Decentralized finance(DeFi) in the blockchain ecosystem.
1.Introduction.
Contemporary decentralized finance ("Decentralized finance" or "DeFi" for short) poses a technological and legal challenge to let's call it - traditional financial system all over the world, by depriving familiar intermediaries(banks and other financial institutions) of their power to mediate most transactions between citizens and business partners, thus allowing users to retain real control over their money and create tools for a new kind of revenue. This presentation aims to provide clarity on the regulations of the financial crypto market, in order to clarify the fact that the technology behind the DeFi model promises a dynamic, disintermediating revolution in finance, all of which is leading to new realities in the traditional financial sector, which is aware of what is happening and is trying in every way to slow down the process described. The paper will also discuss the important legal implications of the DeFi model for existing financial regulations as well as the challenges faced by regulators on the subject in the EU and the US.
1.1.What is the DeFi financial technology model?
Decentralised finance is delivered through online platforms that allow users to carry out different types of financial transactions, with the aim of improving the accessibility, speed, security and efficiency of financial services without an intermediary. The DeFi concept uses blockchain technology as well as different types of cryptocurrencies (mainly so-called "stable coins" usually based under Ethereum[1]) because of the concept of "smart contracts" implemented in the code to manage financial transactions such as lending, borrowing and trading outside the control of traditional financial institutions such as banks, brokerage firms and centralized exchanges. Users therefore interact with open software protocols through so-called "unhosted" wallets. Unhosted wallets are digital, physical wallets (usually looking like a flash drive or external hard drive) that are managed by the users themselves, rather than by a service provider that offers "hosted" - web-based crypto wallets.
1.2.How does the DeFi concept work on a technological level?
Decentralized finance uses blockchain platforms to remove technically centralized models and allow facilitated delivery and access to financial services anywhere in the world using cryptocurrencies, rather than having it all happen in a slow, speculative manner(banks no longer provide interest but have fees for each transaction) through traditional financial intermediaries. By eliminating the latter, DeFi users maintain full and transparent control over their financial flows through personal crypto wallets (operating under DeFi smart contracts) and trading services, allowing them to interact directly with each other through DeFi mobile online applications (so-called "dApps").
1.2.1. "Smart Contracts" at DeFi.
The technology behind the DeFi concept uses smart contracts that provide the basic components for the operation of dApps, encoding the necessary conditions and activities for the operability of these applications. Simply put, smart contracts are computer programs running on a blockchain that control digital assets and automate the terms and volitions between buyers and sellers or lenders and borrowers. These smart contracts record every low-level expression of intent in the software code concerning a specific transaction between two or more parties, thereby providing transparency in the legal relationship between the parties, providing transaction certainty, and minimizing costs. Another factor that proves that smart contracts are trustworthy is the level of security they provide. Smart contracts operate on networks with immutable data. This means that the data generated cannot be altered or edited in any way. This allows the workflow to be executed securely while maintaining information security. Encryption technology implements smart contracts according to a well-defined, pre-programmed plan.
Therefore, one of the significant benefits that smart contracts offer is automatic execution when the terms of the contract are met. Thus, no manual operations are required to achieve the results. In other words, smart contracts are free from interruptions, and the set conditions cannot be changed by third parties. Thus, it helps organizations automate certain business-in this case financial-functions and solves issues where trust is an issue.
1.2.2 Software protocols in DeFi.
DeFi software protocols running under blockchain technology are based on rules created to manage specific software tasks or activities having a specific financial outcome. They are interoperable, which means they can be used by multiple entities simultaneously to build a service or application, allowing buyers, sellers, lenders and borrowers to interact with each other in real time, make will statements that are noted in code and enter into lightning(like timing) transactions. DeFi protocols achieve their investment goals through self-executing(automatically) smart contracts that allow users to invest cryptoassets in a token that other users can borrow. Understanding DeFi protocols requires an understanding of the definition of decentralized funding. Peer-to-peer financing, also known as decentralized financing, refers to the transition from conventional, centralized financial systems to peer-to-peer financing. In addition to tokenised digital currency and so-called “stable coins”[2], the DeFi ecosystem has successfully created a platform for lending and borrowing. Over time, the DeFi landscape has evolved into a vast network with integrated financial tools and protocols.
The most common protocols for current DeFi projects are built on the Ethereum platform[3].
1.2.3. Decentralized applications (dApps).
So-called dApps[4] transform basic protocols into simple user-centric services. DeFi can be used for the full range of financial services, including crypto asset trading, lending and borrowing, savings, payments, equity trading, risk insurance, etc.
