Know Thyself-Custody - The Daily Gwei #384
Ethereum is a self-custody forcing function.
“Not your keys, not your coins” has been a mantra of the crypto ecosystem for as long as I can remember and it still remains critically important to this day. If you aren’t in control of your own private key/seed phrase then your funds aren’t truly yours - you basically just have an IOU that comes from some third party. Though what Ethereum is really good at is acting as a “self-custody forcing function” for users to get control of their funds - even if they don’t actually care to.
Ethereum is really good at getting people to get their funds off of centralized exchanges and self-custody them using a hardware wallet or something else - but not because people actually want to self-custody. Think about it - the only way someone can use almost all of DeFi is by doing it from their own wallet so there is a very strong external pull to get users to self-custody. This is the main reason why, as Hasu notes above, there are more people self-custodying ETH and Ethereum-based assets than people self-custodying BTC (which is wild when you really think about it).
Another big driver of this self-custody recently is the fact that all NFT-related activity happens on-chain and we’ve obviously seen an explosion in that area over the last few months. I’m not just talking about layer 1 Ethereum either - Immutable X and the Polygon PoS chain have been quite popular for NFTs and still require users to self-custody their funds. I’d love to see hard data around how many new on-chain users we have had in the Ethereum ecosystem due to NFTs - it’d have to do be easily in the hundreds of thousands (if not millions) - and then I’d also love to see how many of these users went on to interact with on-chain things other than NFTs.
Given that we’ve been in a speculative bull market for around 18 months now, there have been plenty of new tokens that have been issued on Ethereum and many of them either never see a large centralized exchange listing or that listing comes at a much later date. Due to this, many people use DEXs on Ethereum to trade these tokens and to do this they obviously need to self-custody their funds - another perfect example of the Ethereum self-custody forcing function at work. Though in saying this, I wonder how many people just go back to a centralized exchange with their funds once they are done trading these tokens - would be an interesting data set to view.
Ethereum just has so many incentives for people to get their funds off of third parties such as CEXs and self-custody them on Ethereum. In addition to everything I outlined above, there are also a bunch of other things people can only do on-chain such as participating in DAO, registering an ENS name, playing crypto-based games, donating to projects on Gitcoin and so much more. Then we can look at Bitcoin and see what incentive people actually have to self-custody their BTC other than wanting to have true ownership over their BTC (which, let’s be frank, most people don’t really care about). The harsh reality is that there are little to no other incentives unless someone wants to use BTC as money (which fewer and fewer people are doing these days) - maybe this changes in the future, but I doubt it.
In the end it’s all a game of incentives and Ethereum is by far the leader in acting as a forcing function to get people to self-custody - we should all be very happy about this.
Have a great day everyone,
Anthony Sassano
Enjoyed today’s piece? I send out a fresh one every week day - be sure to subscribe to receive it in your inbox!
Join the Daily Gwei Ecosystem
All information presented above is for educational purposes only and should not be taken as investment advice.
Good article and good points. I wonder a lot about who or what is going to assist people as they continue to enter the crypto space. As you get further away from the epicenter which is filled with tech experts, enthusiasts and even just above average curiosity, you get into the rungs of people who may not even be into crypto and the ideas behind it but rather just don't want to completely be left out.
Maybe they are social media users who read an announcement that certain new features will take payment but only in crypto. So now that user might begrudgingly decide to read up on what it's all about. But they have no intention of being their own banker or protecting their keys anymore than they protect their car keys.
So they will look for a service that they can "trust" to hold their funds safely when not in use. Who wants to deal with the effort it takes to create your own geo-diverse multisig setup? They will simply want to buy credits for the new game on ABC web 3 site and use them when needed.
And this is where I think the banks will find their niche in crypto. Taking it old school again when they offered custodial services for the community by building thick vaults that actually secured actual fiat and scarce metals etc. We entrusted our tender to them (gave up our keys) and they promised(*) to hold on tight for a fee, until we needed to use that value in the future. If they screwed up, the govt had our backs (more or less). And a nice suit and friendly smile didn't hurt either. Who doesn't love Julie, teller #3 at their local branch? She always asked how my kids were doing. I liked that.
So take all that, digitize it, outsource to Fireblocks or whomever, make sure Julie is part of the welcoming party and tell the customer "Integrity, security, TRUST where you need it most in today's ruthless confusing world full of bad actors trying to steal your money with the click of a button. If you accept our service (for a modest fee) you will be able to use that $CRYP token any time you wish. But it will always be safely protected by our..... Yadda yadda"
And pair that with the exponentially increasing horror stories of lost keys, stolen keys, social engineering troupes, and that's how, at least in my dystopian vision, the banks will remain relevant...*though without the worry of FDIC to adhere to.
Hopefully something will solve this before it happens. I only hope I finish it sooner than later. ;-)