##Is decentralization the answer to DeFi's SEC problem?

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Aave and Synthetix this week took further steps to decentralize their protocols. Is it enough to keep regulators off of their backs? Or were they untouchable all along?

In brief

Two of the largest DeFi protocols took steps toward decentralization this week.

Lawyers say that decentralization is necessary to appease regulators. They said that many DeFi projects are at risk of being hurt by regulators.

Leaders from the two DeFi protocols in question, Aave and Synthetix, said they are not concerned.

The creators of the third and fourth largest DeFi (decentralized finance) protocols, Synthetix and Aave, this week took steps to further relinquish control over the networks to their token holders, ending their reign over the networks they have spent the last few years building.

Decentralizing the network is a common card played by DeFi projects to give control to their users, who can use it to vote on the future of their network without having to rely on some centralized organization.

Decentralizing also keeps regulators off the protocol creators’ backs. They generally operate without licenses—but if nobody controls the network, nobody can be held accountable by government authorities, including for securities violations, which were the downfall of crypto startup fundraising through ICOs. 

Lawyers told Decrypt that DeFi projects are destined to draw the ire of regulators, who are starting to pay more attention to the thriving, $4 billion industry. Since June 1 the amount locked up in Synthetix has quadrupled to $496 million; Aave on Sunday peaked at $600 million, a nine-fold increase.

“Developers who create a market for synthetic securities are playing with fire, period,” Josh Garcia, a partner at New York law firm Ketsal, told Decrypt. 

But the founders of Aave and Synthetix told Decrypt that there was never any risk to begin with. And even if regulators found a way to prosecute them? “It’s unstoppable,” said Stani Kulechov of Aave, the decentralized lending protocol he founded.

Out of their hands

First came the announcement from the Synthetix Foundation, the non-profit that heretofore acted as a steward over its decentralized exchange for tokenized stocks, fiat currencies and commodities. On Tuesday, the Foundation announced that it would dissolve into three DAOs (decentralized autonomous organizations). 

Decentralized lending protocol Aave followed a few days later. “Aavenomics,” proposed Kulechov, would be the latest milestone on “the journey towards a more decentralized governance.” Aavenomics introduces a bolstered governance system that lets token holders vote on future network upgrades. “In practice, we build whatever our community decides,” he said. 

There’s another angle: regulators are starting to pay more attention to decentralized finance. Earlier this month, the US Securities and Exchange Commission and the CFTC, pounced on San Francisco-based crypto stocks platform Abra, and prevented it from offering tokenized versions of stocks and fiat currencies. 

That’s similar to the product offered by Synthetix—only Synthetix’s users trade among themselves and the protocol’s owners don’t collect fees, whereas Abra is a for-profit entity that executes trades on its platform on behalf of its customers, Kain Warwick, the former director of the Synthetix Foundation, told Decrypt. 

Both Kulechov and Warwick said that their announcements this week were not related to the Abra case. Kulechov said he’d been working on Aavenomics since the day after Aave launched, January 8, and that he published the proposal as soon as his protocol swelled with money. “We feel that our team should not govern the future of something that is [a] public goods in its nature,” he said. 

Warwick said that his announcement followed the commencement of the Australian tax year—not Abra. He has gunned for the Foundation’s dissolution ever since 2018—it was a “mistake” to create it, he said; hiding behind a non-profit is a “net negative” for a decentralized protocol, he wrote on Tuesday.