Unlike traditional software that runs on centralized servers, dApps run on a decentralized network of censorship-resistant nodes that are difficult to shut down. Given the transparent nature of blockchain, most dApps feature open source software that users can verify and audit themselves.
Most blockchain protocols on which dApps are built are protected and incentivized by a Proof-of-Work (PoW) consensus mechanism, a Proof-of-Stake (PoS) consensus mechanism, or a combination of both. Although there are many other types of consensus mechanisms, these two are by far the most common. These consensus mechanisms work to maintain network security while avoiding centralization problems in their own way. In addition, dApps are typically designed to incentivize users - usually through token rewards - to maintain the security, transparency, and operational efficiency of the dApp itself. Perhaps most importantly, dApps are global and accessible to the majority of the population via the Internet.
1.2.4 Management Tokens in DeFi.
Some DeFi protocols distribute so-called "management tokens" to reward users for engaging with the system and for performing or maintaining various types of transactions. Participants typically earn tokens by interacting with and providing services to a protocol, for example by providing liquidity in a decentralized exchange or collateral on a lending platform. Examples of such prefects are Uniswap and Compound, in the former case you exchange your tokens or offer a portion of them for a % of the reward, and in the latter you lend your tokens and earn the interest, which you can withdraw at any time.
These management tokens usually give users a right of return (reward) from the project and allow users to vote on changes proposed within the protocols. Based on the associated rights, as mentioned the management tokens have value and can be traded. This structure enables a wide range of holders to contribute to the management and development of a project by voting on proposed changes to the protocol and, therefore, its incentives and operations.
1.2.5 DeFi platforms.
The DeFi concept does not just build financial services as software, but re-creates the whole ecosystem of finance on new technological foundations, the so-called "DeFi platforms". These platforms target consumer financial interfaces that require blockchain technology as well as crypto holders to operate. Blockchain technology acts as a digital highway, allowing DeFi transactions to move. There are several decentralized platforms including decentralized exchanges (DEX), lending and borrowing, equity trading (complex derivatives), insurance, asset management, etc.
1.2.6.DeFi lending platforms.
DeFi Lending Platforms are online platforms that allow cryptocurrency holders to instantly and anonymously lend huge sums of money to people who want to borrow, provided they can provide sufficient collateral to deposit in a smart contract and settle the loan within an agreed timeframe. Lenders earn interest on the amount borrowed (credit intermediation). Some DeFi protocols offer crypto loans against collateral in fiat money and vice versa. In addition to loans, DeFi users can borrow tokens to participate in blockchain activities such as governance. Some examples currently present in the crypto space are Compound, Makerdao and Aave.
1.2.7. DeFi derivatives platforms.
Derivatives are contracts with values derived from underlying assets. They were originally used to balance exchange rates for international swaps in the foreign exchange market or currency market. The concept has spread to other financial markets. Examples of derivatives are options, prediction markets, futures and secured loans. These securitised contracts give investors a way to interact with an asset without holding it. In addition, derivatives allow investors to hedge positions, speculate on the direction of movement, leverage their holdings and transfer risk to other parties. The two classes of derivatives are lock derivatives and options derivatives. In locking derivatives, the parties are bound to the agreed terms throughout the life of the contract. Option derivatives allow the holder to buy or sell the underlying asset before expiry.
DeFi's derivatives platforms create markets for synthetic assets where users can create derivative positions in cryptocurrencies while providing collateral (collateral) to support those positions (derivatives trading). They automatically track the value of commodities, stocks, indices or any combination of financial instruments. The most famous example to date is Synthetix.
1.2.8. Non-custodial lending platforms.
Cryptocurrencies have expanded further into the DeFi world through the recent creation of custody-free lending platforms. These are decentralized marketplaces in which users participate as depositors or borrowers. The concept of these lending platforms is designed to mitigate any potential loss or default by controlling the collateral in the blockchain. Retail lenders are able to quickly liquidate unhealthy loans on these lending platforms through the underlying technology of the platform itself. DeFi tokens also have the potential to open up liquidity in various markets that were previously unable to transact. Theoretically, DeFi users could provide credit and liquidity through cryptocurrencies to users around the world, including markets in developing countries that traditionally do not see an influx of Western funds.
