SEC promotes self-custody and DeFi staking

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Stak­ing on cen­tral­ized exchanges and stak­ing in decen­tral­ized finance (DeFi) are two dis­tinct meth­ods of par­tic­i­pat­ing in blockchain net­works and earn­ing rewards. While both involve hold­ing onto and “stak­ing” assets, the way they oper­ate and the ben­e­fits they offer are different.

Cen­tral­ized exchanges offer stak­ing as a way for users to earn rewards by hold­ing onto spe­cif­ic cryp­tocur­ren­cies with­in the exchange. The exchange acts as a cen­tral­ized inter­me­di­ary, mean­ing users have to trust the exchange to hold and secure their assets, as well as to dis­trib­ute rewards accurately.

On the oth­er hand, DeFi stak­ing oper­ates on decen­tral­ized net­works such as Ethereum, where users hold onto assets direct­ly and use smart con­tracts to earn rewards. This elim­i­nates the need for a cen­tral­ized inter­me­di­ary, giv­ing users greater con­trol and secu­ri­ty over their assets. In addi­tion, DeFi stak­ing often offers high­er returns com­pared to cen­tral­ized exchanges, as rewards are gen­er­at­ed through net­work con­sen­sus and gov­er­nance processes. 

Stak­ing on cen­tral­ized exchanges is a con­ve­nient way for users to earn rewards, but it comes with the trade-off of rely­ing on a cen­tral­ized entity. 

Cen­tral­ized exchange solu­tions offer sev­er­al ben­e­fits for stak­ing, includ­ing con­ve­nience and ease of use. These solu­tions typ­i­cal­ly pro­vide a user-friend­ly inter­face, mak­ing it easy to stake cryp­tocur­ren­cies, where­as self-cus­tody options may be more com­pli­cat­ed and require advanced blockchain knowl­edge. Addi­tion­al­ly, cen­tral­ized exchanges gen­er­al­ly have high­er liq­uid­i­ty and trad­ing vol­umes than decen­tral­ized exchanges, which can make it eas­i­er to buy and sell staked assets for cen­tral­ized exchange users.

When think­ing about whether cryp­to is or is not a secu­ri­ty, it’s impor­tant to note what Gary Gensler said in his pub­lic address after the Krak­en stak­ing enforce­ment action. He said: “Not your keys, not your cryp­to.” Since you can’t stake on Bit­coin, he was obvi­ous­ly refer­ring to tokens/coins oth­er than Bitcoin. 

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In the cryp­to world, there is a grow­ing divide con­cern­ing secu­ri­ty and risk between cen­tral­ized and self-cus­tody solu­tions. Some believe that large insti­tu­tions are bet­ter equipped to han­dle the secu­ri­ty of their keys, while oth­ers pre­fer to be the sole own­er of their keys to avoid any poten­tial risks asso­ci­at­ed with los­ing access to their assets. Last­ly, self-cus­tody and decen­tral­ized solu­tions require the user to man­age their stak­ing nodes and par­tic­i­pate in net­work gov­er­nance, which can be time-con­sum­ing and require ongo­ing main­te­nance com­pared to cen­tral­ized solutions.

DeFi stak­ing, on the oth­er hand, offers greater secu­ri­ty and con­trol but requires a deep­er under­stand­ing of the under­ly­ing tech­nol­o­gy and process­es. Ulti­mate­ly, the choice between the two will depend on the individual’s pri­or­i­ties and risk tolerance.

Self-cus­tody has become more and more cru­cial in the cryp­tocur­ren­cy indus­try. As the num­ber of indi­vid­u­als and insti­tu­tions enter­ing the space con­tin­ues to grow, the issue of who is respon­si­ble for the safe­keep­ing of one’s dig­i­tal assets becomes increas­ing­ly impor­tant. In the world of cryp­to, self-cus­tody is the equiv­a­lent of say­ing “your keys, your cryp­to.” This means that when you self-cus­tody your cryp­to, you are in con­trol of your keys and your assets at all times. If you opt-in for cus­to­di­al solu­tions, you do not have con­trol of your pri­vate keys, essen­tial­ly mean­ing you don’t tech­ni­cal­ly own your assets. 

One of the many sig­nif­i­cant ben­e­fits of self-cus­tody lies in the secu­ri­ty it pro­vides. When you rely on a third par­ty, such as an exchange or cus­to­di­an, to hold your dig­i­tal assets, you are entrust­ing them to secure the assets prop­er­ly. How­ev­er, even the most rep­utable insti­tu­tions are not immune to hack­ing and oth­er secu­ri­ty breach­es. By keep­ing your assets in your own cus­tody, you are tak­ing a proac­tive approach in pro­tect­ing them from poten­tial vulnerabilities.

Self-cus­tody also grants more flex­i­bil­i­ty in terms of man­ag­ing and using your assets. When you entrust a third par­ty with your assets, you are sub­ject to their terms and con­di­tions, which may lim­it your abil­i­ty to access or use your assets. Self-cus­tody, on the oth­er hand, allows you to take full con­trol of your assets and make deci­sions about how to use them. It’s also worth men­tion­ing that with self-cus­tody, you have more auton­o­my and free­dom over your assets as you don’t have to abide by the rules and reg­u­la­tions of a third par­ty. This also means that you don’t have to rely on their func­tion­al­i­ty and avail­abil­i­ty, and you can access your assets any­time and anywhere.

Trans­paren­cy and self-cus­tody go hand and hand while man­ag­ing one’s dig­i­tal assets. By keep­ing your assets in your own cus­tody, you have a clear and direct view of all trans­ac­tions made with your assets. This allows you to keep track of your assets and mon­i­tor any sus­pi­cious activ­i­ty. The user has the abil­i­ty to set their own secu­ri­ty pro­to­cols and mea­sures, such as mul­ti-fac­tor authen­ti­ca­tion and cold stor­age. Addi­tion­al­ly, self-cus­tody enables you to have more con­trol over your assets in terms of pri­va­cy. With self-cus­tody, you can have more con­trol over your assets and their man­age­ment; after all, isn’t that what cryp­to was built for?

To sum up, self-cus­tody is essen­tial for any­one in the cryp­tocur­ren­cy space. By tak­ing con­trol of one’s own dig­i­tal assets and pri­vate keys, indi­vid­u­als and insti­tu­tions can ensure the secu­ri­ty and flex­i­bil­i­ty of their assets. Self-cus­tody offers auton­o­my and free­dom over their assets while elim­i­nat­ing the numer­ous risks asso­ci­at­ed with cus­to­di­al solu­tions. Mass adop­tion is tak­ing place as we speak, and self-cus­tody has become an increas­ing­ly impor­tant con­sid­er­a­tion for indi­vid­u­als and insti­tu­tions. We believe in empow­er­ing the user to take full con­trol of their assets with the added ben­e­fit of being able to access and use them at any time and from anywhere.

Thought leader in DLT, tech, finance, reg­u­la­tion, entre­pre­neur­ship and busi­ness. CEO of BankSo­cial.

This arti­cle was pub­lished through Coin­tele­graph Inno­va­tion Cir­cle, a vet­ted orga­ni­za­tion of senior exec­u­tives and experts in the blockchain tech­nol­o­gy indus­try who are build­ing the future through the pow­er of con­nec­tions, col­lab­o­ra­tion and thought lead­er­ship. Opin­ions expressed do not nec­es­sar­i­ly reflect those of Cointelegraph.

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