Challenge – Approach the limits of traditional finance.
DEFI, or decentralized financing, aims to solve several problems with which users are confronted with traditional financial systems:
Limited access: Traditional finance often excludes people due to geographic location, credit history or minimum balance requirements. DEFI, built on Blockchain technology, offers access without permission, which means that anyone with an internet connection can participate.
Lack of transparency: Traditional financial systems can be opaque, with complex cost structures and hidden costs. DEFI promotes transparency via smart contracts, which automate transactions based on predetermined rules visible on a public blockchain.
Centralized control: Traditional finance is controlled by institutions such as banks and governments. DEFI allows users to give them control of their assets. Users hold their funds in cryptographic portfolios, eliminating the need for intermediaries.
Inefficiency: Traditional financial processes can be slow and heavy, transactions taking days to settle. Defi draws blockchain technology to facilitate faster and more effective transactions.
These limitations create problems for a wide range of users:
The non -banished: Millions of people worldwide do not have access to traditional banking services. DEFI offers them a secure and alternative means of managing their finances.
Sub-Baurized users: People with limited credit history or living in areas with forced financial services can take advantage of the inclusive characteristics of DEFI.
Those who seek transparency: Users who appreciate clear and initial costs and control over their assets find the emphasis placed by DEFI on smart contracts and attractive self -sufficiency
Those frustrated by slow transactions: Defix to users who need faster and more rationalized financial transactions.
By attacking these limitations, DEFI opens a world of financial possibilities for a wider audience, promoting the financial inclusion and the empowerment of users.
Rules:
Only fully decentralized, local and downloaded fronts or full online fronts would be possible. This leaves the protocols DEFI with a choice: either to rotate a somewhat centralized “hybrid funding” model (HYFI) to comply with EU regulations or completely decentralize.
“True” DEFI is exempt from Mica: in the context of the actual EU regulations, the fully decentralized protocols are exempt from falling into the requirements of the mica, as mentioned in the recital 22:
“When crypto-active services are provided completely decentralized without any intermediary, they should not fall within the framework of this regulation.”
The immediate question raised by this section of Mica is what means precisely by “without intermediary” and “in an entirely decentralized way”?
As the Mica should be fully implemented by the end of 2024, the protocols DEFI in Europe must choose between completely decentralizing to bypass the regulations or the implementation of KYC measures similar to other centralized financial service providers.
For those who adopt decentralization, regulations such as mica in Europe will establish clearer borders. This new regulatory framework will offer more clarity on the construction of truly decentralized applications following regulatory requirements.
Many DEFI protocols will have to critically assess their operations to ensure that their platforms are truly decentralized and comply with legal standards. The DEFI sector can adopt various strategies to maintain decentralization, a key approach being the decentralization of website tips. Supporters of decentralization could soon be witnesses evolving in something more similar to traditional finance, the very sector they aimed to challenge.
DEFI must still comply to attract institutional investors:
The clears must work between the implementation of sufficient LMA procedures to attract the liquidity of the tradfi and not become a target of regulatory action.
Decentralized identities (DIDS) could transform KYC / AML compliance. However, for the DIDs to be practical, they must be universally adopted, a process that could take a long time.
Redefine implementation:
Let us discuss the difference between redo-trio deffi kY and uniswap v4 defi kyc hook.
Uniswap V4 allows specific exchange pools to introduce KYC checks:
This specific hook allows a KYC procedure. So you can add it to a swimming pool. Now, everyone who wants to participate in a swimming pool with this hook must first undergo a kYc. A KYC procedure is the “knowing your client” procedure. Among other things, this forces you to provide an official identity document issued by the government. Currently, this hook seems ideal for swimming pools compatible with us. It allows KYC or a white list application. The latter is intended for users who wish to join such a liquidity pool.
From the user’s point of view, this centralization by the supplier of liquidity pool makes it indistinguishable from CEX (centralized exchange). The whole promise of Defi is undermined!
The Redefi approach consists in using a KYC Trio Utility token. Its utility comes from the condition that if you have this utility token, your KYC has been completed. Each participant DEFI application will check the account token balance of the account when submission of the DEFI transaction. If the balance is positive – the account belongs to the user of the trio, of which the KYC was carried out in advance. There is compliance in the decentralization of financial applications. For REDEGI-everything you need is to add a simple balance request to the SMART DEFI contract.
The main distinction is that the application remains decentralized while being in conformity! DEFI is preserved and the oracles are not necessary!
DEFI operators should not ignore the importance of the compliance of the LMA. As regulations and regulatory expectations are evolving, the integration of Robust LMA / KYC measures from the start will be crucial.