1.2.9. Innovative DeFi services.
Based on DeFi technology, users can now receive financial services such as margin trading, so-called "Yield farming", "liquidity mining" and crypto betting in the ledger. In recent years, betting platforms and income farming protocols have gained meteoric popularity. In fact, "Yield farming" is a tool for providing liquidity in a blockchain project. This financial phenomenon can be classified as the "act of seeking rewards" when interacting with DeFi protocols by temporarily depositing assets as collateral in a liquid token that can be used by other users, including investors and startups, in exchange for financial rewards(interest).
"Liquidity mining" is a specific form of income extraction where digital asset owners provide liquidity to DEX in exchange for rewards. As DEX has historically suffered from low liquidity, this is an important development for the ecosystem as well as a major source of revenue for some digital asset investors. While liquidity miners and income producers add funds to tokens with liquidity, pledgers either hold funds in a wallet or delegate their coins to a validator node. This technique(from DeFi staking) involves the process of locking crypto assets into a smart contract in exchange for rewards and generating passive income. The cryptoassets that can be staked are fungible tokens or non fungible tokens (NFTs), and the rewards usually correspond to earning more of the same. This is a great way to incentivise cryptocurrency investors to hold on to their assets while earning high interest rates.
DeFi staking is more attractive to investors who can benefit from higher rewards than a traditional savings account. Yet it comes with higher risks, coupled with more significant challenges that crypto markets reveal, such as the well-known volatility in all areas and the network security of new blockchains. This new financial instrument is becoming increasingly popular as it does not require any particular trading or technical skills, and the most significant challenge for investors may be the selection of an appropriate and secure platform.
In contrast to proof-of-work blockchains (from the proof-of-work (PoW) blockchains), which use extensive computing power to verify transactions on the blockchain, DeFi stacking is based on proof-of-stake (PoW) networks. Proof-of-stake (PoS) networks) in which transactions are verified by validators who are the underlying pledgers of the network.
2.DeFi Market. Challenges and drawbacks.
Since 2019, DeFi has been one of the fastest growing crypto sectors. Interest in crypto and DeFi grew rapidly during the Covid-19 pandemic and investment accelerated for the aforementioned reason. However, DeFi is still in the early stages of its evolution, in which the total financial value locked in DeFi from various types of instruments (collateral tokens, smart contracts/DeFi protocols) across leading platforms such as Maker, Compound, Uniswap and Aave has grown from less than $1 billion in 2019 to over $90 billion in January 2022.
This growth is driven in part by investors seeking increased transparency and control of their funds regarding the open web as an attractive alternative to traditional banking. Another reason evidencing this growth has been the maturation of stablecoins, such as cryptocurrencies designed to track the value of fiat instruments, such as the US dollar (USDT). Incentive structures such as yield farming and management tokens were developed through which participants could earn returns for providing liquidity to DeFi services.
2.1.DeFi benefits.
The use of DeFi applications has a number of interesting benefits beyond traditional financial services, in terms of easier access to financial products and liquidity, improved market efficiency, enhanced financial privacy, lower fees, process transparency, and faster innovation.
2.1.1 Peer-to-peer trading at DeFi.
Because dApps fuel the blockchain ecosystem without intermediaries, thus using self-executing codes that predict the outcome and resolution of activities on these platforms, they also provide flexibility as well as direct person-to-person trading with high levels of transparency and zero join requirements.
Peer-to-peer (P2P) trading is a type of cryptocurrency exchange method that allows traders to trade directly with each other without the need for a centralised third party to facilitate transactions. Unlike traditional Bitcoin (BTC) exchanges, which typically have strict rules and require users to go through a vetting process before gaining access and using the platform, DeFi P2P trading platforms are typically much more lax in their requirements.
With DeFi P2P trading, you can select your preferred quote and trade directly with a counterparty from your own hardware wallet instead of using an automated mechanism to execute transactions. This means you have greater freedom to choose the best rate and payment method for your needs - and at a lower cost. You can also better protect your privacy as you trade directly with a counterparty through a public key exchange.
2.1.2.Economy.
There are also theoretical benefits to international financial transactions on DeFi. The decentralized nature of DeFi platforms and their protocols makes them technologically accessible worldwide. The idea is that thanks to the cheaper alternative offered by DeFi, money transfer fees and bank commissions, for example, will decrease, and currency conversion will have to become cheaper to make the services in question more competitive.
2.1.3.Lower costs.
DeFi as decentralized platforms without custody have low costs because they, as market competitors, often remain unregulated and have minimal operational and regulatory costs. The absence or lack of central intermediaries for such services makes it difficult for regulators to prohibit as well as fully regulate DeFi services accordingly.
