Navigating the complexities of DeFi custody

Simply put, the future of finance is evolving and the inherent benefits of DeFi are pivotal as the market evolves – from removing middlemen to lower costs and unleashing efficiencies to creating a more transparent, resilient and better-distributed framework. However, what we are still seeing at the moment is a thin veneer of decentralisation, where we haven’t removed the systemic risk of centralisation but we’ve introduced the inefficiencies of decentralisation. Imperative we continue with the journey of full decentralisation for end users to reap the full-scale benefits.

DeFi promises a distinct way to earn interest on digital assets whilst affording  lower fees and risks and deeper liquidity than traditional financial services. And this is achievable utilising the same mechanisms as traditional finance such as trading, lending, hedging etc. Yet institutional investors are often left stranded, unable to take advantage of this new marketplace due to an absence of appropriate control, safety and due diligence checks and the nascent overall structure of market applications which are not often user-friendly or easy to integrate with.

The potential impact DeFi could have on traditional finance, made pursuing this emerging market a straight-forward decision for Trustology, especially as our TrustVault solution had already been built with this functionality in mind. We did not want to build another cold storage solution. We wanted to be solving the next problem i.e. crypto custody in the fast lane.

DeFi is set to become a $5 billion industry in 2020 with $3 billion in value already locked in. It’s on a clear growth trajectory. This is pretty evident in the recent minting of 4 million DAI via the collateralisation of WBTC. This significant development signals demand for non-ERC-20 assets, meaning the sector is starting to broaden out beyond just Ethereum. However, you’ve still got Ethereum at the forefront with Ethereum 2.0 proof of stake model set to roll out in Q3 2020 and the staking opportunities on the network that will be made available. We’re now seeing major centralised exchanges chomping at the bit to jump into the sector. Arguably, the sole motivation for Binance’s smart chain is to compete with Ethereum for DeFi dominance. It will be very interesting to see how earnings compare between staking at the base protocol level versus higher level Defi protocols such as lending. 

As the diversity in blockchains increases, there’s an increasing need for cross chain support. Trustology spotted this early, extending its service to Binance chain and BEP-2 tokens, DEX, and—when it rolls out—Binance’s new smart chain.  

It isn’t just about facilitating access, either. It’s about allowing entry in the safest, fastest possible way so our clients never miss a trade or opportunity in the market. Custodians can mitigate risk arising from fraud, scams, and hacks—as well as regulatory risk—with a combination of insurance, compliance checks, transaction controls, and best-in-class hardware, software  and security protocols.

Thanks to our Metamask integration, we’re pretty much the first custodial wallet provider to give our users secure access to DeFi dApps. 

Institutional investors are under regulatory and investor scrutiny.  Outside of securing their digital assets, they really need to prove they adequately mitigating risk and this has to do with obligations to mitigate holding and fiduciary risk. Plus, let’s face it with crypto funding of trading accounts, comes the headache of managing millions of keys, and wanting to transact instantly and securely. Manual operations are too expensive and cumbersome, and for that automation is truly needed as it provides speed, scalability and resilience. And with DeFi you need to be able to support an almost infinite number of protocols, do so securely and in real-time with segregated keys and controls fit for institutions without compromising on speed or access. That’s hard to do with custody solutions that are not in real-time such as cold storage.  

Also, let’s not forget that trusted and insured custodians can protect against stolen private keys— and thus stolen funds—as well as scams and hacks which the crypto industry is regrettably prone to. An example of this was seen in April when DeFi protocol DForce was exploited for $25 million in customer assets. This shouldn’t be surprising, DeFi is in its nascency. As such, opportunists are able to abuse loopholes in the sector’s infrastructure. But, as contrary as it sounds, this needn’t affect investors.     

It’s been said that DeFi protocols are only as safe as their code. While this is true for the most part, we don’t entirely agree. Users and businesses participating in DeFi can do a lot more to protect themselves when it comes to the safe custody of their private keys. Leading with a custodian to secure locked funds in defi staking protocols for instance, ensures withdrawal keys are protected.  With a custodian, the duty of care falls to them. If, in the unlikely instance, they should fail, insurance buffers guarantee that user funds remain intact. 

Additionally, custodians serve to not only  enhance the legitimacy of the sector but to ease the burden of managing the technical risk and responsibility that comes with defi, such as running your own infrastructure, e.g. nodes, indexers etc. which for less tech savvy individuals and businesses this can be a big barrier to entry. Some investors, such as family offices and other institutional entities, simply want to dip their feet in an exciting new financial opportunity without fear of risk. Custodians such as Trustology provide that option, allowing secure and insured access to an unregulated space to enable mass adoption. As such, institutional investors no longer have to worry about KYC and AML or any other regulatory compliance as it’s built in along with other advanced controls such as multisig and allowlists or whitelists as commonly known.. 

