How does crypto-custody provide better protection for your digital assets?

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The crypto industry has recently seen significant instability and events, such as the collapse of an algorithmic stablecoin, protocol, and one of the largest exchanges. Additionally, the failure of a major crypto exchange FTX also negatively impacted user sentiment.

Unfortunately, this has also provided supporters of traditional finance with another opportunity to claim that the crypto industry is failing. Interestingly, there have been 467 cases of people declaring that Bitcoin is dead.

Crypto believers have always propagated decentralized finance as the way forward for the community to thrive. However, it is important to note that FTX-like incidents occur due to mismanagement of user funds and the inability to run a fintech company with impeccable SOPs and good corporate governance.

In fact, in 2008, Satoshi Nakomoto launched Bitcoin to remove intermediaries from finance and thereby protect users from poor governance and middleman business practices. This is not the failure of the blockchain or decentralized finance industry, but the result of an unregulated centralized exchange mismanaging client assets, an example beyond imagination.

The FTX incident highlighted the need for a safer and more reliable financial infrastructure in the industry. We can take advantage of this to lay the foundations for innovation and a better future.

Let’s look at some of the initiatives that can be taken to protect user funds and prevent FTX-like incidents:

Not your keys, not your coins When you store your money in a safe in your home, you usually lock the safe and keep the keys in a safe place. Similarly, the concept of Not your Keys, Not your Coins means that users must always maintain control of their private keys to maintain control of their cryptocurrency.

It highlights the importance of keeping cryptocurrency in wallets or accounts where only you have access to the private keys. This helps to ensure that you remain the sole owner of your cryptocurrency and are not dependent on any third party either.

Store your crypto assets in a secure environment (like a digital wallet) and protect your private keys. You are in control of your assets and you are responsible for protecting them.

When you store your digital assets on a centralized exchange or with a custodian, it works like shared custody where the exchange holds the keys to the coins you own. In a pleasant situation, you can withdraw your coins to any wallet address and transfer your holdings. Yet, in a situation where your centralized exchange is in a financial mess and files for bankruptcy, you lose custody of your assets.

The safest way to store your digital assets is to store them in a wallet entirely under your control, with keys known only to you. This way of storing digital assets is known as self-custody, and as long as you don’t share your private keys with anyone, your assets are safe and under your control. Additionally, blockchain provides highly secure storage for your digital assets that is impossible to hack.

Local, Regulated, Licensed and Compliant It is important to choose exchange and custodial services after due diligence. Since crypto is unregulated in some countries, user funds do not enjoy consumer protection. Custody providers must be regulated and must have obtained a license from regulators to provide virtual asset services.

Some leading exchanges regularly release proof of reserves to provide transparency with their users and maintain trust with the investment community. Release of this sensitive data into the public domain is part of ongoing efforts to create an environment of trust within the crypto industry.

Although self-custody is the highest form of security, you can gift your digital assets. Using licensed custodian services is a very convenient option for storing your digital assets.

DeFi is the way forward Real crypto builders are working diligently towards a decentralized future of finance that puts power in the hands of the people. The so-called centralized crypto banks recently filed for bankruptcy and were run as unregulated banks.

These centralized crypto banks locked users’ digital assets to offer a percentage return and loaned locked users’ funds to institutional borrowers. Interest charged to borrowers was split among users.

Since these entities were not regulated like traditional banks, business practices were not transparent and they followed no standard operating procedures. The long crypto winter disrupted the homeostasis of these unregulated centralized crypto banks, resulting in a complete loss of user funds.

Defi platforms also offer yield products where loans must be over-collateralized, and all position and liquidation rules are transparent. In the event that a borrower faces liquidation, he cannot meddle with the trader to continue operating under the secured loan.

We have seen this time and time again, in the case of margin calls, so-called centralized landing products had to pay their Defi loans first compared to their positions on other centralized landing gear. Defi protocols still work successfully as they provide a transparent view of positions without involving third parties to hold client funds. However, there are still risks associated with smart contract security and other forms of financial attacks. So please choose your Defi platform carefully.

Insurance of digital assetsInsurance coverage and custody of assets are two different things. Asset insurance providers such as Nexus Mutual, Canopius, Munich Re, Zurich Arch, etc. are now underwriting crypto risks to provide insurance to various crypto companies.

For example, insurance company Defi Nexus Mutual approved 9/10 claims for custody coverage to people stranded from CeFi funds for more than 90 days in Hodlnaut (members who held active FTX custody coverage when withdrawals were interrupted for the first time).

The company, in its newsletter, also mentioned that if withdrawals were halted on February 6, 2023 at 22:54 UTC, members who held active FTX custody coverage when withdrawals were first halted can start depositing. complaints. Nexus Mutual also settled numerous claims during the Teraa Luna fiasco and the box’s flash loan attack.

In addition, asset custodian companies take on the responsibility of safely storing investors’ assets. However, what sets them apart is that they do not hold user keys. They also help customers obtain insurance for their belongings.

Although insurance coverage provides an additional layer of protection for digital assets, it is equally important to ensure the safety of digital assets by using hardware wallets to store cryptocurrency and tokens offline, such as Ledger or Trezor, and opt for self-guard to have full control over your keys.

The recent FTX incident highlighted the importance of secure storage of digital assets and the need for a more robust infrastructure. Users should understand the importance of self-custody and storing digital assets in a secure wallet.

It is also important to use the services of licensed custodians and exchanges and opt for digital asset insurance from trusted insurance providers. All of these steps will help protect user assets and prevent incidents of mishandling user funds.

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