The future of crypto custody: minimizing trust and maximizing yield
Bitcoin offers the possibility of completely removing trust from transactions. But in reality, most digital assets today are still stored with third-party custodians — putting trust right back in the picture.
Qredo has developed an alternative solution: trustless and institutional-grade infrastructure, removing the risks associated with private keys.
Organizations no longer need to send funds to a third-party custodian, and can retain complete control over their assets through an open architecture that serves all their governance, compliance and TradFi integration needs.
This liberates digital assets to be securely traded on centralized exchanges and deployed into decentralized finance (DeFi), allowing organizations to benefit from what is increasingly becoming a critical component of custody — healthy yield.
The trust trap
Taking possession of private keys gives individuals the freedom of full control over their crypto. The responsibility that comes with this freedom, however, can be difficult to manage at an organizational level.
As the single point of failure responsible for billions of dollars worth of losses, private keys raise operational questions that can be tricky for a business to answer: How can they be kept secure from external attackers? How can signing permissions be delegated to fit organizational structures? And how can the risk of rogue employees running off with them be mitigated?
While some teams might opt for self-custody — flipping a coin to see who takes the hardware wallet home that night — most organizations will opt to use a third-party custodial service. This means surrendering funds completely, and transferring all assets to a wallet controlled by a custodian, which typically operate outside of the regulatory framework.
Withdrawing assets from the custodian then means navigating cumbersome and delay-prone workflows, and shuffling funds between hot and cold wallets; an expensive and cumbersome process that impedes institutions’ ability to quickly execute time-sensitive trades or access DeFi.
More often than not, this ends with organizations locking digital assets away in implicit acceptance of the buy-and-hold strategy — unable to capitalize on volatility or tap into the high yields offered by DeFi.
But, there is a better way.
En route to trustlessness
Custodians are now moving away from creaking cold storage and hot wallet architecture towards infrastructure based on multi-party computation (MPC) — a massive leap forward in cryptography that allows public keys and digital signatures to be produced without the need for a private key.
MPC can resolve the compromise between security and accessibility that is built into hot and cold wallet combinations, and — theoretically — can allow centralized custodians to become decentralized.
Unfortunately, it hasn't quite worked out that way.
Instead, these custodians still demand trust: They run all of their MPC nodes themselves, storing digital asset ownership information in SQL databases and vulnerable hardware enclaves such as Intel SGX. Assets are thus left exposed to internal attack vectors — such as rogue employees and colluding partners that might decide to do a runner with the funds — and external attack vectors such as hacks. Attackers of a centralized MPC custodian can bypass the security of the MPC network and simply focus on a much easier target: the database storing the ledger that records which assets customers are entitled to.
Only an immutable record — such as an entry on a blockchain — would provide sufficient security to record asset ownership and not be easily tampered with.
To provide this kind of trustless custody, Qredo has built a decentralized and blockchain-based implementation of MPC.
Shares of the private key are contained in the MPC nodes, which are geographically distributed between security-hardened Tier 4 data centers across global financial hubs.
The MPC nodes are controlled by the Qredochain, a Layer 2 network that provides an immutable registry of assets and activity. Each custodial operation — each transaction, each signature, and each change to wallet custodial policies — is mined into the Qredochain, effectively turning the network into a vault.
In this way, the power conferred by holding a single private key is spread over a decentralized governance layer that can flexibly allocate transaction signing authority to fit organizational needs.
TradFi to DeFi
To close the gap between this new breed of trustless custody architecture and traditional finance, Qredo tops the Layer 2 network with a Layer 3.
Based on the Matrix) protocol, this third layer enables information to be attached to blockchain transactions. For example, it might enable the private negotiation and execution of a peer-to-peer transaction similar to ‘Bloomberg Chat’. Or, the sharing of Travel Rule information between regulated Virtual Asset Service Providers (VASPS).
Bridging to the future, Qredo also provides access to DeFi through an integration with MetaMask Institutional (MMI).
Using MMI's browser app, organizations can interact with DeFi through the dApp's native interface, while routing orders through Qredo Network to comply with governance needs as part of their trading and order execution strategy — with minimal disruption to user experience.
This bridging of TradFi to DeFi is the future of custody.
Institutions and organizations of all stripes — from corporate treasurers and regulated custodians to hedge funds — will soon be able to operate digital asset custodial operations using a decentralized tech stack, with seamless access to DeFi protocols that enable the generation of healthy returns.
*Sign up to our pilot program and learn more about how Qredo and MetaMask Institutional are providing organizations with access to DeFi — without compromising on security, operational efficiency, or compliance.