Disclaimer: This article is intended to convey more market information and does not constitute any investment advice. The article only represents the author's views and does not represent the official position of MarsBit.
Editor: Remember to follow
Source: Paul Brody, Rodney Ramcharan
Original title: There’s No Future for DeFi Without Regulation
Today I want to tell you something that may be beyond your expectations: Today’s blockchain era is actually the second experiment of decentralized finance (DeFi). Long before the advent of blockchain, the United States was the last country among the major industrial countries to establish central bank . The Federal Reserve System was founded in 1913, more than a century later than the founding of Bank of England, and most European countries already had their own central banks at that time. Even though there are so many precedents, after experiencing a series of financial crises, the establishment of the Federal Reserve has still gone through a lot of hardships.
Before the founding of the Federal Reserve, the US banking industry operated very much like the current DeFi: it had the characteristics of the "Wild of the West" era, with almost no supervision and no lender of last resort. Therefore, the crisis in one bank may soon spread to other banks. Subsequently, a high-leverage short operation made the establishment of the Federal Reserve possible, which led to the collapse of financing company Knickerbocker Trust due to insufficient liquidity. Nick Bock's collapse has led to a wider stock market plunge and a wave of bank runs.
Like in 1913, the role and role of regulators have not been welcomed by the market. The arguments at the time were the same as they are now: the banking crisis hurt the market, but they were a form of market normative and conditioning, and the crypto ecosystem needed stricter normative standards due to the lack of central banks.
People think cryptocurrencies are better than 19th century banks. The extremely high transparency brought by blockchain technology allows people to clearly know which funds and companies are operating in what risky operations, or are at risk. However, the following four factors are superimposed, making it difficult to form a transparent, disciplined and standardized market.
Four factors
First, many companies and protocols have begun mixing on-chain DeFi with off-chain unregulated centralized finance (CeFi) models. It is obvious that you can use traceable, clear and transparent on-chain technology to discipline assets, but you will eventually store unknown off-chain assets, and finally the assets are transferred to multiple owners. If an asset is on the chain, others can see it. However, if the same assets are pledged off-chain, a company's liabilities may be far beyond what people can determine through on-chain data.
Therefore, if the company does not share this information, evaluation based on on-chain data will be dangerous and incomplete. Some of them must be total fraud. Because they fail to isolate funds or supervise their own processes. It may take several months before we can report it comprehensively, and what we will eventually get may be some "bankruptcy" incidents with huge scale adjustments.
"The mature development of DeFi is crucial because it is related to the future of the banking industry."
Secondly, transparency has its limitations. It is a good thing that end users can understand fully decentralized and on-chain systems. This does not mean that users really understand what they are investing in? Or how to conduct a risk assessment. Only a small percentage of cryptocurrency buyers have the technical knowledge to fully understand the most complex DeFi protocols. In short, like traditional banking, users or depositors are dispersed and lack regulatory expertise to truly and adequately restrain these institutions.
Most users not only do not have the ability to understand the protocol, but also cannot achieve the "transfer to value" without effective on-chain and off-chain financial service benchmarks and other standards. Banks must comply with the liquidity and capital value standards set by regulators and publish test results.
Finally, the market is not rational in the short term.In the first part of the early 2021 cycle, speculative frenzy drove up all projects, and then plunged in November 2021, and despair caused people to quickly settle in the plunge, which lasted until most of 2022. Over time, rationality may prevail, but at present, investors often do not act rationally. DeFi's automation and connectivity may also accelerate the spread of panic.
Indeed, some well-managed DeFi protocols have survived this worst period of the crypto winter and have suffered little damage, MakerDAO is a good example. Maker—a DeFi lending system that issues DAI stablecoins—just briefly decoupled from the dollar and quickly recovered. Another type of good-performing company is CeFi, which focuses on the long term and actively demonstrates goodwill to regulators and auditors . Receiving support from the "big four" audit firms or listing on US stock exchange is a powerful incentive for these companies. The mature development of
DeFi is crucial because it is related to the future of the banking industry. Compared with other industry issues, the banking crisis has caused much more systemic damage to the economy. The purpose of the financial system is (or should be) to direct capital to enterprises that make investments, drive productivity and economic growth. And when this purpose cannot be achieved, the entire economy will be affected. The US banking crisis in 1907 caused industrial output to fall by 11% and imports to fall by 26%. This is roughly the same level as the decline during the 2008 global financial crisis.
Although the impact of the financial crisis may not have changed much before and after the establishment of the Federal Reserve, the frequency of occurrence has changed. In the 19th century, there were banking crises and panics in the United States in 1819, 1837, 1857, 1873, 1884, 1893 and 1896, and almost every time it caused an economic recession. However, in the 20th century, we only experienced one major crisis—the Great Depression. By the 21st century, we have also experienced a major crisis, namely the global financial crisis, which has a much smaller impact than the Great Depression, thanks to the visionary vision of the then Federal Reserve Chairman Ben Bernanke.
For the blockchain business ecosystem, the lessons of history are right in front of you: if you do not accept regulatory compliance, no insurance model guaranteed by the government, and legal currency based on professional central bank , the crypto industry will have no future. Even the best-run company will experience major crises due to poor risk resistance and will eventually be eliminated by the market. Without the above conditions, DeFi will not have a real future.
Editor in charge: Kate
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