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21st August 2021 > > Decentralised Finance.


Decentralised Finance (DeFi) is often not decentralised at all.

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As Martin correctly pointed out yesterday’s daily gain for the price of BTC was +$2,700 not -$2,700. I do get embarrassed by my typos but - putting aside my personal concerns and vulnerabilities - the key issue to focus on is that we are now $4,700 higher than just 2 days ago. Nice.

I will leave it to Larry to tell us whether this is sustainable or not from a techie point of view.

Curious Cryptos’ Commentary – Regulation and Decentralised Finance (DeFi)

The inevitable and highly welcome march of regulation, led for now at least by the US, has turned its sights onto the arena of DeFi.

It seems to me that even the most casual of observers with only a passing interest in the crypto world could not have failed to notice that DeFi is often not really decentralised at all. For sure, elements look fully decentralised, but the on-ramp to those elements are often highly centralised.

If you are not convinced, let us look at two clear examples.

First up, and initially a topic seen in the CCC on 30th July 2021, is Uniswap, one of the original decentralised exchanges (DEX). In response to the concerns of Gary Gensler, Chair of the SEC, about tokenised stocks on Uniswap, the Uniswap Foundation announced that all tokenised stocks would be removed from the DEX. As the CCC explained at the time:

"… Uniswap announced the delisting of hundreds of tokens, suggesting that far from being decentralised, it actually acts in much the same way as any other exchange.

"Uniswap have “clarified” this situation by stating that the Uniswap Protocol – which acts as the medium for token exchange – is fully decentralised, but that the Uniswap Interface – which is how one interacts with the protocol – is an open source yet centralised piece of software.

"That sounds like hair splitting to me.”

A second example is the phenomenon known as CryptoKitties. These non-fungible tokens (NFTs) are not only digital works of art, but also provide utility in the form of being able to breed your CryptoKitties alongside other gaming type events.

In principle it looks like these NFTs are decentralised, but again the gateway to any of the features other than simply as a digital representation of art, is highly centralised.

In practise there is no decentralisation in CryptoKitties at all. The very first line of code allows for three predetermined public addresses (presumably owned by the creators of CryptoKitties) to pause the code at any time. That fact immediately destroys any pretence of decentralisation.

So next time someone claims that CryptoKitties is decentralised, you can put them right straight away.

Back to the main point.

Gary Gensler, the man leading the regulatory charge despite some recent missteps (see CCC 13th August 2021 and his ham-fisted attempt to hand some responsibility to the Commodities and Futures Trading Commission) has publicly stated what is now obvious – that many DeFi projects are centralised:

“These so-called decentralized finance platforms actually have a lot of centralization. There’s a group of entrepreneurs that are running these platforms. They should come in and to that extent work with us and get registered.”

Crypto Mum, SEC Commissioner Hester Pierce, makes the point plain:

“If you want to be decentralized, you really need to be decentralized, and that is going to then put you in a different category from the perspective of regulators because that’s just not something that we’ve dealt with before.”

Any project that is truly DeFi cannot be regulated.

Any project that has a smidgeon of centralisation can and will be regulated, because of the pressure the SEC can bring to bear on individuals.

This is all very good news.

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