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Decentralized finance or DeFi is the latest crypto buzzword. People are really liking the idea of lending and borrowing activity without the intervention of any third party or custodian. Being your own bank is easy nowadays with the help of DeFi. New protocols are appearing every day to manage your own finance autonomously. ‘Yield farming’ was an unknown term even some time back and now DeFi farmers are cultivating high yield crops on the blockchain. Technology really changes very fast and innovation is a key feature of blockchain technology. The whole DeFi ecosystem is being run by smart contracts. These smart contracts are financial robots. We are witnessing the next generation financial revolution in the making.
Understanding the risks of DeFi
DeFi is really rocking now! But there are inherent risks associated with the movement. Smart contract failure, hacks, absence of insurance, frauds are big problems here. Every day a new DeFi platform and token appear with a promise to give you a better yield. It is true that DeFi has really evolved after the establishment of smart contract audits and peer reviews as informal rules but still hacks and frauds happen. Many anonymous DeFi projects are attracting high TVL today. Autonomous DAO may sound good on paper but you never know who runs the platform and how it gets operated. Many DAPPs may not be really decentralized due to the high level of control obtained by a few developers. People are jubilant with the internal governance but there is no link between the internal governance and the external regulations. Janet Yellen, the US Treasury Secretary nominee, recently commented that: “I think we need to look closely at how to encourage their use for legitimate activities while curtailing their use for malign and illegal activities… If confirmed, I intend to work closely with the Federal Reserve Board and the other federal banking and securities regulators on how to implement an effective regulatory framework for these and other fintech innovations.” Andrew Bailey, the Governor of the British central bank, also shared similar concerns. He told the World Economic Forum that digital currency projects would have to go through different governance models required for a ‘lasting digital economy’.
What about mainstream capital?
DeFi TVL is growing at an astounding rate but there is no secure industry standard. It does not address any regulatory issue and thus it is inaccessible by the institutional investors. The stance of governments is also unpredictable. Will mainstream capital flow into DeFi in absence of any clear framework regarding adherence of legal parameters? Not really! Brendan Blumer, co-founder and CEO of Block.one first used the term ‘ProFi’ as an answer to counter the problems.
WTF is ‘ProFi’?
‘ProFi’ is programmable open source finance. ProFi is Block.one’s future vision and it will bring mutual integration of traditional finance and crypto ecosystems. ProFi will be the descendent of DeFi but most probably there is a long way to go before we see something concrete. DeFi aims to create a parallel financial channel but ProFi will aim harmonious integration of traditional finance into the blockchain. The vision seems to be a bit similar to the vision of Ripple or Stellar. Working with a regulatory framework is extremely cumbersome and time-consuming but Block.one is going to obtain this difficult strategy! Brendan said in one of his tweets that: “Organizations that commit to a high degree of compliance are optimistically viewed by some as 'playing the long game', and seen as 'slow' by others; it really does create distinct buckets of how different businesses in the space approach opportunity.”
Let’s play the guessing game
ProFi will be pro-regulatory but how will it be offered? It is really too early to guess. Block.one is maintaining secrecy regarding their project. The huge BTC holding of the company is going to play a pivotal role in this. In this tweet, Brendan said that “B1 is building products designed to leverage our Bitcoin as more than just a store of value, and we have accumulated well beyond our previously announced 140,000 BTC position.” The EOS investors are a bit dissatisfied with Block.one building BTC portfolio but the company built EOSIO software that helped to run not only EOS but also some other blockchains like Telos, WAX etc. Yes, Block.one and EOS are bound to remain very much linked always. Let’s not forget that the company raised $4 billion through EOS ICO and they are the second biggest EOS whale till now. How will ProFi bring value to EOS? EOS can act as a layer2 scaling solution for Bitcoin by wrapping methods on its fast and scalable blockchain.
Bitcoin’s lightning network is not a great success but Bitcoin has started to do well on other blockchains in tokenized form. Wrapped BTC is the number one asset of Ethereum DeFi. Tokenization of assets offers a viable business proposition. Block.one must be trying to capitalise on that opportunity as the motto of the company is to take part in diversified businesses (they are already trying to challenge Facebook by launching Voice). Permissioned access, regulation and compliance to the law of the land! ProFi will bring all these and the outcome will be interesting to watch due to its striking difference with DeFi. The success of DeFi signifies that popular innovations can continue to happen in the field of financial services. Is there any harm in bringing market integrity and consumer protection for broader adoption?
Note: This post was first published here for Cryptowriter in association with voice.com.
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