In this article, you will get to know about the most essential advantages and disadvantages of the decentralized financial system, how it impacts your finances, and how to prevent involvement in illegal activities and money laundering.
DeFi is a financial system of the future and differs from the traditional financial system by its principles of work without the control of the regulators and third parties. DeFi provides access for everybody 24 hours a day without the involvement of intermediaries. This is the main benefit of the system for users all over the world.
Due to 40 years of fundamental research, the DeFi structure that will replace the traditional payment system in the future appeared.
During the year, the DeFi market has reached a total value of $61 billion. The cap of stablecoins achieved $112 billion at the end of the second quarter of 2021.
On the other hand, the most crucial problem in the DeFi infrastructure is that investors lose their assets because this sector is not regulated and controlled. There are not any intermediates in this field who can regulate processing transactions. If malicious actors hack a decentralized platform, investors don’t get any remedy. Loretta Joseph, a global digital asset regulatory stated, that the main advantage and disadvantage of the DeFi is the absence of intermediaries between the users of the DeFi platform. Nobody knows how it will be regulated in the future. Investors of the DeFi platforms often become scammed. After that, they can’t apply for the regulators to complain and recover their digital assets.
One more issue of DeFi platforms is that nobody controls the level of purity of digital assets. At the decentralized exchanges, there is no KYC verification of the users. There is no way to check whether this user is a hacker or scammer and what digital assets enter an exchange. Therefore, you never know what crypto assets enter your wallet.
How to protect your digital assets in the DeFi sector?
An alternative solution to this issue is crypto analytics and AML services providing users with a possibility to verify crypto assets. Using these services, you can check what addresses this or another transaction visited before entering your wallet.
Cryptocurrencies obtained in a dishonest way, including hacking attacks, crypto thefts, ransomware, fraud, and other types of crimes, are “dirty”. While “dirty” cryptocurrencies enter your wallet, all your crypto assets become “dirty”. Therefore, it’s essential to verify cryptocurrencies before entering your wallet by using crypto analytics and AML services. They allow staying confident that your cryptocurrency has not been involved in illegal activities, and it doesn’t impact your reputation.
When it comes to the statistics, from 2019 to the end of the first half of 2021, the DeFi sector has lost $285 million because of hacking attacks. As experts stated, a huge number of hacking attacks were available due to a low level of competence and coding issues.
Among the most important problems in the DeFi sector, we can emphasize the volatility of crypto markets as compared to government-backed fiat currency, a high risk of money laundering, and terrorist financing. A huge number of crypto transactions enter NFT markets. Circulation of a huge number of transactions causes regulators’ suspicions. They consider huge circulation as money laundering.
How do DAOs function?
DeFi decentralized autonomous organizations (DAOs) are used for conducting transactions across diverse networks. This ensures crypto lending and liquidity mining. DAOs involve more than $543 million. Smart contracts regulate any actions that exist in DAOs.
A smart contract is a code that runs on the Ethereum blockchain. Due to them, transactions are sent over the network. The users can’t control them. Developers deploy smart contracts to the network. Participants of the network can interact with smart contracts by validating transactions that fulfill a condition written in the smart contract. When a smart contract is hacked, customers don’t get any recovery from the platform. This is the main issue of the decentralized platforms. Consumers can’t apply for the recovery of their costs because of the absence of regulators and authorities. Generally speaking, DeFi platforms are P2P without any intermediaries. The main question asked by the financial experts is how this sector will be regulated in the future.
The primary purpose of DAOs is to transfer crypto-assets across diverse networks. This ensures the development of crypto lending and yield farming. The overall value of DAOs amounts to $543 million. As mentioned above, all the actions are regulated and executed by smart contracts enforced by algorithms.
The main benefit of decentralized exchanges is that participants of the platforms can trade with each other without any intermediaries who control the process of trading. Therefore, the level of risk of fraud, scams, thefts, and other illegal actions increases among the users. According to the FATF, DApps need to implement AML requirements.
According to the review, only four from 16 exchanges reviewed meet all the regulations. So, the importance of AML services is very high. Suppose you are a participant of a decentralized platform. In that case, you never know what assets enter your crypto wallet, what addresses a transaction visited before, and whether an owner of the cryptocurrency purchased for products or services on the dark market before or not.
To be confident that you get pure cryptocurrencies, it’s essential to use AML services that help track transactions and determine a level of crypto assets’ purity. While using AML services, you are confident that your account isn’t banned on the exchange, you don’t lose your reputation in the cryptocurrency community, and you don’t cause interest of authorities.
Cryptocurrency exchanges should implement AML services in their work to protect their users from the risk of money laundering and provide them with a high level of security.