In this article, we will dive into the world of the Legal framework of decentralized platforms and explore three key concepts: DeFi, DEX, and DAO. We will also have an overview of the current legal framework surrounding these technologies.
WHAT IS DECENTRALIZATION?
Decentralization involves shifting control and decision-making from a central entity to a distributed network. The goal of decentralized networks is to minimize the need for trust among participants and prevent any one participant from exercising excessive authority or control over others, which can damage the network’s functioning.
Decentralization has several benefits, including creating a trustless environment in which each member of a network has a copy of the same data and can deny any altered or corrupted data; enhancing data reconciliation by providing real-time access to a shared view of the data; reducing points of weakness that could lead to systemic failures; and optimizing resource distribution for better performance, consistency, and a reduced likelihood of catastrophic failure.
When we talk about decentralization, three key concepts must be explored: DeFi, DEX, and DAO. These concepts are all closely related, but they serve different purposes in the blockchain ecosystem. Below we explore what sets them apart and what makes them so important for the future of finance.
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DeFi
DeFi refers to a new decentralized financial system that operates on a blockchain-based network, allowing individuals to access financial services in a decentralized and open manner. It gets rid of the need for intermediaries like banks, making financial services more accessible, transparent, and inclusive. DeFi is made possible by blockchain technology, which allows for the creation of smart contracts that can automate financial transactions. As the technology and infrastructure behind DeFi continue to improve, it is expected to play an increasingly important role in the future of finance.
When it comes to its main characteristics, it can be said that DeFi is non-custodial (no central authority), self-governed(most DeFi protocols are open-source and allow the community to review and further develop the code underlying the protocols),and composable(existing components of DeFi networks can be combined to create new applications). DeFi applications allow parties to manage their digital assets instantly, without any central authority or intermediary. They are open-source and community-driven, with the community able to review and develop the underlying code. The composable nature of DeFi allows existing components to be combined to create new applications, which can lead to the creation of innovative products and structures. However, this also adds to the complexity and risks of the market.
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DEX
A decentralized exchange or DEX is a new type of Dapp that operates on a blockchain and allows for the peer-to-peer exchange of tokens or crypto assets without an intermediary party. Participants in a DEX control their assets and all transactions are transparent and recorded on the blockchain, making them immutable.
In a DEX, users maintain control over their assets by using their private keys to access their wallets and sign transactions. This provides a higher level of security, as there is no single point of failure or vulnerability that can be exploited by attackers. Some popular Dexs include Uniswap, PancakeSwap, and Sushiswap.
DAO
A DAO, or decentralized autonomous organization, operates on a blockchain network and is governed by a batch of rules encoded in smart contracts. Members can participate in the organization’s decision-making process through a decentralized voting system. DAOs are transparent, autonomous, and have the potential to provide a more democratic and cost-effective alternative to traditional organizational structures.They are used for various purposes such as managing funds, creating applications, and running communities. There are many examples of DAOs that are either currently in operation or development, including MolochDAO, MakerDAO, DAOstack, Aragon, and GnosisDAO.
In summary, DeFi refers to a new type of financial system, DEXs are decentralized exchanges that allow for peer-to-peer trading, and DAOs are decentralized organizations that operate without the need for a central authority.
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WHAT IS THE CURRENT LEGAL FRAMEWORK OF THESE DECENTRALIZED PLATFORMS IN THE EU?
Since DeFi, DAOs,and DEXsare all relatively new concepts in the field of blockchain and cryptocurrency, their legal status in the EU is still evolving.
In the EU, DeFi platforms are generally subject to the same regulations as traditional financial institutions, including anti-money laundering (AML) and know-your-customer (KYC) regulations.DEXs are also subject to the same regulations as traditional cryptocurrency exchanges, including the EU’s Anti-Money Laundering Directive (AMLD5) and the General Data Protection Regulation (GDPR). However, the decentralized nature of DEXs can make it more challenging to enforce these regulations, and there are currently no specific legal frameworks for regulating DEXs in the EU.
Furthermore, the legal status of DAOs in the EU is still uncertain, and there is currently no specific legal framework for their regulation. However, some EU member states have started to develop legal frameworks for DAOs and smart contracts.
WHAT IS NEXT?
The European Commission has recognized the need for regulation to provide minimum standards for participants in the DeFi industry and protect capital, as well as define the regulatory treatment of cryptoassets not covered by existing financial services regulation. It has proposed the Markets in Crypto-Assets Regulation (MiCA), which would establish a uniform framework for crypto-assets throughout the European Economic Area, providing legal certainty, supporting innovation, and ensuring appropriate levels of consumer and investor protection. MiCA will apply to those engaged in the issuance of cryptoassets and to CryptoAsset Service Providers (CASPs) in the EU-27, and will clarify which tokens qualify as “financial instruments” and which qualify as “cryptoassets”.
Also, according to Finland’s communications minister, Timo Harakka,the European Union should consider legislation to recognize DAOs that govern Web3 applications. This move could prevent having to alter thousands of laws or countries undercutting each other in the race to attract innovative businesses. Harakka said that “thinking on a multinational level” is needed to avoid “harmful regulatory competition” among the bloc’s 27 members and prevent individually altering thousands of different laws regulating different kinds of contracts. The approach is reminiscent of the MiCAlegislation, which will create a uniform standard for each country if it is adopted. Currently, regulators across the world are struggling with how to classify and regulate decentralized initiatives such as financial applications in which there is no central lender.
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CONCLUSION
In conclusion, decentralization is a key concept that has revolutionized the world of blockchain and cryptocurrency. The emerge of DeFi, DEX, and DAO has brought about a new wave of innovation and disruption in the financial sector. These concepts enable individuals to transact, exchange value, and govern financial systems without relying on centralized intermediaries.
However, as these concepts continue to gain popularity there are concerns about the legal framework that governs them. It is important to recognize that the decentralized nature of these systems presents unique challenges for regulators and hitting the right balance between innovation and protection will be essential in the years ahead.
Understanding the Legal Framework of Decentralized Platforms
Ananda Sacramento
All rights reserved. All rights of the Understanding the Legal Framework of Decentralized Platforms article belong to Gurcan Partners International Law Firm. The author has no responsibility for the information in this article. This article is prepared just to inform.
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REFERENCES
Amazon Web Services, ‘Decentralization in Blockchain’, available at: https://aws.amazon.com/blockchain/decentralization-in-blockchain/
European Commission, ‘Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937’, available at: https://op.europa.eu/o/opportal-service/download-handler?identifier=f689e5b2-4f55-11ed-92ed-01aa75ed71a1&format=pdf&language=en&productionSystem=cellar&part=
Fakorede, O., Adeyemo, D., Adeleke, D., & Ogundele, O, ‘DEX: A DApp for the Decentralized Marketplace’
Organisation for Economic Co-operation and Development (OECD),‘Why Decentralized Finance (DeFi) Matters and the Policy Implications’
- Bhayana, M. Khatwani, & A. Yadav, ‘Blockchain and Decentralization: Legal Issues and Challenges’, Journal of Advanced Research in Law and Economics, 12(3), 695-709. doi: 10.14505/jarle.v12.3(51).20.
Wu, W., Xu X., Zhang W.,‘From Technology to Society: An Overview of Blockchain-Based DAO’
