Cryptocurrencies and Decentralized Finance (DeFi) were born of the ideological desire to create a parallel financial system free of the intervention of governments and their central banks. But in a case of babies and bathwater, this also means that this parallel environment largely operates without a court of law ensuring fair play. The indelibility of software code deployed on public blockchain platforms is the first and final line of defense against bad actors.
Last August, the DeFi platform provider Poly Network was thrown into turmoil after a hacker exploited a fault in one of their smart contracts (which was not a smart legal contract) to extract over $600m. Poly Network was left understandably distressed: according to the ‘law of the code’, it wasn’t even clear if a heist had occurred – they used the smart contract as Poly Network wrote it, but not as they intended it to be used. As smart contracts have no legal standing, intention played no role.
Faced with a breach of this magnitude, Poly Network tried it all. Peer pressure, appealing to a higher ideal and, finally, threatening whatever litigation they could.
The hacker eventually returned the funds claiming that they were a ‘white hat’ good guy. But they were under no legal obligation to do so. This situation points towards something paramount: DeFi ideology performs best in fair weather. When disaster strikes, even hardcore believers revert to a hierarchy of authority that culminates in the state.
Or, as Mike Tyson famously put it; “everybody’s got a plan until they get punched in the face”.
Hunit firmly believes that the value of law must not be forgotten as we embrace technological advancement. In large, complex environments where humans are responsible for configuring Smart Legal Contracts, it is inevitable that errors will occur or vulnerabilities will be found by people with bad intention. When these things happen, it is critical that we have the extra layer of insurance offered by the legal framework that dominates every other aspect of our collective lives. Why should your finances be the only part of your existence outside the reach of a court of law?
Indeed, mainstream, institutional money will never enter into the DeFi space in a meaningful way while the final adjudicator is code; the certainty of the state is essential for organizations bound by regulation and shareholder scrutiny. The simplicity of the Hunit system highlights to the DeFi community the importance and value of the law within the sector. Far from the law being obsolete in the modern age, it can adapt to solidify the considerable benefits that come when we unlock a digital future.