Trade Decentralized Assets, Held in Centralized Vaults? The Inherent Contradiction.
Last week, my co-founder Brian released a detailed blog post on Seed CX’s Digital Asset Storage and Settlement Solution.
Uniquely, at Seed CX every client has a non-omnibus, segregated wallet. Settlement occurs at the end of each trading session between participants’ segregated wallets on-chain. At the same time, there have been several announcements of purely centralized ledgers on cold storage of assets.
There is a philosophical and technical difference of opinions emerging. It seems inconsistent to build a centralized solution to trade and settle a decentralized asset.
First, if centralized wallets succeed, we diminish the value of the network that is inherently derived from decentralization. If any one centralized custodian were to succeed in becoming a centralized monopoly, the value of the asset is undercut.
Second, holding assets in single omnibus wallets undercuts one of the key benefits of the blockchain which is an independently verifiable proof of ownership without the need for a third party.
Nor do I agree with CoinBase CEO Brian Armstrong who, in a recent blog, seems to view centralization and decentralization as a binary. At Seed CX, we have developed the first hybrid solution — we allow for trading at nanoseconds, coupled with the benefits of on-chain settlement and independent verification of assets.
This discussion has impact beyond just the traditional assets currently associated with the nomenclature of ‘cryptocurrencies’, such as Bitcoin and Ether. The benefits of tokenization, decentralized storage and settlement has a much broader potential impact.
In the same way that electronification completely changed the way in which assets are traded and left some established players behind, tokenization will have a similar impact.
Tokenization through BTC and ETH is the wedge for broader asset tokenization. The potential value if properly executed could be immense. To put it in perspective, if just 1% of all tradable assets were tokenized, $3.2 trillion would come on chain (Credit Suisse estimated that there is $320T in asset value in a recent report).
That said, this change in trading will not happen overnight, nor will it lead to the complete destruction of the existing framework. To continue the analogy of electronification, there are still some trading pits here in Chicago and in other financial centers, however electronic volume makes up the vast majority of global trading.
Seed CX Solution: The Balance of Centralization and Decentralization
Our distributed custody and settlement solution allows users to:
- Utilize the public blockchain to verify each settlement transaction executed on the platform
- Have immutable, independently verifiable proof of ownership of their digital assets
- Maintain security of assets held in a multi-signature wallet with the keys distributed in different geographic locations
- Have settlement obligations pooled per participant with movements then executed on-chain for maximum efficiency. Settlements are initially completed off-chain within Zero Hash’s secure ledger infrastructure, in its capacity as a FinCEN-registered Money Service Business and money transmitter.
Trust established by decentralization
As Seed CX’s settlement infrastructure interacts with a distributed ledger, this allows anyone with access to the blockchain and a wallet address to verify the movement and ownership of a digital asset. Each participant on Seed CX can independently track their ownership and movements on the blockchain. There is no longer a need for the reliance on the accuracy of a centralized entity.
To take the digital asset offline, to be held in cold storage and to be transacted on a private centralized ledger or network managed by an intermediary, undercuts the core value of a public ledger that is verifiable, immutable and does not require an intermediary for validation.
The notion of trust is sometimes portrayed as a purely libertarian phenomenon.
Trust in centralized groups is something that permeates institutions. For example, ISDA agreements between counterparties take months, sometimes years, to negotiate. The importance of being able to independently validate ownership has been heightened by institutions’ recent experiences including the MF Global Crisis and the Lehman bankruptcy, which is still being litigated.
We have spoken to dozens of institutional groups and fund administrators who express an inability to gain the comfort needed to rely on third parties that are often unregulated and unaudited. The whole purpose of the blockchain is to provide independent validation and indisputable proof of the ownership and control of assets.
Our wallet infrastructure enables new groups to enter the digital asset arena.
Conclusion: Use the benefits of blockchain
In short, at Seed CX, we believe in the value that blockchain technology provides as a decentralized public ledger. As such, we have uniquely built a settlement infrastructure of segregated wallets and on-chain settlement.
There is not a need to build a ledger of ownership independent of the some of largest and most independently decentralized ledgers. We believe in the value that blockchain technology provides as a decentralized public ledger.
Decentralized networks survive on being decentralized.
