Rethinking the Rule and Role of Law in Decentralized Finance

Decentralized Finance (DeFi) has presented itself as the next building block in a market-based crypto economy. While the jury is still out on its (potential) benefits for society at large, it has become apparent that DeFi is qualitatively different from earlier blockchain applications because of its governance model based on Decentralized Autonomous Organizations (DAOs). This decentralized governance model has enabled the evolution from peer-to-peer to peer-to-network applications, allowing more sophisticated financial transactions to take place on permissionless blockchains. This paper analyzes the political economy of decentralized governance, the means by which the law attempts to govern DeFi, and alternative roles that the law could occupy in the governance of DeFi. It is found that as applications grow more complex, the need for politicized decision-making increases, but that enforcing regulatory perimeters becomes even more challenging. It is therefore suggested that the law could occupy a more facilitative, incentive-based role in the governance of DeFi as opposed to an enforcement-oriented role. By way of illustration, a state-organized DAO serving as forum to reach rough consensus on network-to-network matters is proposed. It is concluded that rethinking the rule and role of law in DeFi serves purpose as it provides state actors with additional tools and policy options in a transnational environment hostile to formal state intervention.