Why Regulated DeFi Protocols And Stablecoins Are The Next Conquerable Frontier

The Terra/Luna debacle does not signal the crash of crypto; it does signal the urgent need for compliant DeFi protocols and stablecoins. Many people will claim crypto is crashing whenever a bear market occurs. The native volatility of this industry can lead to wild price swings in either direction, increasing demand for some degree of consumer protection. That same protection may need to apply to decentralized finance, as compliant protocols, products, and services are needed in the wake of the Terra/Luna debacle.

There Is No Crypto Crash

Financial markets will always go up and down in value. Stock markets do so, as do foreign exchange pairs and cryptocurrencies. One differentiating factor is how crypto markets are accessible 24/7, and trading can not be stopped if extreme volatility occurs, unlike with stock markets. It is a free market, and traders will drive prices in whichever direction they deem more feasible. 

The recent bear market, which saw crypto assets shed over 50% of their all-time high values in the past 12 months, is not a sign of a crypto crash. It does show there is increasing volatility for various reasons. Overarching financial and macroeconomic events have not aided the market. Nor has the recent Terra/Luna collapse, even though such incidents are relatively rare. Moreover, the destruction of that ecosystem is due to fatal flaws in the UST stablecoin design, which dragged everything down with it.

Designing an algorithmic stablecoin and backing it up with unsustainable mechanics will ultimately trigger a collapse. Additionally, the Terra team offered little transparency regarding UST’s inner workings until it was too late. Investors who banked big on Terra and Luna were unable to properly assess the risks they were taking and paid a steep price for it. Thankfully, the market is slowly putting the incident behind it and seeks to establish higher price levels.

One may wonder whether the Terra/Luna/UST incident could have been avoided. A proper regulatory framework would certainly help, although such rules do not exist yet. Anyone can create a blockchain-based token and claim it will do X, Y, or Z. However, they face little repercussions if things don’t pan out and people lose hard-earned money. The need for regulatory-compliant DeFi protocols, products, and services has never resounded louder than today.

Properly Regulation Decentralized Finance

Given the lack of transparency surrounding UST – and its effect on Terra and Luna – there must be some proper industry standards for all stablecoins. For currencies backed by physical reserves, companies need to segregate customer and company funds, which most issuers do already. Additionally, they should ensure protection up to a certain amount and guarantee conversion between said stablecoin and fiat currencies at all times. Specific regulatory requirements exist for all types of financial providers, and stablecoin issuers should fall in the same category.

However, things are different where algorithmic stablecoins are concerned. Unlike fiat-backed assets, algorithmic stablecoins are often backed by code, algorithms, and volatile cryptocurrencies. The concept makes tremendous sense, but it is complicated to keep a peg to $1 when the underlying asset – be it bitcoin, Luna, or anything else – sheds over 20% of its value in mere hours. It isn’t possible to maintain stability without stable reserves, unfortunately.

Thankfully, the industry is aware things need to change. With the help of outfits like Phree, it becomes easier to address the lack of regulation, security, and accountability. Not just for protocols in the DeFi industry today or tomorrow but also TradFi companies exploring decentralized finance opportunities. With Phree, any team or developer can build solutions in a compliant environment where one can follow the rules by default instead of worrying about these things later on.

The idea of providing “compliant DeFi as a service” makes for an appealing venture. It bridges the gap between traditional and decentralized finance while providing much-needed consumer protection and improved transparency. Moreover, Phree works with Web3 Foundation, Parity Technologies, Mastercard APAC, and PwC Switzerland to bring more regulatory compliance to DeFi. Ongoing engagement with Swiss regulators will help establish a compliant baseline, and its end-to-end Enterprise Risk Management framework will offer additional peace of mind. 

What Will The Future Hold?

The potential decentralized finance represents cannot be underestimated. However, one must acknowledge the biggest opportunities for DeFi may not necessarily come from within the crypto and blockchain ecosystem. Instead, one can find the true liquidity in TradFi and the companies willing to build decentralized finance solutions. That can only occur when regulatory compliance is the norm rather than an exception. 

Incorporating regulation into DeFi will take a good while, but it is good to see solutions like Phree tackle this concept through an accessible approach. Compliance will prove necessary to onboard the next billion people to decentralized finance, and regulated white-label solutions can play a significant role in these proceedings.