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DeFi must implement proper governance before it’s too late

garretschoenbergOctober 19, 2022
DeFi must implement proper governance before it’s too late

Carolyn Wilkins, an external member of the Bank of England’s Monetary Policy Committee, said in a speech on October 19 that the lack of regulation and good governance in the cryptocurrency sector is more than a hindrance to business and a lack of protection for users. and an existential threat. Decentralized finance (DeFi) will be a good place to sort things out, she said.

Speaking at the University College London Center for Blockchain Technology, Wilkins said the most common fraud complaints reaching the Financial Conduct Authority, the UK’s financial regulator, concern cryptography. In addition to its financial risks, investors are also concerned about reputational risks, which Wilkins said are abundant in DeFi.

Wilkins saw the concentration of power in the DeFi “whales” as a source of risk. On the top 10 proof-of-stake platforms by market capitalization, she observed that the top 50 validators held between her 47% and her 100% stake. At the same time, there is a lack of transparency about accountability. This tension can also be seen in the Oki incident in the United States. Wilkins said:

“We live in a world that is inherently uncertain, which means that there can never be a set of smart contracts for every situation, and if the unexpected happens, a centralized Decision-making is always required.”

However, it is not always clear when centralized decision-making is needed and by whom. Crypto needs to take shape quickly as regulated traditional finance is also adopting blockchain technology and could target some of the market share of the crypto sector. Wilkins said:

“Companies regulated in traditional finance are increasingly applying underlying blockchain technology to traditional capital markets. They have familiar, battle-tested governance. If the crypto industry didn’t put its house in order just because of that, it would be in a better position to capture this market.”

Wilkins cited JP Morgan’s Onyx blockchain trading network and HQLAX collateral management platform as examples of threats to deploy.

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Regulators are moving, albeit slowly, and the industry can help, Wilkins said. She advocates “industry-driven mechanisms to develop codes of conduct and best practices,” regular code audits, and “disclosure of how the right to change code is determined and who holds the ‘commit key.’ ” was recommended.