Trust in Context: The Impact of Regulation on Blockchain and DeFi

Blockchain & Society Policy Research Lab Research Nodes 2022/1

EUI Department of Law Research Paper Forthcoming

‘The Impact of Emerging Technologies on Trust and Governance’ (special issue of Regulation and Governance), Forthcoming

Amsterdam Law School Research Paper No. 2022-07

Institute for Information Law Research Paper No. 2022-01

Amsterdam Center for Law & Economics Working Paper No. 2023-03

23 Pages Posted: 9 Mar 2022 Last revised: 24 Mar 2023

See all articles by Balázs Bodó

Balázs Bodó

University of Amsterdam - Institute for Information Law (IViR)

Primavera De Filippi

Université Paris II - Panthéon-Assas

Date Written: March 7, 2022

Abstract

Trust is a key resource in financial transactions. Traditional financial institutions, and novel blockchain-based decentralized financial services (DeFi) rely on fundamentally different sources of trust and confidence. The former relies on heavy regulation, trusted intermediaries, clear rules (and restrictions) on market competition, and long standing informal expectations on what banks and other financial intermediaries are supposed to do or not to do. The latter rely on blockchain technology to provide confidence in the outcome of rules encoded in protocols and smart contracts. Their main promise is to create confidence in the way the blockchain architecture enforces rules, rather than to trust banks, regulators, markets. In this article, we compare the trust architectures surrounding these two financial systems. We provide a deeper analysis of how proposed regulation in the blockchain space affects the code- and confidence-based architectures which so far have underwrote DeFi. We argue that despite the solid safeguards and guarantees which code can offer, the confidence in DeFi is still very much dependent on more traditional trust-enhancing mechanisms, such as code governance, and anti-fraud regulation to address some of the issues which currently plague this domain, and which have no immediate, purely software-based solutions. What is more, given the risks of bugs or scams in the DeFi space, regulation and trusted intermediaries may need to play a more active role, in order for DeFi to gain the trust of the next generation of users.

Keywords: Trust, trustworthiness, blockchain, decentralized finance, finance, institutional analysis, regulation

JEL Classification: L50, Z18, B25, P16, B52, H41, O35, Z13

Suggested Citation

Bodó, Balázs and De Filippi, Primavera, Trust in Context: The Impact of Regulation on Blockchain and DeFi (March 7, 2022). Blockchain & Society Policy Research Lab Research Nodes 2022/1, EUI Department of Law Research Paper Forthcoming, ‘The Impact of Emerging Technologies on Trust and Governance’ (special issue of Regulation and Governance), Forthcoming , Amsterdam Law School Research Paper No. 2022-07 , Institute for Information Law Research Paper No. 2022-01, Amsterdam Center for Law & Economics Working Paper No. 2023-03, Available at SSRN: https://ssrn.com/abstract=4051842 or http://dx.doi.org/10.2139/ssrn.4051842

Balázs Bodó (Contact Author)

University of Amsterdam - Institute for Information Law (IViR) ( email )

Rokin 84
Amsterdam, 1012 KX
Netherlands

Primavera De Filippi

Université Paris II - Panthéon-Assas ( email )

12 place du Pantheon
Paris cedex 06, 75231
France

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