The rapid growth of decentralized finance (DeFi) has introduced a peculiar irony –while traditional finance traders are migrating to DeFi, they are compelled to rely on centralized custodians, which inevitably introduces counterparty and regulatory risk.
Below we explore some of the drawbacks of using centralized custodians to access decentralized applications (dApps) and highlight the advantages of non-custodial solutions, such as our own distributed multiparty computation (dMPC)-based approach.
Centralized custodians, by design, retain control over users' private keys and have the ability to halt access to digital assets. This arrangement exposes users to the risks of law enforcement, regulatory actions, and the broad range of vulnerabilities inherent in a centralized intermediary such as operational, technical and security risks.
The transfer of users' assets to a custodian-controlled wallet relinquishes their control over their own digital assets, making them reliant on the custodian's management. Unfortunately, the history of reported thefts from centralized exchanges and custodians over the past five years underscores the imperfection of this approach. Some key examples include the Mt. Gox hack, Bitfinex hack, and Bitstamp hack.
Securing private keys continues to be a challenging task.
Today the gold standard for crypto custody involves the use of multi-party computation (MPC), a cryptographic technique that allows multiple parties to perform computations on private data without revealing that data to one another.
This innovation eliminates the need to store private keys in any central location, greatly mitigating the risk of loss or theft. However, most centralized custodians that have implemented MPC still maintain control over their customers' digital assets by storing asset ownership information in centralized SQL databases. This undermines the very purpose of MPC, as hackers can bypass the security of the MPC network and target the otherwise vulnerable database, altering ownership records or accessing assets at will.
To ensure the robust security of digital assets and to prevent any unauthorized modifications to their ownership records, an immutable record, like an entry on a blockchain, is an ideal solution to protect the validity, reliability and verifiability of digital asset ownership.
Qredo ensures that ownership and governance rules are directly written to the Qredo Network, a Layer 2 blockchain, which provides immutability, integrity, and security to these critical levers of digital asset control. Changes to policies require approval via a Boneh-Lynn-Shacham (BLS) configured signing application which employs a cryptographic signature scheme allowing users to verify their digital signature is authentic when transacting digital assets. This ensures a transparent and secure signing process.
Qredo's self-custody protocol presents an ideal solution for accessing DeFi protocols and dApps, particularly for organizations that must adhere to compliance regulations and require complex governance workflows.
Featuring native integrations with three of the main gateways to DeFi, including MetaMask Institutional, WalletConnect, and an upcoming integration with Sui Wallet, Qredo's enterprise-grade security for digital asset ownership, access, and control makes the Qredo platform an evolution beyond the current standards of crypto custody. Qredo users can seamlessly access decentralized protocols and applications while benefiting from this enhanced security.
Relying on centralized custodians to access decentralized applications introduces counterparty risks, compromises privacy, and limits interoperability.
While custodians have adopted MPC, their continued centralization and reliance on vulnerable databases undermine the security benefits this technology promises.
Conversely, Qredo Network's implementation of dMPC technology aligns with the core ethos of crypto, offering a secure gateway to DeFi protocols and applications. Embracing a crypto-native solution to one of the fundamental challenges in crypto is yet another way this ingenious and leading technology continues to empower individuals and institutions to engage in the crypto economy while always maintaining control and ownership over their own digital assets.