Celsius and the importance of web3 keys

Last week we saw yet another victim of 2022’s “crypto-crash”, with Celsius filing for bankruptcy. The news is once again full of negative headlines, and questions regarding the future of cryptocurrencies, NFTs, the metaverse, and even blockchain technology in general.

Celsius’s filing is bad news for everyone, including of course those that were involved with it — not least the thousands of users who had trusted their assets to the company. The purpose of this article is to delve into some important concepts around why this situation arose, and how Freeverse’s Living Assets Layer-2 platform is set up to avoid similar problems.

Celsius is a custodial service — that means that it stores users’ web3 wallets’ private keys on their servers, and takes full responsibility for users’ money, just like a bank. Being a custodial service allowed the company to pause withdrawals, as Celsius did some weeks ago.

The difference between a custodial and non-custodial wallet is huge. A non-custodial wallet is one where the user has full control over their assets: no other party, service or company can pause, transfer or act on them. The advantage of this is that it gives the user full control over their assets; but one downside of non-custodial wallets is that when users lose the keys, they lose everything — there is no ‘Forgot your password?’ reset functionality.

Some companies offer a service whereby they store users’ keys in their servers, and essentially “trade on users’ behalf”. This is called a custodial wallet. The advantage of this service to the user is that you can use web2 methods of authentication (email, passwords, two-factor authentication etc.) and, crucially, if a user loses their account access, they can always contact the company to reset it.

The disadvantage though, is that users don’t really own their assets — they delegate that responsibility to a 3rd party. And when that 3rd party goes bankrupt, there is very little they can do.

At Freeverse, we designed the Living Assets Layer-2 platform based around several main pillars, a key one of them being that the private keys of users must never even pass through the platform. Not one single actor within our Layer-2 platform (nodes, relayers, verifiers, etc.) requires, gets to see, or stores any user or client private key. Only signatures are required, as is standard safe practice.

DApp builders on the Living Assets platform can therefore build applications that interact with their users via any set of web3 compatible wallets of their choice (e.g. MetaMask). They can still choose to integrate their products with custodial wallet services, but that is ultimately their choice; the Living Assets platform adds no extra trust assumption.

As part of our efforts to make the Living Assets user-experience more friendly — we also provide DApp builders the option to offer an Onboarding Wallet to their users, which is almost frictionless, does not require any external plugin or mobile app, and yet, is built around a Two-Factor Authentication pattern.

One final massively important pillar of the Living Assets Layer-2 is that it does not store any crypto-currencies: users are not required to bridge their native crypto or ERC-20 tokens to the Layer-2 before being able to trade. This has two major consequences. First, it dramatically reduces friction and improves UX. Second, and most importantly, it prevents hackers from attacking the Layer-2 infrastructure to steal users’ funds… because there aren’t any to steal.

If you want to know more, feel free to read more about our platform, or contact us, we’d love to hear from you!