Governance tokens within decentralized finance (DeFi) are having a moment again as the regulatory tides may be turning. The anticipation of the Clarity Act, which promises a new framework for DeFi, coupled with a pro-crypto stance from political figures, has injected renewed optimism into the market. This shift comes on the heels of a period of turmoil. In the meantime, the Securities and Exchange Commission (SEC) used this period to crack down on DeFi projects—including those with governance tokens. Recent signs suggest the squeeze of regulatory pressures are starting to let up. This trend may enable DeFi to more meaningfully act as a complement or substitute for TradFi.
Regulatory Winds Change
Decentralized finance projects have been on the SEC’s radar for a while now. Governance tokens, which give holders governance rights over protocol changes and other critical decisions, have been especially in the spotlight. A new, more flexible regulatory paradigm may soon be upon us. It’s pro-crypto policy spearheaded by Donald Trump that’s moving this trend. Perhaps that’s why speculation is running wild that the SEC is preparing to soften its approach. This change would inject new capital into DeFi projects.
The Clarity Act is about to lay down, for the first time, a clear legal foundation for how DeFi can operate. Alongside the cultural impetus to expand this technology, the DeFi movement is steeped in American values of economic freedom, private property rights, and innovation. These regulatory changes could remove decades-old legal hurdles for DeFi projects. This amendment has the potential to foster dynamic, creative expansion and innovation throughout the industry.
Market Performance and Project Developments
After a recent correction, governance tokens are again trending upwards. Indeed they have, as over the past week they have outpaced the broader market by an eye-popping margin. This bullish market action is a result of increasing investor optimism about the long-term value of DeFi.
Developments like Uniswap and Aave, which were first born from and nurtured in the Ethereum ecosystem, would benefit tremendously from these changes. US-based decentralized exchange Uniswap saw a trading volume of $92 billion in May. This milestone is a big deal as it is its fourth-best month since 2020 showing its continued relevance and increasing user adoption. On top of that, both Uniswap and Aave have increased their accessibility and utility by becoming multichain platforms. Increasing amounts of ETH are being deposited on Aave and Sky. This creates an exciting new way for users to borrow stablecoins and unlock additional liquidity for trading.
DeFi's Continued Evolution
Even with regulatory uncertainties, DeFi projects have made hefty technological gains and built perhaps insurmountable bridges with TradFi institutions. Together, these efforts open up new, amazing possibilities for DeFi. Under a better regulatory regime, we’re likely to see both more growth and greater entrenchment into the overall financial system.
Uniswap is an important, symbolic project, and one that would be better served by going in a different direction. DeFi has been hoping for one last green light to do battle with TradFi. The Ethereum eco system is the birthplace of these three projects and nothing would help them more than a realignment of priorities.
