IMPORTANT POINTS:
- The EU highlights serious risks in DeFi and seeks to regulate it.
- DeFi capitalization is small compared to the total crypto market.
- ESMA proposes a methodology to categorize smart contracts in DeFi.
Two recent articles from the European Securities and Markets Authority (ESMA) focus on the Decentralized Finance (DeFi) ecosystem in an attempt to understand and regulate this market.
According to the EU financial markets and securities regulator: “DeFi presents serious risks to investor protection.” These articles, published on October 11, seek to identify the correct approach to managing these risks.
In addition to the written material, ESMA has announced a webinar to address the aforementioned topics. This event will take place on October 25, and interested people can register until October 23 using the link provided by the EU authorities.
Article 1: DeFi developments and risks in the EU market
Despite the European Securities and Markets Authority raising awareness of the “serious risks” of DeFi due to its “highly speculative nature” and “significant operational and security vulnerabilities,” the regulator states that they are not significant risks to stability. financial.
Regarding this, ESMA points out a relatively small size of the capitalization of Decentralized Finance compared to the total capitalization of the crypto market. Citing the $45 billion recorded in June 2023 for Total Value Locked (TVL) in DeFi, it corresponds to only 4% of the cryptocurrency market value on the same day.
However, this relevance is even lower at the time of publication, with a total recorded value of $36.9 billion according to DefiLlama data, equivalent to 3.5% of the total market capitalization of $1.06 trillion for the cryptocurrency market.
Article 2: Categorization of Smart Contracts in DeFi
On the other hand, ESMA proposes a methodology to allow an adequate categorization and understanding of the DeFi market within the second article titled “Decentralized Finance: A Categorization of smart contracts”.
The EU securities and financial markets regulator classifies smart contracts into five main groups. These categories are tagged as:
- Financial: These are smart contracts used primarily to collect and share money, powering basic monetary tasks. Additionally, they include activities such as online lotteries and other types of online gambling that collect and redistribute funds.
- Operational: These are smart contracts that help manage how other smart contracts work and use memory. This is essential to allocate resources efficiently and ensure everything runs smoothly.
- Tokens: These smart contracts allow people to create, track and dispose of digital tokens. Some well-known types are ERC20 and ERC721. ERC20 tokens are identical and can be exchanged for each other, as digital money or digital assets. ERC721 tokens (NFTs) are unique and cannot be divided, like digital collectibles, art or items in video games.
- Wallet: Smart contracts in this category handle things like fees, account balances, public access, and permission control, making it easier for people to use the blockchain.
- Infrastructure: These smart contracts handle the basic tasks that form the basis of other smart contracts and blockchain applications. They deal with things like data, signatures, and how information is encoded and decoded. It is similar to the infrastructure or public services we rely on in cities.
A notable variation in diversity has been observed from the first to the second wave of smart contract implementations (between 2017-2018 and then 2021-2023). This indicates the increasing incorporation of intricate and interconnected protocols that have become a defining feature of Decentralized Finance.
