Why the crypto sector needs radical transparency in the post-FTX world
It is easy to predict the “death of the crypt.” Over the past few months, confidence in the crypto industry has fallen due to bad actors, and the long decline in cryptocurrency prices, otherwise known as the “crypto winter.” These factors undermine the long-term use of digital currencies and financial assets. However, the original capability of blockchain technology still holds.
The goal of cryptocurrencies and decentralized finance (DeFi) is to reduce barriers to financial inclusion for the masses through technology that removes the challenges that exist for users of current centralized financial institutions. DeFi is available to anyone with an internet connection, offers low fees and often high interest rates, offers security and transparency, and full autonomy to users.
Sounds good in theory, right? But if you’re new to crypto or just “crypto-curious,” the learning curve to access truly decentralized finance isn’t just steep, it’s practically vertical. Quite simply, many of the current applications are too difficult for most people to use. There are many steps you have to go through to deposit fiat currency, you have to deal with self-storage of assets, and these applications do not have the user interface for mass adoption. Consumers rightly need a more simplified and user-friendly alternative. To help, many crypto-curios have moved to custody products.
In short, the difference between detention and non-custodial release is simple. Custodial solutions use centralized technology to store user assets in one place, enabling more simplified application security measures as these operations take place with a third party. Non-custodial solutions keep users’ individual security data on their platforms themselves, ensuring that no third-party involvement occurs. While this is more in line with the goal of complete decentralization, putting individual users in charge of complicated security protocols can make their experience much more complex.
To put the pitfalls of non-custodial solutions into perspective, it is estimated that nearly 20% of Bitcoin is lost due to users not remembering their seed phrase, the very long and complicated security phrase used to log in. Forgetting or misplacing this sentence means you could be banned from your assets forever, as non-custodial platforms have no authority to reverse user actions or support users when a mistake is made. In addition to the disadvantage of memorizing seed sentences, there are a number of other disadvantages of non-memorization. Trading can take longer as each transaction takes place on the blockchain, rather than in one centralized location. Trading can also be less private as the blockchain is known for its extreme transparency. Finally, trading on non-custodial platforms can be costly with additional transaction fees common in the crypto space.
A crucial part of generating crypto adoption is building transparency and trust. This could be a point of contention for custody solutions as recent events, such as the collapse of high-profile players such as FTX, BlockFi and Celsius, have weakened the concept of centralization as a stepping stone to a fully decentralized economic ecosystem. Custodial wallets, when integrated with top-notch operational due diligence and operating under a credible regulatory regime, allow users to easily embrace crypto while offering a high level of comfort that their assets are safe and secure.
We believe that the industry is able to find the balance between operation and safety in several ways. The first and arguably the most important at this point is radical openness. Software that allows customers to see where their assets are at all times is a must, and unfortunately, it has been a new feature in the general crypto landscape. There should not be a veil of secrecy between customers and their private finances. In addition, it is important to ensure that all trading takes place within regulated environments, and that customer funds are never used for borrowing and lending without their consent.
Finally, despite conflicting views on third-party custodians, the security and reputation of a platform can be accredited to invest in the most trusted providers of digital asset security on the market. Using trusted custodians provides security for investors against cyber-attacks, internal collusion and human error, freeing up capacity for a better user experience on the main platform. By ensuring customer funds are secured by an independent third party, and giving customers direct access to where their funds are, we can reduce concerns about opacity and bad actors at custody providers.
As pioneers at the forefront of Web3 and DeFi mass adoption, we need to be aware of the sector of the market that is eager to enter this space but is unfamiliar with the technicalities of doing so. Providing a safe and easy way for customers to invest in cryptocurrency is the only way we are going to see large-scale adoption of this technology.
