DeFi's Wild West Days Are Over: Smart Rules Save Web3

Remember the gold rush? Chaos, scams, and a few lucky winners. That's been DeFi for too long. The utopian ideal of a wholly unregulated online Wild West is a perilous delusion. Then it’s really time to trade our six-shooters in for smart contracts and smart regulations.

Innovation Needs Guardrails, Not Anarchy

We've all heard the argument: regulation kills innovation. It's the mantra of the crypto-libertarian. But think about it: does a Formula 1 race happen without rules? No. To expand the boundaries, you do need rules to protect pushing the envelope too far or unsafely. Otherwise, it's just a demolition derby.

The regulation bogeyman frequently comes out due to bad actors. Hedi Navazan, the Chief Compliance Officer at 1inch, pointed out the flaws in a “one-size-fits-all” model. That’d be like trying to regulate a bicycle just like you regulate a Boeing 747. It doesn't work. Instead, we need nuanced, risk-based regulations that are more suited to the unusual landscape of DeFi.

Institutional investors are largely staying away from DeFi. Why? Because they need clarity. They should know what the new rules of the game are going to be before they invest billions of their own dollars. Uncertainty breeds inaction. That inaction is a far greater threat to innovation than any regulation – well-crafted or otherwise.

User Safety Is Not Optional Anymore

Unfortunately, the DeFi space has become saturated with scams, hacks, and rug pulls. How many stories do we have to hear of hardworking Americans being bankrupted by unaudited protocols and fly-by-night projects? All of this creates a perfect storm for bad actors, taking advantage of those who do not understand the technology.

Think of it like this: imagine a city with no traffic laws. No stop lights, no speed limits, no driver's license. Total freedom, right? Wrong. It’s a complete nightmare, and the most disadvantaged are the first to suffer. DeFi without regulation is the same thing.

The Biden administration’s policies in 2022 left a lot of crypto businesses unsure on where they stand, and that’s fair. It’s a new space. Paralysis isn't the answer. What we don’t need is reactionary regulation that has the effect of protecting users while crushing innovation. This isn’t an effort to kill innovation, but rather to build public confidence in innovation.

We need statutory and regulatory guidance that directly holds developers accountable for the code they deploy. Regulation that requires audits of smart contracts. Regulation that protects everyone and provides recourse for victims of fraud. Is that too much to ask?

Risk-Based Rules: The Only Way Forward

So, Hedi Navazan’s argument for tailored, risk-based regulatory approaches could not be more timely. A protocol dealing with billions of dollars in collateral should be subject to stricter scrutiny than a small, experimental project. It's common sense.

We should stop pretending this is a binary “regulation vs. no regulation” issue. The real question is: what kind of regulation? In what ways can we craft regulatory guidance that sparks responsible innovation but prioritizes user protection and disallows bad acts?

This new strategy recognizes that there is a difference between DeFi projects. It enables regulators to target their scarce and limited resources on the markets and plays posing the most risk to the American public.

The Wild West was fun while it lasted, but it was not sustainable. It was eventually tamed — if not outright by the vagaries of nature — then by laws and institutions. DeFi needs the same evolution. Join us as we call on policymakers to adopt smart rules that protect users and unlock the full potential of Web3. The future of finance depends on it.

The Wild West was exciting, but it wasn't sustainable. It was eventually tamed by laws and institutions. DeFi needs the same evolution. It's time to embrace smart rules, protect users, and unlock the full potential of Web3. The future of finance depends on it.