The rise of decentralized finance or DeFi has been nothing short of spectacular during the past few years. In 2019, the entire DeFi ecosystem was valued at only between $400-$500 million but then it grew steadily to reach the $1 billion mark by February 2020, which was right before widespread awareness of the global COVID-19 pandemic began.
After briefly crashing along with the traditional financial markets in March 2020, DeFi recently skyrocketed to nearly $100 billion, according to available data. Although the market has gone through a strong correction at the time of writing, it’s clear now that DeFi is definitely here to stay. Why? Well, because it offers arguably better ways to lend assets, borrow funds and engage in attractive yield generating opportunities at a time when most banks are offering near-zero or even negative interest rates if you’re in Europe.
While DeFi does have its advantages and great opportunities, the sector has also experienced a large number of hacks, advanced exploits, scams and other serious issues that may prevent it from truly becoming a mainstream industry. But there are several projects working in this nascent space to ensure that the ecosystem can grow in a sustainable manner.
Reliably Verifying User Info for Decentralized Financial Organizations
A project called Astra offers a way for decentralized organizations to adhere to regulatory requirements but without having to compromise their main product offering. Astra has been specifically developed to verify information in a wide range of settings.
The protocol’s developers explain that their technology chooses the most suitable experts (delegates) to carefully review the evidence, data and related KYC details. After completing these tasks, they are able to provide a "fair" decision based on the findings of their investigation. Transactions carried out between decentralized financial organizations are then able to move forward without being impacted by regulatory restrictions, the Astra Protocol team explains.
Crypto-related Crime and AML Report
In August 2021, the Cryptocurrency Crime and Anti-Money Laundering Report had been released by leading blockchain security firm CipherTrace, which confirmed that DeFi has been on the rise during the past 18 months, since it allows the average investor or trader to easily access capital markets.
Without requiring third-parties or intermediaries, many decentralized protocols provide far greater yields compared to more conventional financial platforms, the Astra Protocol team writes in a blog post. They also mentioned that banking institutions can offer only a quarter of a percent, meanwhile, certain DeFi protocols will deliver as much as 6% (or even higher in some cases).
However, as most people would know, with greater rewards also comes a much higher level of risk. The CipherTrace report revealed that DeFi-related hacks (appr. $361 million) made up over 75% of major exploits this year and have increased almost 3-fold since last year. One important theme highlighted in the report was how regulatory guidelines might help with lowering DeFi-related problems.
The update from CipherTrace further examined how crypto firms are complying (or not) with the Travel Rule. The US Department of the Treasury Financial Crimes Enforcement Network or FinCEN notes that the Travel Rule "requires all financial institutions to pass on certain information to the next financial institution, in certain funds transmittals involving more than one financial institution."
Astra Legal Tech Can Ensure Travel Rule Compliance
This information is usually the transaction sender’s name, account number, address and some other contact details. But decentralized protocols typically don’t include these details. Because of this lack of information, the Financial Action Task Force (FATF) has stated that no jurisdiction reported actually being aware of any virtual asset service providers (VASPs) that completely followed all the requirements of the Travel Rule.
Astra tech is, however, able to reliably verify the credentials of potential DeFi traders or investors so that these decentralized platforms are able to ensure regulatory compliance. The Astra Protocol team explains that they’ve created a patented platform that serves as a decentralized compliance layer, enabling various protocols to follow the Travel Rule, regardless of which jurisdiction they are operating in at the moment.
After receiving a request from a potential new user, the decentralized organization may be able to use Astra as the decentralized compliance layer. These processes may be completed by service providers without requesting and maintaining KYC details for clients by themselves, the Astra Protocol team explains. Without these capabilities, compliance is quite difficult or almost impossible in a decentralized ecosystem.