Aave is the most extensive DeFi lending protocol with over $16 billion in crypto assets locked. This removes one of the major obstacles for regulators to engage in decentralized finance (DeFi). Profits are possible because cryptocurrency investors do not want to sell bitcoin. Borrow up to 85% of your asset’s value and pay 3.1% on your mortgage using an innovative contract-based protocol.
For economists, competitor Compound offers a lower return of 1.6% to lower your risk as you earn up to 70% on your backup cryptocurrency. If the bitcoin price falls too low, the collateral assets are liquidated.
The recent sharp price drop has been a good test for the sector. Well done, but still not without risk. If the price drop of a cryptocurrency is steep enough, there is a chance that the asset used as collateral may not sell quickly enough.
Alternatively, some smart contract errors may be detected. As for the core protocol, the bug should have been fixed by now, as a lot of money has been locked for a while.
The news that Aave was testing a privileged private liquidity pool first appeared in May when someone discovered a pool they did not have access to. Aave confirmed this news in a Blockworks webinar last week. It provides access to the institution without knowing the other party and reduces the risk of noncompliance.
Initially, security and security firm Fireblocks implemented KYC according to rules agreed with the legal counsel of various agencies involved in the pilot project.
The regulated DeFi approach
Mike Novogratz, the founder of cryptocurrency asset management firm Galaxy Digital, has three approaches institutions can take to engage with DeFi. It is permissible to assume that DeFi is not of interest to the Department of Justice of the United States (DoJ). As a regulator, it was uncomfortable for him.
Such as in this case, or an organization like Chainalysis studying the blockchain to validate high-probability transactions. We’re seeing more users as folks like us become more comfortable and active in DeFi.
Meanwhile, Novogratz worries about authorities’ interest in the area and if this would make Aave uncomfortable, forcing Aave to pick between the two. Aave must admit that it is not as open as it once was and will not operate without consent. We will allow regulators to continue to exist no matter what KYC emerges. This is an existential question. I don’t know the answer.
A threat to banks
Novogratz asked what causes FOMOs to fear missing out on DeFi with institutions. According to him, Bitcoin will be of interest to individuals and large corporations, and organizations.
The irony of DeFi and many players in the cryptocurrency space is the simultaneous courtship and contempt of the institution. Rettig was a little more diplomatic. (DeFi) outperforms the traditional financial system in many ways, and banks should be a little nervous about it.
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