But not with who you think

DeFi is at war. TvL is at its pre-pandemic level of $50 billion, with BTC prices
and ETH
. Rising inflation is reducing the cost of money for investments in fintech innovation and raising capital is becoming more difficult. Many fintechs are facing downsizing and layoffs, while their customers face rising costs for mortgages, energy and food.

Regulators can’t seem to move fast enough with spot market and stablecoin regulation and have resorted to blunt enforcement tools as a jab at the industry front. OFAC and Tornado Cashand the The recent application of the CFTC the action against bZEROx sent a shiver down the spines of DeFi network players.

Regulators do not appear to have a stated goal of regulating algorithms, but in the absence of individuals or corporations to hold accountable, as is commonly done, they must be seen to be taking action against cyberattacks sponsored by the States.

The regulator is not the enemy at the gates of DeFi

DeFi is at war with hackers. The industry is being warned that it needs to put itself on a war footing to better protect its customers, staff and shareholders from damage caused by hackers, both financially and reputationally. It was one of big posts following the Fintech Nexus Merge conference in London last week.

“There is a revolution taking place. This will change things for the better. The government’s question is not how to allow this to happen, but what can we do to make it happen… I think there is now a serious realization that unless the US authorities and Britons have put in place a positive liberal regime with space for building, we will do it”, said Matt Hancocks, British MP and digital champion.

Nonetheless, October is the worst month for crypto hacks, and the industry is on track to perform worse than the 2021 record if it continues according to Chainalysis.

“If you accept that the crypto ecosystem is at war, then you better be clear about who your enemy is: the threat posed by security weaknesses and those who seek to abuse decentralized products is greater than the threat of regulatory action,” said Anastasia Kinsky, Head of Programs at GBBC Digital Finance.

The weakest links

The recent $117 million Mango Markets hack makes the DeFi industry look like rank amateurs. The hacker manipulated a price oracle and borrowed money from the Mango Treasury based on an inflated reserve, and the rest is history. The pirate is to negotiate a bug-bounty for a eye-watering sum of $47 million, which is a great return on investment, the hacker is estimated to have invested $10 million in the hack and sends a signal to the world that cybercrime pays and pays well .

Beyond oracle hacks, bridge hacks and hacking of conventional web2 technology infrastructure supporting more resilient blockchain technologies are the weakest link. The Ronin Bridge The $540 million Axie-Affinity hack alleged by state-sponsored terrorist Lazarus Group painfully illustrates this point and arguably accelerated the use of blunt tools by agencies like OFAC.

Professional hackers and cyber syndicates are one thing, but state-sponsored cyber is another, and some behind-the-scenes industry estimates place state-sponsored cybercrime volumes far ahead of cyber syndicates, a unappetizing subject.

Bloomberg estimates that only 26% of global GDP will be generated by free market economies by 2050, digital innovators seem naïve to think that they can simply abandon algorithms for finance in the great global public digital sandbox of Web2 and let the strengths of network advantages take their course, quickly failing along the way.

Lex Sokolin, chief economist at Consensys said“So for me the next phase and the missing piece for this transformation from FinTech to DeFi is that DeFi is not a repackaging of the traditional financial sector for the traditional economy… so for me the next step is for the Web3, is it necessary to develop its own GDP and a productive and functional economy.

With arguably the world’s worst macro-political instability in many years, digital innovators must accept that there are powerful states and forces not rooted in democratic capitalism that seek to weaken it at every opportunity, and DeFi seems to offer this opportunity. The industry needs to turn this opportunity around – the big opportunity for DeFi is to make the economy of Web3 better than Web2 and TradFi, and safe for society to use – this should be a DeFi primacy.

ID In Web3 and the race for DAO legal structures

Social media has done a good job of trying to break down democratic capitalism, which is holding its own. With no (digital) identity required to create personal or entity accounts, hate speech and toxic speech online are on the rise. The stimulus-response loop in many cases is amplified by algorithms, due to the (apparent) popularity of inflammatory content.

DeFi is well advised to pay attention to the lessons here. Anonymity in your ecosystem, especially where the right to vote is conferred, could very well be existentially fatal. It’s not something that professional money managers or financial stability-focused agencies will appreciate.

The race for jurisdictions to proclaim DAO legal structures is on, with a number of US states passing laws, including Vermont, Wyoming and Tennessee. Singapore is well planned Guardianand it’s rumored the Australian Department of Treasury is studying the legal structures of DAOs. The European Union has just published a report on the regulation of DeFi which experts advise to be incorporated into the drafting and the MiCA level 2 law by 2024.

In the United Kingdom, the Law Commission of England and Wales has just launched a project examine the legal status of DAOs. The Commission has published a consultation document on the legal treatment of digital assets and recommends reform to create a third category of personal property, called “data objects”. This is revolutionary legal protection for digital assets (holders) and all eyes are on it to become law.

Although it is unclear how, when, and where the law will help to better accelerate the benefits of DeFi. What is clear is that cyber resilience needs to be built into DeFi to protect against syndicated cybercriminals who are innovating at the same, if not faster, pace than top innovators. It is quite another to ignore the cyber threats posed by the enemies of democratic capitalism and the free market.

When it comes to cyber resilience, if DeFi is to be at the heart of the future of Web3, it is not going to evolve without becoming cyber resilient and mastering the identity of the legal entity. Digital innovators and lawmakers need to hurry.

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