Rebuking our belief in the centuries-old traditional financial ecosystem, we are now at the brink of accepting the new decentralized finance ecosystem open-heartedly. We are moving towards a more democratic approach to handling our finances overcoming the lapses and complexities of the traditional models. While we are embracing disruptive blockchain technology, it is still at a nascent stage, and consistent up-gradations and innovations are in progress to make it more competitive.
As we observe, traditional primary markets have always been under the dominance of the big market players, and other end investors were never involved in the primary markets. Moreover, the dependency of the small investors on the large capital investors often had put them at risk of losing their assets.
The decentralized world is building a new hope for a more autonomous financial environment where every small investor will have more financial freedom and transparency than ever. The DeFi model is based on blockchain technology and more specifically on smart contracts. DeFi offers financial services such as borrowing, lending, or trading without third-party interference, faster than ever at low cost.
While entering into this groundbreaking liberal ecosystem consisting of multi-asset digital marketplaces, it’s high time to reform the market structure and regulatory framework.
Risks Involved in Embracing DeFi
DeFi is coming up with immense potentiality and assurances but while embracing it at this nascent phase, it also involves multiple risks. Security breaches, frauds, smart contract failure, no insurance protection makes it highly vulnerable for investors. Fundamentally, DeFi offers concrete security with smart contract audits and informal rules but still, it is vulnerable to hacks and frauds. Also, the anonymity of the people involved has its advantages as well as disadvantages. Several DApps are being controlled by their developers or more importantly, there is no synchronization between the internally governed DApps and the external regulations imposed.
While shifting our focus towards this newly emerging multi-asset digital marketplace, we thus need to restructure the models of markets and regulations. Currently, a global population of 1.7 billion people doesn’t have access to traditional financial services. So decentralized finance seems promising to achieve financial inclusion of these people. But certain technical and financial threats loom over this domain.
Several fintech experts believe the very idea of complete decentralization of finances might not be achieved with the existing loopholes in this concept. Let’s have a look at the probable risks involved in the DeFi system.
Risks involved in DeFi Ecosystem
Smart Contract Risk (45%) can occur through bugs and errors delivering unforeseen results
Financial Threat through Collaterals (20%) because of the volatile nature of the digital assets.
Current Incentivized Liquidity process risk (10%) with varying interest rates does not guarantee absolute liquidity of the assets.
Risk in Centralization (12%) involves the threat through the admin keys where protocol developers can alter various parameters in the smart contracts including interest rates, oracles, etc.
Oracle Centralization (12.5%) – whether centralized or decentralized oracles can be manipulated more or less. While centralized Oracles can be manipulated easily, decentralized oracles tend to reflect faulty market values for the assets, which eventually can cause losses to the users.
New Market Venues
Along with the traditional marketplaces such as stock exchanges or commodity exchanges, we are witnessing a new set of DEX trading platforms where trading is done with multiple assets. Tokenized forms of anything and everything can be exchanged irrespective of their functions and characteristics. It is noteworthy that our traditional market structure involves intermediaries to facilitate the operations.
Considering the changing parameters of markets, the global community of economic thought leaders and decision-makers is coming to a consensus that the upcoming digital projects should have a different governance model to facilitate the future digital economy.
Also, the policymakers should understand this new paradigm and restructure the policies and regulatory framework by harmonizing the traditional setups with the emerging new crypto ecosystem. And to facilitate the new eco-model, innovative intermediary ventures will be required to cater to the new unification.
The Barrier for Capital Flow from Institutional Investors
DeFi projects are growing exuberantly with monumental growth in terms of Total Value Locked (TVL). But due to the ambiguity of industrial standards and regulations, institutional funds are not flowing into this industry so far. Mutual incorporation between the crypto industry and the traditional financial resources will soon be in demand. But owing to the uncertainties and inadequate regulatory structure by the Governments, mainstream investors are reluctant to enter this sector.
Some enterprises have been trying to resolve this issue and Block.one is ahead of them. In November 2020, Brendan Blumer, CEO and co-founder of Block.one, had tweeted about their unique upcoming project ProFi.
The innovation in the #DeFi space is revolutionary, but the recent guidance of global regulators regarding its lack of compliance controls makes it difficult for mainstream capital to access the opportunity.
— Brendan Blumer (@BrendanBlumer) November 10, 2020
ProFi or “Open Source Programmable Finance” is the brainchild of top DApp developing firm Block.one that implies an innovative financial solution ahead of DeFi. ProFi will supposedly function as an intermediate channel between the public blockchain of the Block.one and the regulated financial external world delivering the best crucial security verification standards. ProFi claims to integrate the transparency of blockchain governance with the external regulatory framework ensuring authentication with full data integrity.
ProFi proposes an innovative core approach towards the world of centralized finance overcoming loopholes in the DeFi. It aims to integrate the risky permitted access to transactions validating them with regulations and compliance.
ProFi could be envisioned as a descendant of the DeFi with a core difference in the approach. While DeFi intends to create a parallel financial ecosystem, ProFi aims to connect traditional financial resources to the benefits of blockchain.
As governments are in the mode of shaping up policies in this sphere, long-term institutional players can sustain only by addressing the professional and regulatory requirements.
Block.one CEO Blumer believes that though the compliance with regulatory framework is cumbersome and time-consuming the digital assets enterprises will have to be part of it for long-term business.
How ProFi Will Operate?
The EOS blockchain from the Block.one is an open-source operating system aiming to build decentralized applications (dApps) for the masses. EOS has a robust innovation ecosystem to take the DeFi to another level.
Block.one claims to dominate the markets with its innovative solution but as of now, apart from CEO Blumer’s tweets, the very idea is highly guarded and kept under wraps. But in the forthcoming months, more clarifications are being expected from the firm.
In Blumer’s words:
“Compliant programmable open-source finance will completely disrupt the mess of our legacy financial system, drive value back to asset holders, and greatly empower us all by eliminating layers that currently tax our time, money, and freedom.”
In the last couple of years, the company has managed to raise $4 billion through the ECO ICO project. The company has been subjected to various lawsuits along with the latest $24 million penalties imposed by the Securities and Exchange Commission (SEC) for selling unregistered ICOs. It well defines their focus on building a financial DApp complying with government regulations bringing more transparency and efficiency.
Bitcoin Role in ProFi
Block.one has an impressive Bitcoin portfolio with more than 140,000 BTC in its treasury. As per the indications, Bitcoin will play a crucial role in this project more than just a store of value. EOS can be utilized as a layer 2 scaling solution for Bitcoin wrapping methods. Tokenization of BTC can be a feasible business approach as it is a topmost asset of Ethereum DeFi.
Bitcoin’s lightning network has not gained much traction so far, but tokenization of Bitcoin can become a successful business proposition. Block.one with its unique approach towards mass appealing projects can surely pave its path into mainstream adoption through ProFi.
The future could be ahead of DeFi with Compliant Open Source Programmable Finance.