Among the past few years of crypto industries, crypto industry has not been getting the best image to the public due to rug pulls, theft, or even fraud which causes thousands and billions dollars of loss and the worst of all, is the public trusts. After a large number of filtering, most crypto fanatics has started focus on the criticisms and advice provided form the public for improvement rather than sticking their head in their computer and focuses on coming out with a new code. Contrary to what many people think, banks and governments around the world are eagerly developing new products and competitive regulatory regimes to support the next cycle.
Given the security and immutability of the underlying blockchain technology, the underlying crypto technology has proven to be capable of scaling and has been trusted to hold and transact many billions of dollars in assets. However, counterparty risk management for cryptocurrency is still in its early stages, with only a few prominent voices on crypto Twitter providing analysis of crypto products and institutions.
To survive in 2023, businesses must shift away from self-serving innovations and toward products that are inherently safe for the larger community. Crypto users have the opportunity to overcome trust issues and cross the chasm into a safe widespread adoption.
Decentralized Finance
Decentralized finance (DeFi) developers created yield-generating staking mechanisms for coin HODLers as well as collateralized lending protocols, allowing users to take money off the table and purchase real-world assets while avoiding capital gains tax. On the other hand, other developers created new, improved blockchains and useful layer 2s, enabling users to ship innovative products at scale. Better and more efficient crypto exchanges arose, offering more creative leveraged trading methods.
All of this innovation is true in that, while it demonstrated the value of our technology, it was also, by necessity, very inwardly focused. The goal of creating crypto currencies is to help crypto users build trustless financial protocols where counterparty risk is no longer an issue. Furthermore, it is to protect users from early exchange hacks and the ICO bubble’s exuberance. These developments ushered in a flood of external smart money to fund large bets on tokens and the industry itself, as well as a new class of financial products that drew the next generation of retail crypto investors looking for yield and growth. However, increased interconnectedness and the mixing of tokens with significant counterparty risk (such as FTX) eventually led to the 2022 failures.
Creating the Next Gen of Crypto
As of 2023, it will be the first full year of developing the next generation of crypto use cases. Many industry experts believe that the best way to drive industry growth is to apply what has been learned from previous cycles to practical, real-world situations in order for the industry to fully mature and finally cross the chasm.
For example, crypto experts now ready to apply tokenization and DeFi to use cases involving off-chain assets and liabilities. Examples include centrally issued stablecoins and NFTs (non-fungible tokens) that establish an ownable and tradeable blockchain-based right to real-world intellectual property. While primarily used for crypto applications, centralized stablecoins also demonstrate the concept of tying tokenized rights to off-chain value.
Among this industries, the most crucial skills which is required are Counterparty risk management for transactions, token issuers, and DeFi participants. This is still in its early stages, with a slew of pundits on crypto Twitter pontificating about worst-case scenarios involving exchanges and protocols.
As of 2023, the industry faces the critical task of closing critical gaps which includes:
- Making stablecoins practical for traditional payment use cases.
- Making tokenized securities a reality by embracing securities law and not looking for loopholes.
- Using NFTs for financial purposes such as uncollateralized debt by actual counterparties.
With the comparison, the industry can now see the benefits of the technology developed in the previous cycle. It is a watershed year for the crypto industry, with a chance to prove its worth to the general public.
Possible Opportunities to Rebuild Trusts from Users
It is critical to rebuild trust as an industry; it must be the industry’s top priority. Even though layer-1 blockchains are mostly trustless, but the industry as a whole is not.
End users and financial regulators, for example, must work together to rebuild trust in the cryptocurrency industry. Others will rebuild trust if the industry does not take the necessary steps to rebuild trust. Additionally, rather than being forced by authorities or traditional finance, these actions must be made by the sector itself.
Finally, trust is critical for making crypto safer for everyone. They not only reduce risk, but also collaborate to manage risk and continuously improve safety. This includes minimizing fund theft, minimizing fund loss, minimizing rug pulls, improving data privacy, minimizing the impact of sanctions risk on critical infrastructure, and improving record keeping to meet end user and business tax, audit, and other requirements.
Critical Steps toward conquering the industry’s Lack of Trust
The focus should initially be on managing counterparty risk, similar to traditional banking. All users, from institutions to individuals, should trust their transaction partners to reduce the risk of fund loss, money laundering, and exchange hacks. To achieve this, a revised approach is necessary for depositing and withdrawing crypto from exchanges and self-hosted wallets. Users without technical knowledge should expect transaction privacy and security, with details shared only among involved parties.
Higher-level authorization flows must be implemented in the second development to grant transaction participants the authority to reject unwanted funds or liability. Additionally, exchange-hosted crypto is vital in safeguarding the privacy and security of keys for most users, despite popular misconceptions. Conversely, self-hosted crypto will remain fundamental in upholding the integrity and safety of the industry. It serves as the ultimate checks and balances, ensuring a secure ecosystem and keeping centralized parties accountable.
None of the above should necessitate changes to the underlying protocols, but new protocols could easily differentiate themselves by directly supporting the protocols above.
Infrastructure providers have already taken the lead in addressing some of the issues that centralized exchanges face. On-chain analytics, for example, provides businesses with practical tools for monitoring risk and investigating incidents. Meanwhile, MPC (multi-party computation) wallet providers are making key management easier and funds settlement faster. Regtech solutions are also assisting centralized exchanges in managing the real-world risk associated with transaction counterparties.
Now that these foundational building blocks are firmly in place, the moment has arrived for crypto users to depart from the setbacks of the past and progress resolutely towards the goal of attracting the first billion users to the world of crypto.
To speak to a professional on Cryptocurrency, contact KXCO.IO
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