Digitally Native - The Daily Gwei #449
Leaving the physical world behind.
There are 2 main assets that we all used to using in our every day lives that we can truly self-custody in a “decentralized” way - digital assets and physical cash. As the years have gone by, many governments have worked to phase out cash for various reasons which has meant that much of our financial activity now happens in the digital realm. Though there is a key thing to note here - the “digital” traditional financial system and crypto are 2 wildly different things.
Let’s run through an example - say you want to turn physical cash into its digital version. To do this requires a centralized intermediary (usually a bank) that will simply take in your physical cash deposit and issue you an IOU in your bank account (which can be accessed digitally). When you transfer money around online via banks, all that’s happening most of the time is that a database entry is being updated to reflect the transfer. Sound familiar? That’s essentially what happens when you send crypto-assets from one address to another - but of course it’s done in a decentralized and non-custodial way.
Crypto rails can do what banks do with 1000x the efficiency and in a truly digitally native way because crypto-assets are issued digitally first - not physically first like cash. This means that the ETH in your Ethereum wallet will always ultimately be secured by the Ethereum network no matter where it exists because the ledger that keeps track of the ETH supply is the Ethereum protocol itself. The same is true for any asset that is minted natively on the Ethereum network - whether it is an ERC20 token, an NFT, or something else. This enables a truly digitally native financial system to emerge that does not rely on centralized intermediaries or band-aid solutions.
This all brings me to what I wrote about in my tweet above - having true self-custody over a digitally native asset is only possible thanks to crypto technologies. No other assets - whether physical first or digital first - will give you the option to self-custody in a decentralized way because there is always some centralized intermediary that needs to exist for the asset to exist. This is as true for cash/fiat as it is for in-game items of traditional video games and this is exactly why DeFi is going to completely disrupt all of finance in the coming years.
So now is the part where I remind you that if you have any material amount of money invested in crypto-assets, you should be practicing self-custody by using something like a hardware wallet. Leaving your coins on exchanges is similar to putting your cash into a bank account - you are relying on a centralized intermediary to both secure your assets and honor any withdrawals. Of course, there’s nothing particularly wrong with this on the surface, but I think everyone should take advantage of the amazing innovation of self-custody that crypto has given us!
Have a great day everyone,
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All information presented above is for educational purposes only and should not be taken as investment advice.