The main face of cryptocurrency Cardano (ADA) Charles Hoskinson believes that decentralized financing (DeFi) is in a bubble. However, this does not necessarily have to be detrimental.
Defi is a term for decentralized financing, which brings together financial products and services that are based on blockchain technology and do not require an intermediary to use them. Market participants, ie buyers, sellers, creditors and debtors in such a system, communicate directly with each other.
DeFi differs from the traditional financial system in that it has no brokers or banks to include and supervise the entire trading process. Part of their work is the use of government-issued IDs or other documents that require market participants to allow them to participate in it at all.
Defi is therefore accessible to anyone, unlike the traditional market. Interest in it began to rise significantly from the summer of 2020, especially through DeFi projects built on the Ethereum blockchain, in which are now locked tens of billions of dollars. However, competing blockchains such as Binance Smart Chain, Solana or Terra are already experiencing their defiance, while the first successful DeFi is awaited in the case of Cardano or Polkadot.
Regulation can slow down DeFi
However, regulation can be a problem for defi. The new head of the US Securities and Exchange Commission (SEC), Gary Gensler, recently pointed out that the defi is far from being as decentralized as its name suggests, and advised the creators of these projects to register with the SEC as soon as possible.
Regulations can also be a potential risk for DeFi, according to Charles Hoskinson, Cardano’s founder, who acknowledged in an interview with Forkast News.
At the same time, he compared the current DeFi market to the ICO mania from 2017, after which a number of projects practically disappeared and investors lost huge money after the bubble burst. However, he does not think that it is necessarily detrimental when we look at DeFi from a long-term perspective.
“Just because the defi is in the bubble now doesn’t necessarily mean it’s in the wrong position. It just means that people understand that there is value, but the market still has a big problem valuing that value correctly. ” stated.
Hoskinson pointed out that the number of existing defi projects are in fact only small projects with small teams and, although they have low liquidity, the value of these projects is billions of dollars.
As for Gensler’s words about regulation, Hoskinson thinks Gensler and the SEC are trying “Regulate the space”. However, their actions can be an obstacle to the development of the sector and can theoretically lead to defi projects having to monitor their users by requiring them to provide identification documents (KYC).
Therefore, according to Hoskinson, DeFi as we know it today may not be very similar to the one in which it will eventually develop. However, he thinks his Cardano is ready for it. “We need governance, we need certification, we need insurance, we need regulation of these things, we need metadata identity,” and at the same time we need to decentralize. The way we prepared Cardano was for this second wave, “ said.