The future of finance is decentralized. Striving to facilitate that prognosis, decentralized finance — or DeFi — is quickly shaping into an alluring prospect for investors and companies alike. Looking to harness this decentralized ideal, rivals to the Ethereum-centric sector are feeling the fear of missing out and leveraging their own blockchains in order to gain dominance. Reaching an early climax this year, DeFi breached $1 billion in locked assets. For the Ethereum ecosystem, this stood as a significant boon, drastically increasing its value proposition — and leading competitors to turn their heads.
With the Ethereum ecosystem intrinsically linked to DeFi, it has become the number one pit stop for developers of decentralized apps. As such, Ethereum boasts some of the best and brightest. Spotting this success, Ethereum’s rivals are entering the fray. While this indicates the DeFi sector is set to grow even further, it also means investors will require a multichain solution.
A white paper released by Binance last month detailed the creation of a new blockchain. Dubbed the "Binance Smart Chain," the venture aims to bestow upon the firm the ability to create smart contracts. Deployed adjacent to the existing Binance Chain, the smart chain will also support the Ethereum Virtual Machine, bringing the interoperability and programmability of the EVM to the Binance Chain. This, in theory, will make it much easier for developers to simply hop over to Binance.
Binance isn't alone in this endeavor. Other centralized exchanges, including Huobi and OKEx, have aired their plans for individual blockchain ecosystems. Following in Binance Chain's stead in 2019, both OKEx and Huobi unveiled plans for their own chains.
Arguably, these exchanges and their new blockchains are making a play for the DeFi sector, and it's easy to understand why. Crypto-centric companies generally accept that the future of finance is decentralized. However, many presently operate within regional and centralized platforms, exposing themselves to the single points of failure the industry was designed to elude. Exchanges now recognize that they need a global stage to reduce risk and open up liquidity. DeFi is this global stage — and exchanges know it.
This race to the top will inevitably nurture far more innovation within the distinct ecosystems, as well as infinite opportunity and choice for investors. However, it’ll also mean far more administration, leaving traders to navigate between separate blockchain ecosystems.
Another factor comes in the form of Ethereum's domination of DeFi and the development of Ethereum 2.0, which will provide new scaling solutions and extra space for its DeFi ecosystem to continue to grow. But while most DeFi-based protocols developed today all demand Ether (ETH), for Binance and its contemporaries, it's a contest of which can create the speediest, most efficient chain to attract the greatest number of developers and users.
Moreover, as Ethereum's DeFi sector grows, so too does utility for Ether. Its rivals have caught on to this and now want the equivalent, with their own chain and their own tokens — all in an effort to capture market dominance.
Guardians of DeFi
Given the breadth and measure of the companies behind these blockchain ventures, it's fair to say that each one will be successful — in its own unique way. This, in turn, will likely generate new participants to join the DeFi fray, thus creating a network effect in which DeFi becomes the new standard. However, with so many DeFi ecosystems in conflict, the cost of operating is bound to increase as users begin to work across separate chains. This will also impact the user experience, as investors will need to juggle between wallets and interfaces, which brings us to the issue of compatibility.
In the cryptocurrency space, we observe a fair degree of incompatibility problems, especially between wallets and blockchains. At present, while several DeFi-primed wallet solutions exist, not all offer multichain support. More to the point, however, none offer custodial services.
Now with more companies entering the DeFi ecosystem in the hopes of maximizing earnings potential and growing their investments, ensuring the safe custody of private keys across multiple chains will become more than a headache — especially if users practice self custody.
While Ethereum makes the buying and exchange process slightly more manageable through atomic swaps, routing Bitcoin (BTC) via Ethereum or Binance Chain becomes much more troublesome. Solutions do exist, and others are in the making, but they're still in their infancy.
Under present circumstances, however, managing tokens in a decentralized way via several protocols is exceptionally challenging. This will only get more complicated as distinct blockchain ecosystems expand.
Much like exchanges, some custodians are starting to realize the significance of decentralized finance. Though even for these entities, the compatibility problem remains. Fortunately, via bespoke solutions such as re-signing technology, real-time independent custodians can act as a mediator between DeFi and traditional finance, allowing users to safely store a multitude of cryptocurrencies and transact with them via any blockchain ecosystem.
The onus isn't solely on multichain support either. As DeFi and cryptocurrency in general look to become more established within the financial industry, they'll garner further scrutiny, particularly when it comes to security. This is especially true for institutional and accredited players, and getting these investors on side is essential if the industry is to reach a new standard.
As touched upon, current custody solutions in DeFi are confined to self custody, single-user options. This stands as a significant barrier to adoption, especially for institutional investors. Without a third-party independent custodian, investors enter the DeFi sector completely unguarded, unregulated and uninsured. Moreover, they lack the essential amenities provided by custodians, including insurance, price and margin call alerts, multisignature accounts and whitelists.
This is one of the critical roles custodians can play, be it in the nascent DeFi sector or the broader crypto industry. They add integral elements of control. These include multisig accounts, which enable several account holders — i.e, multiple employees or even a couple — to sign transactions. Businesses may also opt for multisig controls where more than one user is required to sign a transaction to ensure managing fiduciary and holding risks. Other controls such as whitelists and blacklists help prevent the misappropriation of funds and filter out undesired or unofficial addresses. And alerts can help track performance and inform of a change in asset price, as well as notify on margin obligations to avoid positions being liquidated.
By providing these added layers of utility and security along with effective private-key storage, custodians enable a safe route to access DeFi and digital assets overall for both individual and institutional investors. This is especially true as regulatory compliance becomes a focal point. Not only can custodians provide Know Your Customer and Anti-Money Laundering certainty within DeFi's regulatory gray area, but they can also endow insurance offerings, accounting for one of the most pressing concerns of almost every investor.
There is also increasing individual and institutional investor demand for staking and governance features built directly into wallet and on-exchange accounts. Custodians need to think about the end user and how to make their digital assets work best for them while they are in custody, as securely and easily as possible.
Forward-thinking custodians may look to integrate the most prevalent DeFi protocols directly into the user interface. By enabling notifications and DeFi portfolio tracking tools to assess holdings, trades and stats — as well as to compare rates between different protocols — custodians can enhance the overall user experience.
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