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Unlocking the Future of Finance: Key Insights from Ethereum Zürich Conference 2023 on DeFi Trends and Challenges

Dora Medek (Advertising)

Between the 14th and 16th of April 2023, Zürich provided home to one of the largest Ethereum-focused events of the year, the Ethereum Zürich Conference. The hackathon/conference brought together a high-profile community of Web3 and crypto professionals and enthusiasts and hosted various talks and panels discussing hot topics such as Programming Languages, Cryptography, ZKP, Data Availability, P2P Networking, Ethereum Community, Regulations & Compliance, and Tokenomics.

It goes without saying that DCAP attended the event. In this article, we aim to discuss some of its takeaways and key ideas, focusing on the Liabilities of Decentralised Autonomous Organisations (DAOs), Risk Management in Decentralised Finance (DeFi), and DeFi trends.

Liabilities of Decentralised autonomous organisations (DAOs)

During the insightful talk given by Anne-Grace Kleczewski – Co-Chair of the AML-Compliance Working Group at Crypto Valley Association, Senior Legal Counsel at Bonnard Lawson International Law Firm, and PhD researcher at the Université Catholique de Louvain – it became clear that, currently, liabilities for decentralised autonomous organisations (DAOs) are still a grey zone. Generally and theoretically, many answers are already established in traditional law and thus already apply. However, DAOs are decentralised and, therefore, of transnational nature, making things more complicated and existing legal approaches hard to apply.

With the goal of decentralisation, DAOs often do not want or are unable to choose a single jurisdiction. However, others may take this decision for the DAO based on various factors. In addition, the public narrative of DAOs sometimes differs from internal goals.

Hence, aligning and defining the actual plans and the corresponding responsibility chains internally is essential.

Ultimately, DAOs can position themselves on a broad spectrum from a more CeFi-oriented (centralised finance-oriented) model to a fully DeFi-oriented (decentralised finance-oriented) setup. This positioning affects many considerations, including public communications, the responsibility chain, and the ultimate business model. Optimally, this positioning, relevant questions, and the corresponding goals are clearly aligned along all DAO stakeholders from the beginning and communicated consistently during the setup and scaling phase.

Risk Management in DeFi

The presentation on Risk Management in DeFi by Tim Weingärtner – Managing Director at icadis GmbH, Scientist at Data-driven Financial Risk and Regulatory Reporting (DaDFiR3), and Lecturer at Lucerne University of Applied Sciences and Arts – highlighted that we can use features from blockchains and leverage them to apply solid risk management in DeFi by using the properties of immutability, decentralisation, programmability (smart contracts), transparency and permissionlessness. Furthermore, a lot can be learned from traditional finance in this context.

Risks in traditional finance are defined by Basel II (credit, market, and operational risk) and Basel III (liquidity systemic, leverage, and counterparty credit risk), whereas with DeFi, challenges and risks are mainly with the absence of centralised control and maturity dates, limited supervision, and limited suspension (markets are open 24/7). Moreover, the permissionless accessibility, pseudonymity and immutability characteristics can bring other challenges and risks as smart contracts can be subject to vulnerabilities. In the extreme, there could be no safety net or undoing possible in the case of errors. Also, as of today, the user experience can still be lagging, making it to be used only by experts.

Regulatory requirements for DeFi are growing and DeFi is on the regulators’ watchlists.

Potential solutions and strategies are mainly included the adoption of traditional risk management, decentralised governance and further incentives for liquidity providers to stay committed to liquidity pools.

DeFi Trends

A talk from Garry Krugljakow – Advocate D-A-CH region at Polygon Technology, and Founder of GOGO Protocol and 0VIX Protocol – covered some of the key narratives expected to bring Total value locked (TVL) and user growth to DeFi in 2023. These key trends include the following concepts:

Account abstraction is expected to make self-custody more accessible and simplify this option for a mainstream audience rather than depending heavily on centralised exchanges. Amongst other benefits, users can more easily recover their account if keys are lost, define their own security rules, and have better integrations with Dapps (Decentralised Apps).

Zero Knowledge Proofs and Identity Solutions are helping to enable decentralised identity technologies. Users will be able to own, control, manage and permit the usage of identity-related data efficiently.

Liquid Staking Derivatives, including the “Shapella” upgrade on the Ethereum network that enables validators to withdraw their staked ETH. Drawing much speculation as to whether there will be an outflow of staked ETH. While there could be some immediate selling pressure as unlocks initially become available, in the long run, the upgrade should support the growth of Ethereum staking activity and motivate more staking services and tools to emerge and compete.

As previously noted in Professor Tim Weingärtner’s talk, there is a need for a Formal Risk Assessment Framework in the DeFi landscape. DeFi protocols could be improved to make them more robust to market uncertainties, use capital more efficiently, and reduce reliance on over-collateralisation.

The Ethereum Zürich Conference 2023 was a remarkable event that showcased the potential of DeFi, as well as the challenges that lie ahead. DCAP is committed to staying at the forefront of this field, so we can offer our clients the most up-to-date investment solutions and the best possible returns. With our deep understanding of Web3, we are well-positioned to provide the alpha that sets us apart and propels our investors towards success. We look forward to continuing to explore new possibilities in this ever-evolving field and expanding our service offerings in the process.