This is how regulation affects DeFi adoption

Decentralized finance (DeFi) has become one of the most important sectors in the blockchain industry. In a period of just two years we have seen how the total value locked in DeFi has increased considerably, going from $21 billion at the beginning of the year to more than 100,000 million today.

Keep in mind that DeFi represents a wide range of financial services and products. Among them are the increasingly well-known decentralized exchanges (DEX). However, despite the growth of DeFi lending products, insurance and derivatives trading, global regulation still seems far off.

Through DeFi, blockchain technology is redesigning the different financial systems around the entire planet; and for this it has built markets that, ideally, will be more transparent, secure and accessible. Financial innovation is intuitive and profitable in many cases, but it must be taken into account that institutions that have greater resources still have doubts about being part of this space. The reason is lack of regulation, which may be key to its greater adoption.

For many, compliance is the only way forward, and that, although regulation could cause some aspects to be centralized, projects would have a greater chance of surviving in the long term. However, there are others who believe that DeFi should self-regulate itself; and that in this way, it must be the community itself that is in charge of reaching an agreement to determine what is most favorable for its future. In any case, there will always be unregulated platforms that escape the inspection and control of the authorities.

Doubts about regulation

The main obstacle to overcome when applying traditional regulatory frameworks to decentralized finance is that they have actually been designed for different purposes. While the former seek stability and protect investors, they impose compliance and centralization; and DeFi is based on an operation that seeks cooperation between the participants; and to do this it resorts to the elimination of economic incentives, without intermediaries and opting for a simpler and more effective system.

Over the last few years we have encountered obvious regulation in the cryptocurrency sector; and this has served to create a greater sense of security among private investors, boosting the amount of capital that accesses the digital asset markets. The reason is that it supports innovation and stops illicit use. This makes it possible to apply it to the decentralized finance.

For its regulation, an infrastructure will have to be created to satisfy the requirements of larger institutions. Thanks to this, DeFi investments could be much more experimental. In fact, there have been financial services giants in the blockchain space.

Likewise, there are different leading companies in blockchain technology solutions, such as ConsenSys, which received more than $65 million in funding from global financial services leaders such as JPMorgan, Mastercard and UBS to seek a more complete view of the types of applications that are part of Web 3.0.

At the moment there is much to debate about this, but there are those who think that the regulation of DeFi protocols they may not be the best way to control risk; and that can even be considered to, in some way, violate the principles for which it was created.