Recently, US SEC chairman Gary Gensler remarked in an interview with finance daily The Wall Street Journal that crypto’s DeFi projects aren’t exempted from regulations because more often than not, DeFi projects are not as decentralized as they seem to be. Truth be told, he may have a point.
DeFi or Decentralized Finance refers to a system built on a decentralized public blockchain network that offers financial products and services to anyone having access to an internet connection. Users are liberated from third-party intermediaries such as banks and brokers, allowing for peer-to-peer interaction. However, is DeFi what it claims to be?
CoinDesk’s chief insights columnist David Z. Morris wrote that many crypto observers have warned that many cryptocurrency systems, and not just DeFi, are performing under the pretense of ‘Decentralization’. DeFi should be as censored and irreversible as cryptocurrencies like Bitcoin because that is the principle the networks are built on.
However, a recent example such as the Poly Network hack highlights the concentration of power over a DeFi network after a ‘centralized’ team directly influenced various decisions like offering the hacker immunity as well as a $500,000 bounty for returning the cryptos they stole.
The establishment of various non for profit foundations to manage a cryptosystem was another example given by the Coindesk columnist, which takes power from the users and gives it to a third party, that is, a foundation.
The WSJ article mentioned another example that stated the issuance of ‘governance tokens’ that give the holders the authority to vote on a platform’s decisions. That is, anyhow, hardly what happens. They took into account the Blockchain Credit Partners case where the company issued governance tokens but were managed by just two men.
Thus, Chairman Gary Gensler noted that the term DeFi is a little misinformed and said:
“There’s still a core group of folks that are not only writing the software, like the open-source software, but they often have governance and fees. There’s some incentive structure for those promoters and sponsors in the middle of this.”
A truly decentralized system stands as a solely “code-based, open-source platform run by a community rather than a committee”. Developers have the responsibility to design and maintain a DeFi system, but returning the profits to themselves could shake the very foundations of DeFi.