The case for truly decentralised finance

An analysis of the far end of the spectrum of decentralisation

Daniel Victory

The crypto industry increasingly agrees that most decentralised financial (DeFi) products and services exist somewhere on a spectrum between centralised and decentralised. DeFi protocols or systems often tend to have some elements of centralisation. Most of the proposed approaches to regulating DeFi from international policymakers and regulators focus on identifying these points of centralisation and holding a person or group of people accountable.

However, it can’t be ignored that truly decentralised protocols and systems do exist. The term true DeFi (tDeFi) refers to protocols or systems purely made up of code which run independently and have no person or group of people accountable for operating them (both from a technological and governance perspective). Such systems can perform services that would traditionally be regulated and potentially affect user assets and the value of the assets used or traded on the protocol.

The benefits of tDeFi to users are clear. It makes peer-to-peer financial services that traditionally require intermediaries faster, cheaper and more accessible. Users have direct control of their own assets, so there is less counterparty risk, and transparent, equitable protocols govern financial interactions. Users have universal access to financial services regardless of their geographic location or socioeconomic status.

Currently, we can provide evidence for the following examples of tDeFi.

The Bitcoin network

The Bitcoin network is possibly the best example of tDeFi. Holders of Bitcoin (BTC) can transact with each other without any intermediaries in a permissionless manner. Both the technology and the governance of the network are decentralised.

The technology of the Bitcoin blockchain is decentralised as significant numbers of nodes and miners exist worldwide, allowing it to operate continuously without relying on any single node or miner to validate transactions.

From a governance perspective, the Bitcoin Improvement Proposal (BIP) system, which determines how the Bitcoin Network evolves (e.g. upgrades), is also decentralised, meaning no central entity determines how the Network is governed or evolves. BIPs can be proposed by anyone. These proposals are then discussed, vetted and peer-reviewed by the wider Bitcoin community and core developers prior to a voting/signalling process involving miners. During the voting/signalling process, miners must signal their approval or disapproval of a BIP, and the percentage of miners who approve it determines whether a BIP will be implemented. This is a thorough process with multiple stages, checks and controls to ensure that any BIP propagated to the Network is for the benefit of Bitcoin and abides by its ethos.

The Maker Protocol

Maker is a tDeFi protocol that operates on the Ethereum blockchain. It allows anybody to mint and redeem the DAI cryptoasset, a crypto-collateralised United States Dollar (USD) stablecoin, by depositing certain cryptoassets to vaults on the Maker Protocol. It could be considered truly decentralised for the following reasons:

From a technology perspective, the Maker Protocol operates on the Ethereum blockchain, which is truly decentralised due to its proof-of-stake consensus mechanism and large number of validators, nodes and clients. The Ethereum Improvement Proposal (EIP) system is similar to the BIP described above. The Maker Protocol is composed of a series of smart contracts that mint or burn DAI or liquidate collateral in the vaults with no involvement from a person or group of people.

The Maker Protocol is governed by a decentralised autonomous organisation (DAO), MakerDAO, which is comprised of all users that hold MKR, the Protocol’s governance token. MKR gives holders the right to initiate, participate in and vote on the decisions that determine how the protocol operates, both now and in the future. One MKR token represents one vote in governance decisions. The more tokens a user has, the more votes they have and, thus, the more influence over the system.[1]

The Maker Foundation, comprised of the founders, team, and developers, originally determined how the Maker protocol operated, but with the plan to eventually move to a decentralised governance model once the protocol was stable, sufficiently developed, and bugs were ironed out. This happened in July 2021 when the Maker Foundation was formally dissolved, and complete control over the Maker protocol was handed over to the token holders of the DAO.

Segregated decentralised exchange protocols

Decentralised exchanges (DEXs) can have certain operational elements that are centralised, such as teams that maintain the protocol and can upgrade smart contracts or that actively market and earn from the services provided. But in certain cases, DEXs could also be considered tDeFi if they are sufficiently segregated from legal, governance and operational perspectives.

DeFi protocols are increasingly separating their front-end interfaces, websites or platforms through which users can access the protocol from the underlying decentralised protocol itself to position the protocol as tDeFi. The front-end interface has its own legal entity. A separate developer entity or lab is contracted to build the underlying protocol for the front-end entity, with neither entity able to upgrade or modify it once it’s live. If an upgrade is desirable or necessary, a new version of the protocol would need to be built, and users would then need to migrate liquidity to this newer version. Fees from the decentralised protocol would likely need to go to some sort of DAO treasury, where governance token holders decide what to do with them, rather than go to the front-end entity or founders (at least in their entirety).

In such a setup, the entity that controls the front-end interface could potentially be regulated as a facilitator of transactions in some jurisdictions. However, the underlying protocol operates in a decentralised manner without the involvement of any accountable entity and cannot be regulated under traditional regulatory paradigms.


The existence of tDeFi, exemplified by the Bitcoin network and protocols like Maker, underscores the power of such systems and their future potential, given the many benefits they provide to users. The Bitcoin network facilitates peer-to-peer transactions, operates without intermediaries and is governed by a decentralised process of proposal and validation. Maker’s protocol, built on the Ethereum network and governed by a DAO, allows governance token holders to participate in a decision-making process that ultimately shapes the trajectory of the protocol. As DEX protocols are legally segregated from the entities that govern their front-end interfaces, we are left without a person or group of people that is accountable for the technology.

Our existing regulatory paradigm involves identifying accountable individuals or groups of individuals and subjecting them to regulation. Considering that tDeFi does exist and its growth is undoubtedly on the horizon, how might we shift our regulatory paradigm to achieve regulatory outcomes for financial systems where no individual or group is accountable for the technology or governance?

For more on decentralised finance, check out the other articles in XReg Consulting’s DeFi series:

  1. An introduction to decentralised finance
  2. The existing traditional vs. progressive approaches to DeFi regulation

XReg Consulting is a public policy and regulatory affairs consultancy specialising in crypto. We help governments formulate sound policy, regulators supervise effectively, public authorities build capacity, and crypto businesses thrive and follow the rules. For further insights or questions on decentralised finance, get in touch at

[1] Some may argue that token holders with a significant concentration of MKR would be able to exhibit a certain control over the system. Because the Maker Protocol is pseudonymous, the identities of token holders are unknown, and the existence of such token holders has not been proven.