In an increasingly digital world, security is a high-stakes game. The identities of customers along with their privacy and financial information are all in the hands of centralized security systems. We are reliant on these systems, and even though security plays a critical role in our lives, we rarely stop to think about the consequences of these systems failing us. Yet those who trade financial assets like cryptocurrencies think about these consequences all the time.
Why? The risk of violations of our financial sovereignty coupled with the potential of theft without an option to recover are two big reasons why crypto traders realize security is of paramount importance. Thus, the blockchain and cryptocurrency industries are always looking for better ways to secure assets.
One way cryptocurrencies and exchanges can do this is by incorporating more noncustodial technology into their platforms, thus making transactions and accounts exponentially safer while simultaneously putting control back into the hands of the users. This is a concept that has the potential to drive the industry forward and result in the best-case scenario for security. Custodial wallets often hold millions of dollars worth of assets on behalf of their customers. The benefit of having full control over your funds is the difference between your account being frozen when you want to make a transaction and being able to freely trade at your own discretion. The key is that the customer is in control.
Where noncustodial tech fits in blockchain’s vision of decentralization
Perhaps one of the greatest and most obvious benefits of noncustodial technology is that it essentially eliminates the need for a trusted intermediary. For example, noncustodial wallets work by giving the user a private key that allows them to have full control over their funds when transferring, trading or making purchases.
As a result, noncustodial exchanges are more secure because individually secured accounts are much more difficult, costly and time-consuming to hack than a single centralized account. Having the responsibility of securing your own assets is often criticized as having a negative impact on user experience, but learning the intricacies of noncustodial technology engages users in new ways and enables them to make better-informed decisions.
The freedom and independence ensured by noncustodial technology strike at the heart of the ethos of blockchain: the empowerment of individuals. By decentralizing custody, noncustodial technology proves that greater power can and should reside in the hands of individuals.
By empowering individuals, we also create new competition for legacy organizations, institutions and businesses, which are forced to innovate and deliver more value to their customers and society as a whole. Equity also is not binary — it is a spectrum that we can move along.
Blockchain and crypto don’t need to completely dismantle legacy structures, as there is already massive benefit simply in pushing them along the spectrum to more equitable outcomes. This can be realized in reduced banking rates, improved or more equitable financial services, more effective tax regimes or government policies, less concentration of wealth in exclusive financial instruments, and many other ways. The ideal approach to delivering the best outcomes is one that is pragmatic.
Noncustodial tech proves the industry is maturing
There are, of course, many critiques of noncustodial technology and its applications in the cryptocurrency industry. But ultimately, solving these complications is driving the industry forward in remarkable ways.
For example, one of the biggest hesitations many users have around noncustodial technology is the burden of keeping their own assets secure. If users lose their private key or mnemonic phrase, if assets are lost or hacked, or even if their computer is stolen, there is no getting back into their account or way to retrieve the lost funds. While this can empower users to educate themselves on the process, it’s also an opportunity to develop a better user experience, reduced friction and other enhancements that would ultimately further spread the use of noncustodial solutions.
Decentralization is a spectrum too. It is not either a centralized authority or only one individual. New systems are being developed to decentralize custody to an extent that it will enjoy the benefits of improved security and financial empowerment, but maintain options and backups to lighten the burden on the system itself.
A criticism of noncustodial exchanges is that they are limited in their scope. That is, the solutions appear to attract amateur traders or hobbyists who are playing with the tech and don’t factor costs into the equation. But new solutions are operating that deliver experiences arguably superior even to legacy centralized exchanges by combining the speed and liquidity that traditional exchange traders expect with the security and transparency of noncustodial technology.
As demand for noncustodial technology increases and the tech itself continues to mature, a clear signal will emerge for traditional exchanges to adopt the technology. As adoption grows, users will no longer be hamstrung by the limits previously associated with noncustodial services or those that still afflict centralized exchanges, and this diversification of products in the market will result in massive improvements in user experience and value delivered to customers.
Moving beyond blockchain and cryptocurrencies
The superiority of noncustodial technology and the maturation of the industry as a whole point to the fact that the tech has wider applications to broader financial markets. Even trading in traditional markets has decentralized in the era of the internet. Although still dwarfed by the larger traditional finance markets, noncustodial solutions are recognized as the next wave and, as such, have brought massive inflows of capital from millions of individual accounts — such as Celsius garnering over $300 million in deposits within a year — and legacy organizations are taking notice.
The potential and necessity of noncustodial technology in securing accounts in the digital age and decentralizing and distributing security as a whole is undeniable. The wider adoption of cryptocurrency, digital assets and tokenization comes with the bearer-instrument Achilles’ heel, so to deal with this, we need to increase the adoption of noncustodial technology and educate people about it. We must also continue to improve it and make it more reliable and easier to use.
The views, thoughts and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Steven Quinn is a product manager at Eosfinex and Bitfinex. He focuses on the EOSIO ecosystem of blockchains and communities, blockchain technology such as smart contracts and noncustodial wallets, and global trends toward decentralization and financial sovereignty.