2.1.4 Innovation in DeFi.
Innovative solutions in DeFi technology have led to new types of services, triggering further innovation. If a community of users is dissatisfied with the service provided by a DeFi protocol, that community may vote to change the services supported by that protocol, or it may spin off the existing open source base and develop a new protocol to better meet the needs of the community.
This self-growth, self-control, and innovative approach to each DeFi project is a key criteria for the claim that the DeFi ecosystem is enriching and innovating every day, and that this process is elemental, clean, and absolutely transparent, leading to its constructiveness.
2.2.DeFi and its associated risks.
DeFi is an emerging financial concept, which naturally has its risks, such as presumed user errors. A key issue related to the risk of DeFi is the question of who assumes responsibility for a user error that occurs during a transaction, as it is well understood that it is in blockchain technology that a will made cannot be undone.
I would not say that there is a vulnerability of technology here - on the contrary, it will execute the will of the user and if it is wrong, it will be so noted in the code and the smart contract executing dApps( embedded in the code) will execute automatically, the second the will of the sender to the addressee and the transaction will be concluded - wrong or not.
On the other hand, we can assume that software systems can also malfunction due to a wide variety of factors. For example, what if incorrect input of public or private code causes the system to crash? Or what if the compiler, which is responsible for compiling and executing codes, makes a mistake. Who is responsible for these changes and/or errors?
Although many DeFi tokens have already provided lucrative returns, they come with significant risk and price volatility that exceeds well-established digital assets (Bitcoin and Ethereum). Their lower liquidity means they are more susceptible to large price fluctuations.
Finally, the anonymity of participants in DeFi transactions makes them vulnerable to cyber-attacks, hacks and fraud. This can lead to the loss and/or theft of funds with no regulated means of protection available. However, the regulatory framework is slowly but steadily evolving and this is the subject of the next two paragraphs.
3.Legislative decisions on DeFi in the USA.
In 2022, United States regulators paid close attention to this nascent field, giving significant attention to ending the anonymous nature of the ecosystem. On the topic, it was brought to the public's attention that DeFi's protocols allow users to trade, borrow and lend digital assets without having to go through an intermediary. DeFi ecosystems are inherently decentralized, with the majority of projects being managed by automated smart contracts and decentralized autonomous organizations (DAOs). Most DeFi protocols do not require onerous Know Your Customer (KYC) requirements, enabling traders to trade anonymously.
A leaked copy of the US draft law on cryptoassets and transactions in June showed some of the key areas of concern for regulators, including DeFi stablecoins, DAOs and crypto exchanges. The bill pays particular attention to consumer protection with the intention of eliminating any anonymous projects. The bill requires any crypto platform or service provider to legally register in the United States, whether it is a DAO or DeFi protocol.
On the topic - Sebastian Davis, a director at institutional infrastructure and liquidity provider Aquanow, blamed regulators' lack of technological understanding as the reason for the regressive approach. He told the Cointelegraph that events such as the sanctioning of Tornado Cash users after the app was added to the Office of Foreign Assets Control's list of Specially Designated Nationals showed a lack of technological understanding.
It is worth noting here that in the United States there are multiple federal authorities that have jurisdiction to influence certain legal aspects of DeFi technology, including the Department of Justice, the Financial Crimes Enforcement Network, the Internal Revenue Service, the Commodity Futures Trading Commission and the Securities and Exchange Commission. Despite the number of authorities that have some legal control over the processes described, it should be noted that DeFi investors generally do not receive the same level of protection and guaranteed disclosure that is statutorily guaranteed in other regulated markets in the United States. For example, various participants in DeFi activities and their assets fall within the SEC's jurisdiction because they involve securities and securities-related conduct. However, to date, no DeFi participant within the SEC's jurisdiction has registered with the organization in question for institutional monitoring purposes. If investment opportunities are being offered completely outside of regulatory oversight, investors and other market participants should be aware that DeFi markets are credited by the SEC as being riskier than traditional financial markets, in which participants generally follow specific rules and for the violation of which they bear civil and criminal liability.
Throughout the United States, the SEC has a variety of tools at its disposal, ranging from rulemaking authority through various exemptive or other relief. The U.S. government has devoted significant resources to providing feedback, supporting innovation, and developing in-house expertise to ensure that regulatory approaches are based on an accurate understanding of the technology. For example, the SEC has a FinHub and a number of other bodies have innovation initiatives that engage with DeFi market participants and study the technology.
