Crypto Custody Solutions for Organizations Entering the DeFi Space
Last week, the Ethereum DeFi ecosystem surpassed $100 billion in total value locked. The explosion of opportunities in the space has attracted a surge of interest from organizations and, with it, demand for infrastructure and tools that will facilitate participation from organizations with heightened institutional-grade requirements.
Custody in particular, will play a fundamental role for organizations seeking to access crypto and DeFi. Custodians store private keys and approve and sign transactions. They are paramount to organizations safely acquiring and holding crypto assets.
Earlier this month, MetaMask Institutional announced partnerships with three leading custody providers: BitGo, Cactus Custody™, and Qredo. This article will cover a range of crypto custody solutions and the different technology stacks behind them.
In exploring this technology, it is important to note that different funds, trading desks, and other organizations have different operational and regulatory needs, and therefore require different custodian models.
Crypto Custody: Custody Technology and the Qualified Custodian
First, we segment the idea of crypto custody into two categories:
- The qualified custodian owns the fiduciary responsibilities that go with custodying private keys. The SEC defines a qualified custodian as “an adviser who has custody of client assets, and therefore must comply with the rule, when it holds, directly or indirectly, client funds or securities or [has] any authority to obtain possession of them.
- Custody technology involves where private keys are stored. It is a technology offering for organizations (often qualified custodians) that allows for the key management of digital assets.
Key Storage: Hot and Cold Wallets
Within these two crypto custody categories, further segmentation can be made regarding how keys are stored:
- Hot wallets are deemed “hot” because they store private keys online.
- Cold wallets are not connected to the internet (cold). They store keys inside an offline physical device. These devices are often hardware security modules (HSMs). An HSM is a specialised device specifically designed to generate and hold private keys securely. They are able to approve and sign transactions.
Cold wallets have additional strict security layers and always require multiple approvals to move assets. Qualified custodians often offer a range of cold, warm, and hot wallets. With hot wallets, it is common to have multisig as the signing process. This means multiple individual private keys (N) are generated for every wallet. In order to enable transactions, more than one signature (M of N) is required. The purpose of this is to block a single person from being able to compromise the assets in a wallet.
Founded in 2013, MMI Partner, BitGo, pioneered the multi-signature wallet and was the first digital asset company to focus exclusively on serving institutional clients. BitGo is a global leader in custody and security solutions with over $50B in assets under custody. It secures approximately 20% of all on-chain Bitcoin transactions by value and supports more than 400 digital assets within its platform. It provides the security and operational backbone for more than 500 institutional clients in 50 countries, including many regulated entities and the world’s top cryptocurrency exchanges and platforms.
Multi-Party Computation (MPC)
Hot wallets can store keys in different ways. For organizations, we focus on MPC algorithms.
Multi-Party Computation is an advanced cryptographic technique that removes the operational risk around private keys. It allows for multiple parties to hold parts of a key. Importantly, no single party knows which section of the key the others hold. The private key is effectively broken up into encrypted shares, where any predetermined number (M) of the total number of shares (N) are required to make a transaction (M of N). MPC has proved popular with organizations as it allows for multiple parties to quickly sign transactions (e.g. for active yield farming).
MMI Partner, Qredo offers decentralised crypto custody secured by MPC. Qredo supports institutions—from small-cap crypto funds to global asset managers—to manage their crypto assets and securely deploy assets into DeFi. Its Layer 2 blockchain also enables seamless settlements, and low-cost access to a growing ecosystem of cross-chain trading and liquidity opportunities.
Different Organizations, Different Requirements
It is clear that the needs of organizations vary dramatically depending on where in the market an organization sits. Small crypto funds that prefer active yield farming across the long-tail of DeFi tokens, are very different from multi-billion dollar hedge funds that prefer and need to work with qualified custodians. Larger organizations often need different technology stacks for different funds, different parts of the same book, or different geographies.
MMI Partner Cactus Custody™, for example, is a trust company based in Hong Kong with over USD10 billion in assets under custody. It is the third-party institutional custody service provided by Matrixport, Asia’s fastest growing digital assets financial services platform. Cactus Custody™ offers cold and warm storage, enterprise crypto management features, and DeFi connectivity for miners, corporates, funds and projects.
MetaMask Institutional and Custodian Agnosticism
We at MMI recognize that access to different types of assets, and different requirements for risk management, operational infrastructure, and processes—all drive different needs for different players across organizations.
This means MPC, HSMs, and Qualified Custodians all have incredibly valuable roles to play to help facilitate participation of organizations in DeFi. In order to truly serve this market, it is important to us to work with custodial wallet providers that meet all variations of institutional-grade custody requirements.
In addition to our current integrations, MMI is in the process of forming partnerships with more custody providers in order to cover an even wider breadth of organizational custody needs.
Is your cryptofund, trading desk, or organization interested in accessing and engaging in DeFi?
About MetaMask Institutional
MetaMask Institutional offers unrivaled access to the DeFi ecosystem without compromising on institution-required security, operational efficiency, or compliance requirements. We enable crypto funds, market makers, and trading desks to trade, stake, borrow, lend, invest, and interact with over 17,000 DeFi protocols and applications.