The U.S. Securities and Exchange Commission or SEC starts investigating Uniswap Labs, the developer behind Uniswap, one of the influential decentralized exchanges (DEX) on Ethereum.
Why SEC is suddenly interesting in Defi particularly DEX? Before we dive into the topic, let’s see how different Cefi to Defi.
What is Cefi?
Centralized finance or Cefi was originally invented several thousand years ago. The wide range of assets from cattle, land, precious metals like gold, silver, fiat currency, stocks, bonds, and more. It is centralized because there is a middleman who serves between each trade. All trading ledgers are data that not actual assets transact between until the last settlement. You as their customer will not directly facilitate such transactions but look at each transaction and final settlement. The idea is that an expert will operate behave of your under the trust system.
If you lose the money, too bad that the market is under-performed. Users will not know the rules behind the operation and their faith will depend on how truly the expert will perform.
What is Defi?
Decentralized finance or Defi is financial management under peer-to-peer without third party involvement. You operate and manage your own assets directly.
Benefits from Defi
Three benefits offer by the Defi: transparency, control, and accessibility.
Transparency: users know the precise rules
Control: users is the custodian of their own assets
Accessibility: anyone with the internet and computer can do it
What is the exchange platform?
It is a marketplace where traders can place their assets to exchange in different types where you can 1) do price discovery, 2) through an algorithmic trading matching engine, and 3) settle to make it clear.
What is CEX?
It is a centralized exchange platform that exists standalone to separate from custodians services such as banks. Because all transactions are happening on paper until the last settlement with the bank for security reasons.
What is DEX?
It is a decentralized exchange platform that you are your own custodian to directly trade through your assets.
Transaction dispute from CEX
You may dispute your transactions if you have any reasonable doubt. However, you may only ask your expert to handle the situation.
Transaction dispute from DEX
You may not dispute any transaction as that will be the final transaction to settle with your assets.
The SEC’s concerns
The SEC believes that the DEX is only a place for investors to directly trade their assets but without protections. The platform rules are unclear to investors and investors can only play their unclear rules in the platform. It seems like a centralized platform system disguise with a decentralized system.
There are just some insights into what SEC may continue finding. It may change Defi completely or it may not.
Photo by Chris Liverani on Unsplash
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Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose cryptocurrencies are mentioned in this article. This information is only for educational