The crypto room is an incredible, albeit risky, learning environment. Its volatility is a terrible warning to those looking to test how deep the pool is by jumping upside down. Old guards are constantly warning newcomers, “Take it slow, learn the basics, and stack sats.” Wealth in this space can appear and disappear instantly.
In 2018, many newcomers got their first taste of what a crypto winter feels like. This wasn’t the first time Bitcoin (BTC) crashed, and it won’t be the last.
Although the crypto space has been around for more than 10 years, it is still in its infancy. Technology is advancing so quickly that every year we can experiment with new concepts, new ideas, new uses, and new ways to change the face of the world.
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We also face challenges as bad actors find new ways to scam people of their hard earned cash and with new untested projects that capture value but are very prone to errors, bugs, and exploits. Decentralized funding falls under these new experiments. It promises exciting new financing and investment opportunities, often with disastrous results.
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As more and more traditional companies like Square and PayPal turn to crypto, we have the opportunity to face this challenge. It is up to those who know the space, understand its core values and want it to become much more than a well-kept secret. This is a call to action.
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What would a compliant DeFi look like?
Let’s start with the definition of “compliance”. This means not only that the project complies with anti-money laundering regulations, it also means that it meets quality and trust standards. This means that DeFi projects should be improved in terms of safety, quality, user responsiveness, and regulatory compliance. Simply put, DeFi projects should ensure resilience.
Let me be clear: this is not an argument for apportioning blame and liability for losses – these are decentralized projects, not financial institutions, after all – but there are billions of dollars piled on DeFi projects and this is should matter.
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Our goal should be to increase the number of users – i.e. H. Promote mass adoption – and attract traditional markets and nontechnical investors. We should aim to bring blockchain and the benefits of DeFi to society. In times when governments are floating bonds with negative interest rates and turning on the money printing machine, people need better solutions to preserve their wealth. Better still, people should be able to grow financially regardless of the central bank that rules a particular currency or determines monetary policy.
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What actions could DeFi projects and the entire space take to become more competitive and attractive to a wider customer base? Let’s start with the basics:
Addresses on the whitelist. A list of items / IP addresses that will be given access to a particular system or protocol after receiving initial validation. In the case of DeFi, we might have one or two trusted anchors that could validate an address and do Know Your Customer’s due diligence for the user. Once the user has been validated, all other projects within the same trust channel, i.e. a group of Virtual Asset Service Providers or VASPs who have agreed to follow the same rules and work together within a well-defined platform, can give that user access to products and Services without having to repeat the entire KYC process.
This has two advantages: the user only shows private documents to one or two entities, which reduces the surface area for potential data hacking, and the VASPs can access a larger pool of users without incurring compliance costs. Such a system could also enable individuals and businesses geopolitically excluded from traditional banking, savings and trading ecosystems to invest in high yield products, alternatives to credit and high yield accounts. DeFi is an alternative for these citizens and business owners to save, earn, and transact.
AML and GDPR compliant systems. The institutional capital markets are strictly regulated and monitored by local and international regulators. The aim is to prevent money laundering and the financing of terrorist operations. With an attestation framework, projects can review and comply with existing AML regulations and attract institutional capital while protecting user privacy by eliminating the need to make copies of their personal data.
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Validated code bases and third-party certifications. There are many blockchain projects out there that have not been built under acceptable minimum standards and it is difficult for any user to go through the code base and verify that the code is doing what it is supposed to do. Having third-party validators go through the code and validate its integrity, functionality, and reliability raises the bar, making these projects more competitive and secure for investors.
Insurance. This is a relatively new area in the blockchain, but there are projects that address risk management through decentralized insurance. Insured projects can appeal to a wider audience willing to take on more market risk and less safety risk.
Limits and safety margins. The construction of guard rails and layered safety measures give users the ability to increase or decrease their risk tolerance threshold. In addition, projects can limit their losses in the event that a negative event affects them – for example, investment and withdrawal limits.
The right to vote is the way to go
I firmly believe that individuals should be free to choose whether to risk their assets on untested projects, volatile investments and cutting edge technology. We shouldn’t have to rely on governments to tell us where, how much and when to invest. It is ridiculous that a person can spend thousands of dollars on lottery tickets but cannot invest the same amount of money in venture capital projects without having to overcome massive regulatory or bureaucratic hurdles.
This is why optionality becomes so important: it allows project developers to do what they do best and users to become the main driver in project evolution. The less credible a project is – especially compared to, for example, compliant, audited projects – the less capital and user base flow into the project. These are market forces that are allowed to move freely.
It is also important to make it clear that competition in our field takes place at different levels. Some require collaboration, some don’t. The overall goal is not to build the project that will win the short term war, but to build an industry that will change everyone’s lives for the better, along with the way we do finances and wealth management – how everyone accesses them, without unnecessary third parties or unbridled knee jerk regulation. This is an infinite game.
The views, thoughts, and opinions expressed here are the sole rights of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Juan Aja Aguinaco is an entrepreneur, startup consultant and co-founder of Shyft Network Inc. Previously, Juan was Chief Operating Officer of Decentral, one of Canada’s most influential blockchain innovation centers. Before moving to Canada, he was the vice president and legal advisor of a Mexico City-based oil and gas company. Juan holds a Bachelor of Laws from the Universidad Iberoamericana and an MBA from the Schulich School of Business.