Most of Web3's current policy discussions revolve around what digital currency pioneer NickSzabo calls "wet code" - in this case, it's the laws and regulations of people's institutions. Data encryption provides an alternative - "dry code" or computer code - to maintain investors and users, and should be an easier way to number rules sentence by sentence in verifiable, unlicensed, and self-policing contracts.

This is an approach that relies on the clarity of the incentive technology itself.

Why are policies and regulations important

Let us step back and consider the clear reasons for the regulation of the financial system. Policies and regulations are important because they promote orderly and efficient industries and protect investors from those who use them.

Take the issue of leverage, which means that when they make a secured deal or loan, they have to pay back the loan. Without going into detail, the math behind leverage is to increase the damage line of investment returns, while the risk is a secondary increase. That is, if you have 5 times leverage, you can only gain or hurt 5 times for a given price movement, but you also increase your settlement risk by 25 times. Leverage, in essence, allows stock makers to win according to math lessons.

In addition, the exchange's network operator is treated as an intermediate clearing fact for trade settlement. Historically, large and medium-sized organisations have played a role in wanting to take the other side of the trade and the damage in the event of an investor default.

Chase: You can have the investor take on leverage to increase risk in the second way, and then have the dispersed exchange clear his bet conclusion. Exchanges also have access to settlement price information that is not available in other sales markets, and have an incentive to manipulate share prices for their own gain. You can see why regulators are interested in this allocation and need to avoid exchanges trading with their customers.

DeFi is not the same at all

With decentralized finance (DeFi), you have a completely different approach. Not only is it clear, but there is no need for decentralized physical lines to manipulate the flow of trading orders. Assets are stored independently. Defi must have a completely different method of control, because while the risks for investors remain, the obligations are completely different, and so is a method of risk mitigation.

Smart contracts are making it easier and easier for the financial industry to interact in a way that would otherwise take place in decentralized, independent and structured point-to-point (P2) P) markets. In DeFi, smart contracts can act as aggregators, which are unique to decentralized exchange network operators.

For example, automatic market making agreements specify quotes for various properties based on optimization algorithms and allow owners to automatically assign these set prices to the rest of the market. The smart contract then basically sums up all bids and the liquidity of open prices into a summary pool based on the use of financial accounting. Similarly, the Financial Markets Agreement collects automatic point-to-point (P2) P) secured borrowing.

However, peer-to-peer trading and even private lending are not generally regulatory-themed activities (hard cash is a peer-to-peer technology). If the subject activity of smart contract replication is not controlled, why control it? This eliminates the possibility of digital currencies imposing more effective and transparent restrictions on access to the financial system, without the raw risks of a fragmented financial sector.

Code is law and order

In DeFi, we can automate processes using code and track accounting data suitable for greatly improving equipment operation and risk control. We can even devise a way to protect customers from additional risk. The concept of "code is law" has become key. Of course, if the manipulators of smart contracts had no scruples about the actual operation, the laws and regulations would long ago prohibit fraud.

The system that protects DeFi investors from various bad actors is likely to look more like analytics platforms, defense specialty software and its incentive-based users and big-name institutions allowed. The European Commission has given similar ideas, recognising that controlling DeFi is difficult.