Regarding the existing legal framework, it should be said that under Section 2(a)(1) of the Securities Act and Section 3(a)(10) of the Exchange Act, a security includes an "investment contract"[5] . What we have said leads us to conclude that the basic investment contract test for DeFi transactions should be the existence of an investment in a common enterprise based on a reasonable expectation of profits to be derived from the entrepreneurial or managerial efforts of others. This requirement of the US regulatory framework is at odds with what actually happens in the DeFi concept, as third party entrepreneurial efforts are absent here.
From these perspectives, it is also important to note that U.S. case law defines the existence of an investment contract only when investors have reasonably relied on the efforts of promoters to create a secondary market for trading an instrument, even if that instrument would not be a security in and of itself[6].
That being said, I should note that the statistics point to the fact that the SEC is continually bringing cases against violators of the regulatory framework. For example, in early 2022, the SEC took an enforcement action against an alleged DeFi platform and its individual promoters because they failed to register their app with the SEC while raising $30 million and misleading their investors by improperly spending the latter's money on themselves. US regulators indicate that the more projects voluntarily comply with regulations and register with the SEC, the less likely the SEC will conduct investigations and litigation. The future development of the regulatory framework and case law on DeFi in the US is clearly a work in progress.
4.European regulatory framework on the DeFi issue.
In September 2020, the European Commission adopted the proposed Markets in Cryptoassets Regulation (MiCA). The purpose of this piece of legislation is to improve the harmonisation and legitimisation of how tokens are regulated in general and the oversight of issuers as well as firms that qualify as cryptoasset service providers (from CryptoAsset or CASP). MiCA will set clear rules for cryptoassets in the European Economic Area, establishing a common framework while avoiding any potential inconsistencies.
MiCA aims to provide greater legal certainty, supporting innovation, ensuring appropriate levels of protection for consumers and investors, promoting market integrity and financial stability and thus transforming the current fragmented EU legislation and regulatory framework for cryptoassets into a more unified approach.
The MiCA will be directly applicable across the European Union (EU) without the need for national implementing laws. This approach is consistent with protecting consumers and ensuring efficient and harmonised access to innovative cryptoasset markets within the single market. The MiCA Regulation has four main objectives:
- Provide legal certainty by creating a robust legal framework for cryptoassets within its scope that are not covered by existing financial services legislation;
- Supporting innovation and fair competition to promote the development of cryptoassets by introducing a safe and proportionate framework;
-Protecting consumers, investors and market integrity by taking into account the risks associated with cryptoassets; and
-Ensuring financial stability by including safeguards to address potential risks to financial stability.
The Cryptoasset Markets Regulation was initially expected to be implemented by mid-2023. However, it is likely to be postponed until 2024, as an 18-month period is foreseen to allow for the adoption of Level 2 measures before MiCA implementation.
3.1.Scope of the Cryptoasset Markets Regulation.
The majority of cryptoassets not already covered by other regulations, such as security tokens and central bank digital currencies, fall under the scope of MiCA, namely:
-Electronic money tokens;
Asset-linked tokens;
-Utility tokens;
- Obligations of issuers of cryptoassets under MiCA.
This new MiCA regime clarifies on the one hand which tokens will qualify as "financial instruments" and thus fall under the existing financial services regulatory regime as amended, and on the other hand which tokens will qualify as "cryptoassets" and thus fall under the MiCA specific CASP regime.
The assessment of whether a digital asset will be a cryptoasset and subject to MiCA or a token that is a financial instrument subject to the existing financial services regime will depend on the content of the financial instrument, not the technology behind it.
With the introduction of MiCA, the European Commission intends to bring stablecoins into scope and amend the e-money regime to include a new definition of e-money. The new definition will be "e-money token" or "token linked to an asset", which means a type of cryptoasset whose primary purpose is to be used as a medium of exchange and which aims to maintain a stable value by being denominated in fiat currency.
Other stablecoins are defined as "asset-referenced tokens", which is a type of cryptoasset whose primary purpose is to be used as a medium of exchange and which purports to maintain a stable value by referencing the value of several fiat currencies, one or more commodities, or one or more cryptoassets, or a combination of such assets. Stablecoin issuers (as a type of "asset-referenced token") that are not already regulated as credit institutions or electronic money institutions will need to be authorized, as well as publish a white paper approved by their home country regulator, in order to market it accordingly.
For stablecoins that do not fall within the above definition, issuers of such stablecoins must still publish a white paper, notify the regulator, and may not call their coins "stable".
