DeFi continues to capture the imagination of the cryptocurrency space and is still purported to be the next hot topic to drive adoption and use case of crypto and blockchain. However, the manner in which it is growing is so far not sustainable — albeit still a small niche — and it bears a scary resemblance to the ICO boom.
Ultimately, the ICO craze that took hold of the crypto space through 2017 and 2018 caused massive waves of volatility and huge chances for people to get rich, but what ultimately killed it off was regulators starting to take note of the growing space.
As things stand, regulators have been certainly keeping an eye on the cryptocurrency space as they are aware of the need for control, but also are aware of the potential this space holds and are not trying to stifle it. In the case of the DeFi space, it is still too small for regulators to properly jump in, but if they did, they would probably see a lot they don’t like.
Donna Redel a former chairman of COMEX, a board member of New York Angels and an Adjunct Professor of Law at Fordham Law School, and Olta Andoni an Adjunct Professor at Chicago-Kent College of Law and Of Counsel at Zlatkin Wong, LLP. recently expressed in an article on Coindesk that in the absence of regulation, there needs to be self-regulation — and that is also missing.
The way that DeFi is being exploited rather than nurtured to grow in a way that would appease regulators should they step in, is indeed worrying.
“We believe that, at a minimum, the industry needs self-regulation. Without it, it is on a trajectory to serious regulatory scrutiny and reputational risk,” Redel and Andoni said. We are not the only ones to express concern about DeFi. Vitalik Buterin tweeted Aug. 14:
Also, Robert Leshner, the founder of Compound, a leading DeFi project, said of the yield farming craze recently:
Just like in the ICO craze days, the notion is sound and the arena in which these projects operate makes sense and has potential, but ICO and DeFi have room for greed and bad practice to set in.
“There are certainly similarities: trading frenzy; projects emerging with little or no testing and without audit; no clear regulatory guidance and the recycling of ETH now leading to inflated gas prices. Are we on the precipice of one of the regulatory agencies waking up and sending a missive similar to The Dao Report?,” The Coindesk article added.
The real concern is that if DeFi rises to a point where it is a viable avenue for the use of cryptocurrency it is going to attract regulators — especially being finance-based. However, if the foundation for the growth of DeFi is on greed and poor practices, these issues are going to shine first.
Regulators will be quick to stamp out and cripple any proactices in the financial space that can cause possible harm, and get-rich-quick type of ecosystems are usually chopped down upon hard. Some projects grabbing the headlines as it stands, like YAM and Spaghetti.Money, are big red flags for regulators and they can be the ones who stop DeFi and its potential in its tracks.