Individual consumers and businesses are increasingly aware of the rapid development of the blockchain and cryptocurrency industry. Many people may also be familiar with the nascent decentralized finance (DeFi) ecosystem, which has grown exponentially over the past 18 months. In fact, the entire DeFi market was valued at just $ 1 billion in February 2020, but has now reached a market cap of over $ 95 billion, at the time of writing. according to to the data available.
While DeFi looks quite promising as it can enable greater financial inclusion by providing loans, borrowing, and other essential services to the unbanked, regulators are aware of the types of transactions being done in the emerging space.
U.S. Securities and Commission (SEC) Chairman Gary Gensler has called crypto and DeFi “the Wild West” due to its poorly regulated environment. There are also a lot of issues with smart contracts and the way flash loans are issued. Despite these challenges, DeFi’s skyrocketing continued into 2021, and nothing seems to discourage venture capitalists from making substantial investments in this experimental space.
Bitcoin is arguably the most notable effort when it comes to bypassing traditional financial institutions, however, the DeFi space has introduced a large number of use cases such as accessible insurance services, loans, commodity exchanges and savings accounts. These are all applications that go far beyond those outlined in the Bitcoin white paper, which only covered the implementation of a peer-to-peer electronic payment system.
Although cryptoassets were originally created as a legitimate alternative to fiat currencies, DeFi is based on the goal or mission of completely replacing the legacy financial services industry.
Changes in consumer behavior are driving increased use of digital services
As Web 3.0 and other parts of the decentralized ecosystem are increasingly adopted, many have started using DeFi platforms because they (arguably) provide better digital financial services.
The observed changes in consumer behavior, which are often linked to the COVID-19 crisis, have also led many people to engage in digital transactions. With the increased use of online or virtual platforms, people are also investing significantly more in Bitcoin (BTC), Ethereum (ETH), and other decentralized crypto-assets. These assets are no longer seen as mere speculative financial instruments, as Bitcoin begins to replace gold as a safe haven asset.
Meanwhile, DeFi developers are tasked with writing the software and then exiting the project to allow it to function without a centralized entity. These development teams say this kind of decentralization should help eliminate the need for traditional regulatory frameworks. According to many crypto industry participants, some digital currencies, like Bitcoin (BTC) and Ether (ETH) are decentralized enough to prevent them from being regulated (at least conventionally).
Growing DeFi Use Cases
DeFi is essentially an alternative set of financial products and services that harness the power of blockchain technology. DeFi platforms allow users to access modern financial services, such as lending and lending, which can be done through peer-to-peer exchanges or by directly mediating the transfer of value. This approach eliminates the need for intermediaries.
Transactions are carried out on a public blockchain (without authorization), and not by a centralized banking institution or any other central party. Real DeFi services are not custodians, by design, which means that digital assets managed on these platforms cannot be taken from parties and are in the possession of the rightful owners of the account.
DeFi is based on open source protocols and decentralized applications (dApps) are used to perform digital transactions. Smart contracts, which are a type of automated business logic, are designed to work automatically when certain criteria are met. These types of contracts are deployed using blockchain networks like Ethereum and Solana. These so-called smart contracts aim to replace the intermediary role of traditional financial institutions in a blockchain by using self-executing lines of code.
Regulation needed to ensure the development of cryptocurrency-based financial services
Cryptocurrency proponents have frowned upon early attempts to regulate the source code and underlying protocols of the software. Participants from the crypto industry noted that open source projects should be protected like free speech. However, DeFi poses significant risks to end users, which makes it essential that decentralization is delivered in a compliant manner (if possible).
Many DeFi protocols, including the most important in terms of market capitalization and adoption, have been deployed on Ethereum. DeFi’s growing user base has resulted in a dramatic increase in attacks, bugs, and network congestion.
Ethereum’s public blockchain architecture is clearly not perfect, which means there are very high transaction costs, unsuccessful transactions, and settlement issues. While these issues may resolve themselves, due to regular updates to Ethereum, there is clearly a need for appropriate legal technology or a LegalTech layer for the crypto space.
Astra Protocol: Regulation, Protection, Compliance
Smart contracts used to automate a decentralized decision-making system are a key part of all sufficiently decentralized projects. According to the developers of the Astra protocol, it is an essential part of any decentralized system, including DeFi, as it helps to build trust in the project as a secure investment.
But a regulatory protocol should be created with the aim of removing ambiguities, preventing fraudulent activity, effectively resolving disputes, while ensuring that public blockchains are secure enough for all users.
The Astra protocol has been specifically designed to give decentralized organizations an innovative way to comply with applicable guidelines and regulatory frameworks while remaining sufficiently decentralized. At a significant time when there is so much questionable activity, Astra aims to provide the confidence newcomers need to enter the crypto and blockchain industry.
Astra plans to provide the legal layer for crypto that can be plugged into any existing DeFi platform. Funds must always reach the recipient (s) securely via Astra. And if there is a problem, then the team can resolve it and return the funds in a smooth manner. Any problem can be resolved amicably with the inclusion of a conflict clause – called proof of trust – in the platform and the associated smart contract.
This approach is based on a Proof of Trust system, which is described as a built-in protection mechanism that aims to provide peace of mind in monetary transactions and contracts through an out-of-court and out-of-court dispute resolution system.
To learn more about this project, you can visit their official site.