Issuers of "significant e-money tokens" and "significant asset-linked tokens" will be directly regulated by the European Banking Authority (EBA) and will have additional capital, interoperability and liquidity management obligations.
Cryptoasset issuers covered by MiCA, namely those that offer cryptoassets to third parties, may be subject to several obligations, including, without limitation:
-Publication of a white paper, which has certain similarities to prospectuses published under the Prospectus Regulation;
-The need to obtain authorisation to issue cryptoassets;
-Compliance with certain prudential rules when offering cryptoassets;
- Obligation to act honestly, fairly and professionally towards holders of cryptoassets, in particular in relation to managing conflicts and preventing or maintaining security access protocols.
The applicable regime depends on several elements, taking into account in particular the type of cryptoassets offered and the size of the offer.
3.2 Cryptoasset service providers, services within the scope of MiCA.
Certain standard services, when performed and provided in respect of each type of cryptoasset covered by MiCA, are covered and regulated by MiCA. The custody and administration of cryptoassets on behalf of third parties, as well as the provision of advice on cryptoassets, are some of the services that qualify as cryptoasset services. Entities providing cryptoasset services qualify as cryptoasset service providers.
Cryptoasset service providers must be licensed to provide cryptoasset services. Cryptoasset service providers applying for authorisation to benefit from a European passport must meet certain specific criteria.
3.3.The view of the European Central Bank (ECB) on the MiCA regulation.
In February 2021, the ECB published its opinion on the MICA regulation. Their proposals are generally intended to provide greater powers to the ECB, to set legal requirements for certain issuers of stablecoins and to generally improve the fight against money laundering and take measures to prevent terrorist financing.
The ECB supports MiCA's views and its contribution to the harmonisation of the regulation on cryptoassets. However, the ECB suggests several adjustments and clarifications to improve the view of which tokens and what activity will fall under and be regulated by MiCA, the regulatory authority under which these tokens will fall, and what activity will be subject to MIFIR/MIFID II. The ECB also recommends providing a clearer definition of what constitutes a cryptoasset that falls under MiCA regulation in order to facilitate the cross-border provision of cryptoasset services and establish a truly harmonised set of rules for the cryptoasset industry.
The ECB has proposed a clear distinction between cryptoassets that will be classified and thus treated as MIFID II financial instruments and those that will fall under the MiCA regulatory regime. In particular, the ECB has requested a number of changes with regard to the supervision of stablecoins. The ECB also requires additional safeguards under MiCA, including prudential and liquidity requirements for such issuers of stablecoins.
Author: Mr. Atanas Kostov – attorney at law
[1] Ethereum is an open source decentralized blockchain software with smart contract functionality. Ether (abbreviation: ETH;[a] sign: Ξ) is the platform's cryptocurrency. Among cryptocurrencies, Ether is second only to Bitcoin in market capitalization worldwide.
[2] "Stable coins" are cryptocurrencies whose value is pegged to that of another currency, commodity or financial instrument. Stable coins are intended to provide an alternative to the high exchange value of the most popular cryptocurrencies, including Bitcoin (BTC), as the latter has proven to be more of a speculative instrument, unsuitable for widespread use in financial transactions. An example of an Etherium stablecoin is DAI.
[3] The last two years have seen a huge growth in technologically perfect DeFi protocols. In 2020, DeFi's assets reached a value of over $12 billion, making it one of the most promising financial concepts in the world. Here again, I remind you that DeFi protocols are specialized autonomous programs that have been developed to solve technical and legal problems related to the traditional financial industry. The DeFi protocol aims to change the financial behavior of the more than half of the world's population that does not have access to a bank account, but instead has access to a mobile phone(for example).
[4] You can see all dApps under Etherium, and what their actual functionality is here: https://ethereum.org/bg/dapps/#explore
[5] See 15 U.S.C. §§ 77b and 78c. An investment contract is an investment of money in a common enterprise with a reasonable expectation of profit, to be derived from the entrepreneurial or managerial efforts of others. See SEC v. Edwards, 540 U.S. 389, 393 (2004); SEC v. W.J. Howey Co., 328 U.S. 293, 301 (1946); see also United Housing Found. Inc. v. Forman, 421 U.S. 837, 852-53 (1975).
[6] See Case Gary Plastic Packaging Corp. v. Merrill Lynch, Pierce, Fenner & Smith, Inc, 756 F.2d 230 (2d Cir. 1985).