Capturing the trust of institutional investors is a win-win for the sector. More institutional engagement breeds further legitimacy and brings additional investment. The sector grows, as a result, benefiting retail investors as well.

Firstly, Trustology’s wallet is fast, user friendly and super secure! Capable of transaction processing times of 350 milliseconds, which outpaces hardware wallets by a large degree, we harness end-to-end hardware security, front-end software flexibility and biometrics to deliver a fully automated solution for individuals and businesses with zero human intervention to reduce operator risk. We facilitate and encourage enforced transaction controls such as and multi-sig requiring multiple parties to sign off on a transaction as well as ‘allow’ or whitelists to create controlled environments. This allows the user to block certain unofficial addresses and dApps, providing an added layer of control otherwise non-existent within DeFi. These added layers of security and control build a hugely alluring case for institutional investors.

The true custodial nature of our company combined with the programmability of our technology infrastructure really sets us apart, though.  Unlike MPC, we fully custody the keys on behalf of our users, providing an insured wallet solution that uniquely combines speed, security and usability.   In short, we make the solution hassle free, safe and accessible.  The richness of our APIs, our resigning firmware and segregated wallet structure enables us to generate and manage an infinite number of addresses at scale for thousands of users.  This is something that can’t be done with cold storage for instance.  It makes us agile and able to support any blockchain or protocol faster than many providers in this niche market.  Currently, we support some of the major blockchains out there – Bitcoin, Ethereum and Binance – as well as their respective token standards—ERC-20 tokens and BEP2. 

We also enable regulatory compliance through abiding by KYC and AML built-in controls. This allows institutional investors to feel at home in DeFi—something that is integral to adoption. 

Lastly, and perhaps most importantly, no other DeFi wallet is custodial. Of the few decent DeFi wallets on the market, none offer real-time third party custody. They all require self-custody, which means managing your own private key. This can become severely debilitating—and even prove costly—for individuals and businesses entering DeFi for the first time. This is especially true given the latent risks exhibited by the aforementioned DeFi exploits. 

Trustology is the only custodial wallet providing safe access to dApps via Metamask integration—allowing a tried and tested method of entry while providing fail-safe insurance and regulatory assurance. If all else falters, the user will always be covered.

As an extra layer of security, we have technology that allows us to re-sign transactions and easily support a range of assets and decentralised exchange end-chains as the technology is blockchain and protocol agnostic. So we can go to market supporting new chains and assets faster than most.  This includes Binance’s upcoming smart chain as well. Currently we support a myriad of tokens, including BTC, ETH, and ERC-20 tokens such as DAI, ZRX, HOT, BAT, MKR, OMG, REP, LINK, USDT and VXV.

Re-signing technology is unique to Trustology and enables us to re-sign and support any transaction. This is one of the reasons why we’re able to quickly extend our service to brand new enterprises such as Binance’s smart chain and Ethereum’s 2.0. Moreover, once developers start creating their own tokens on top of the smart chain, the ability to re-sign means we’ll be able to support those assets as well.  This extends to the upcoming launch of ETH2.0 which adopted a new BLS signature that we can easily support. 

It’s essential, particularly in this fast-paced industry, that crypto companies are able to quickly innovate and adapt to the market by supporting emerging protocols.

The next step for Trustology is extended support to ETH 2.0 to enable staking within TrustVault. We’re one of six joining ConsenSys Codefi’s pilot staking programme for ETH2.0 so we’re pretty excited about this. For us, this ties in with our strategy of continuing to deliver on what our customers need to trade, lend, borrow or hedge.  It also ties in with our vision and mission of mass adoption.  Right now we have heavy duplication at the moment across centralised and decentralised ecosystems because we’re still on a migration path to full decentralisation.  To get to that end stage our role is to introduce complementary solutions in defi that make it seamless whatever the use case. It’s about finding the best route as an open, smart custody platform to plug in where it makes sense to offer best execution for our clients without defying regulatory requirements such as segregation of duties.   Our rich API capabilities allows us to do this, and one of the areas we’re focussed on is acting as a settlement agent that works across multiple clearing networks rather than across privatised networks which is not sustainable in the long-term nor cost effective. 

Once we have more migration to defi, it could become the de facto global finance mechanism and we’re looking forward to being the custodial lynchpin for that ecosystem.