Title: The Long Road to DeFi Success: Building Above the Line
Introduction:
Decentralised Finance, or DeFi, has taken the financial world by storm. DeFi projects leverage blockchain technology and tokenisation to create innovative and decentralised financial systems. However, while these projects may start with a white paper and proof of concept, it often takes several years for them to go live. In this blog post, we'll explore the reasons behind this delay and the critical role of building "above the line" in DeFi projects.
The DeFi Lifecycle:
DeFi projects typically follow a similar lifecycle. They begin with a white paper and a proof of concept, showcasing the potential of blockchain technology and decentralised infrastructure. After the initial development, a press release is issued, signaling the project's progress. In many cases, this is where the technology proves its worth. However, despite successful testing, it can take several years for the project to become operational.
Why the Delay?
The delay in making DeFi projects operational can be attributed to the distinction between "above the line" and "below the line" considerations. "Below the line" refers to the technology itself – the choice of blockchain (public or private), consensus protocols, and other technical aspects. While this area garners much attention, it is "above the line" that consumes most of the time.
Building "Above the Line":
"Above the line" refers to the organisational and regulatory aspects of the project. When creating a DeFi platform, these are the considerations that involve creating and managing new organisations to operate the platform. This phase is time-consuming for several reasons:
1. Regulatory Compliance: DeFi projects are often under scrutiny from national regulators who may be sceptical about fully decentralised market infrastructure or supranational currencies. This regulatory oversight means that project operators must adhere to compliance standards, explain their compliance strategies to regulators, and demonstrate compliance once the project goes live.
2. Operational Resilience: Regulatory bodies, such as the FCA/PRA in the UK or the DORA regulations in the EU, impose operational resilience directives. These directives require operators to not only explain their resilience plans but also demonstrate them in real-world scenarios. This adds a significant layer of complexity to the project.
3. "One Throat to Choke": Regulators prefer to deal with a single responsible entity, even in decentralised systems. This requirement results in a designated organisation taking the lead in compliance matters, making them the contact point for regulators.
RegDefy: Speeding Up the Process
Despite the challenges, DeFi projects that aim to deliver faster and more cost-effective Payment versus Payment (PvP) or atomic Delivery versus Payment (DvP) solutions can thrive. This is because they offer real value in the financial industry. RegDefy, a tool and associated methodology that helps navigate regulatory challenges in DeFi, can expedite this process by creating more efficient and compliant pathways for DeFi projects.
Conclusion:
The journey from a white paper to a fully operational DeFi project is a lengthy one, primarily due to the complexities "above the line" – regulatory compliance and operational resilience. Nevertheless, as the DeFi space continues to evolve and innovate, the drive for more efficient and secure financial solutions will remain strong. RegDefy and the willingness to work within regulatory frameworks will be key to unlocking the full potential of decentralised finance.