Vitalik Buterin calls effective way to regulate the DeFi sector

What’s new? Ethereum co-founder Vitalik Buterin has shared his opinion on the regulation of the decentralized finance (DeFi) sector. In particular, he believes that the know your customer (KYC) procedure is not capable of resisting hackers because they write their own code to interact with the contracts. Buterin added that the KYC procedure is more effective for exchanges and is already used on various platforms. On his Twitter account, he highlighted the two main areas of regulation in the field of DeFi and suggested additional ways to make it more effective.

The "KYC on defi frontends" idea does not seem very pointful to me: it would annoy users but do nothing against hackers. Hackers write custom code to interact with contracts already. Exchanges are clearly a much more sensible place to do the KYC, and that's happening already.— vitalik.eth (@VitalikButerin) October 30, 2022

What did Buterin write? The Ethereum co-founder cited protecting consumers and creating barriers to the movement of large amounts of money by malicious actors as the main tasks of regulators. Buterin noted that the second aspect concerns crypto payments in general.

According to Buterin, more effective regulation of DeFi interfaces includes:

• limits on leverage;
• available information on contract code security audits;
• providing more options based on user qualifications rather than the size of their capital.

In addition, Buterin considers it a good idea to write rules that could satisfy the requirements with Zero-knowledge proofs (ZKPs). He noted that ZKPs offer many new opportunities to meet regulatory policy and privacy goals at the same time.

Zero-knowledge proof provides the ability to conceal the source, amount, and recipient of a payment. In this, it allows proving that the payment went through and that the correct number of tokens is on a recipient’s account.

Buterin believes that the cryptocurrency industry is not fully ready for the influx of institutional capital. He praised the fact that the launch of many exchange-traded funds (ETFs) related to digital assets has been delayed.

“The ecosystem needs time to mature before we get even more attention,” he added.

In August, Buterin proposed a solution for confidential NFT transmission. In his opinion, the use of stealth addresses will ensure data privacy for token holders.

In September, Buterin released his book titled “Proof of Stake (The Making of Ethereum and the Philosophy of Blockchains).” It is a collection of his notes and essays on the development and philosophy of the blockchain that he has written over the past 10 years.

To find out what Vitalik Buterin considers the most important after the Ethereum consensus algorithm change, read GetBlock Magazine’s article.