applied in the market. In addition, some projects cannot be started because of non-compliance, not to mention the later promotion. A more regrettable case in this regard is the Basis Stabilization Coin Project. Although the project received very positive support from the market, it was forced to suspend because its bond-type tokens needed to operate in accordance with the US financial regulatory system.
Even without regulatory restrictions, human decision-making and manual operations are still required in most application scenarios. For example, in the margin financing and securities lending business on an exchange, DeFi can allow more people to participate in the provision of securities or funds for margin financing and securities lending business. This can reduce the role of brokers in this business, so that both parties to the margin financing and securities lending can get more benefits. However, for a long time to come, it is still necessary to artificially determine the interest rate of margin financing and make timely adjustments, just as MakeDAO has done recently. In addition, a more friendly, centralized system-based interface is needed to provide a better experience for both parties to margin financing.
In order to get real application promotion, DeFi will start with a fully decentralized, digital asset-based approach, with some modifications to meet regulatory specific requirements and to integrate with some of the existing centralized systems. To provide a truly viable solution to the market. The most typical example of this is the Corda of R3. Corda is a product developed under the "inspirement of blockchain technology." It is not the bottom of a typical blockchain technology, but it meets the data privacy requirements of regulatory and financial institutions, and can meet the financial requirements of financial institutions more than existing centralized systems. So the digital stock exchange SDX under Swiss supervision chose Corda after evaluating all the blockchain technologies in the market. In addition, the technical underlying estimates of several stable currencies in Japan are also based on Corda. The volume of these Corda-based financial applications that can support the running of digital currencies and digital assets is thus visible.
Therefore, in combination with all of the above considerations, the best DeFi solution must be somewhere in the middle of this model continuum, and under the premise of compliance, the full advantage of DeFi and centralized systems can be fully utilized. Such a solution can be widely promoted in the market.
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