DeFi’s next breakthrough is investor protection

Swarm Markets leverages compliance and accountability to tap the full potential of Decentralized Finance.

The universal truth in finance is that options, fairness, and good returns create value.

That maxim is just as true for crypto markets as it is in traditional finance. DeFi has reshaped the landscape for crypto investors by improving all three points when compared to the centralized infrastructure of crypto’s early days. Now, Swarm Markets is building a new toolkit for the financial world, leveraging the aspects of TradFi most beneficial to investor interests in order to take DeFi to the next level.

Dyed in the wool DeFi

Swarm Markets stays true to the core aspects of DeFi because we know it’s the bundling of self-custody, person-to-person transacting, 24-hour markets, and transparent operations that results in the optionality and return potential that propelled DeFi into a global phenomenon. But we still see room for improvement.

Working with Germany’s Federal Financial Supervisory Authority (BaFin), Swarm Markets is pursuing two key areas of innovation: compliance and accountability. Adding compliance and accountability to DeFi deters manipulation, brings new asset classes to DeFi, and increases the scope of participants to include institutions and other investors unwilling to compromise on market fairness.

Compliance is another word for fairness

Smart contracts alone are not a guarantee of a fair market. In fact, relying on the transparency of the blockchain alone may increase information asymmetry to the benefit of insiders and market manipulators because investors cannot be expected to have the level of technical expertise required to accurately assess the risk of transacting with a particular smart contract.

Swarm Market’s compliance with BaFin’s reporting requirements improves the situation for investors in two ways:

• Regulators with domain expertise in evaluating the safety and fairness of financial instruments act as a gatekeeper to ensure that the processes and rules written into Swarm Markets’ smart contracts maintain the highest standards of investor protection.
• Regulated assets listed by Swarm Markets are also subject to disclosure requirements that level the playing field for investors by ensuring that the information necessary to make an informed investment decision is available to the public.

BaFin’s approval can then function as a proxy for validating the fairness of the processes enshrined in our smart contract code and responsible governance of the platform. Investors without the technical expertise to audit smart contracts can invest with confidence, knowing they won’t be taken advantage of by the smart contract authors or parties with superior technical knowledge.

Supercharging DeFi with regulated securities

Stablecoins serve as an anchor point in DeFi as evidenced by — among other things — the fact that platform activity on our DAI/USDC pool is second only to our SMT pool. Stablecoins are essential to DeFi because they are connected to value outside of volatile crypto markets, allowing investors to exit crypto positions while sheltering their assets and creating a stable environment for borrowing.

As a regulated platform, Swarm Markets will go beyond stablecoins and bolster market stability with tokenized asset-backed securities (ABSs) and commodities. The market cap represented by regulated asset classes that could be consigned to DeFi dwarfs the size of the entire crypto market.

That’s why Swarm Markets is working with regulators to build the integrations between asset owners, custody providers, issuers, etc. that allow these regulated asset classes to be digitized and enter the world of DeFi. Assets added to Swarm Markets are screened for quality and legitimacy to ensure that markets will be more efficient and more stable as the balance of real-world value added to the platform increases.

There’s one more step we will take to reach the full potential of DeFi beyond supercharging DeFi with this enormous wealth of real-world value and building fair markets under regulatory oversight: deterring bad actors from hijacking the value created by honest investors.

Accountability is more than just KYC

“I expect that projects that solve for pseudonymity are more likely to succeed, because investors can then be comfortable that asset prices reflect actual interest from real investors, not prices pumped by hidden manipulators.” — Securities and Exchange Commission commissioner Caroline A. Crenshaw

Investors the world over have long demonstrated a willingness to share their identity with the entity through which they trade in return for access to safe markets. Swarm Markets has built a platform allowing investors to do just that while maintaining pseudonymity between transacting parties typical of DeFi.

KYC and AML checks restrict known bad actors from onboarding, but accountability is more than just connecting identity while onboarding. Detecting manipulation and having a system to enforce accountability after onboarding are inherently deterrent to bad actors looking to exploit investors. While it’s impossible to promise absolute security, markets are more likely to be free of manipulation when participants know they will be held accountable.

It also gives confidence to investors when they know they are free to engage in P2P transactions with counterparties unknown to them without the risk that they may become a party to wrongdoing and face consequences like wallet blacklisting and frozen assets.

It’s Swarm Market’s view that adding an identity layer to DeFi provides a substantial value to users and it appears that regulators across the globe agree.

We believe that most investors are attracted to DeFi because of the potential for profitable returns on their investment and are glad to trade a small bit of anonymity in return for protecting their investment. Moreover, we don’t stop people who believe in absolute financial privacy from transacting elsewhere and anyone can build services utilizing our identity infrastructure.

Much more than more of the same

DeFi has proven out from a technological standpoint. Swarm Markets believes the time has come to broaden the focus beyond raw speed and technological innovation in order to attract more participants and build more efficient, fairer markets. Whereas early DeFi projects succeeded in translating key transaction functions of financial markets into code, Swarm Markets is building on that work to transform the regulatory apparatus for protecting investors into processes and code.

We’re executing on regulatory compliance to ensure fairness for all market participants, expanding the set of options for investors by adding new asset classes to DeFi, and leveraging accountability to keep out bad actors who threaten the integrity and profitability of our platform. Our ecosystem of accountability, fairness, and efficiency is purpose built to give investors access to the full potential of DeFi.