Thinking Beyond Crypto Custody

Transcript

and welcome to thinking beyond cryptocurrency i invite you to sing with me today so at any time if you have a thought or a question jump in i will speak about it there should also be a bit of time at the end for more structured discussion not many more words to leave on my profile maybe interesting to know my background originally is in information technology and then a cyber security audit and ultimately custody is what i'm doing now a big

country it's always with a focus on infrastructure and now crypto financial infrastructure of course is what we're building at bitcoin swiss to help the next wave of people and companies on board to crypto financial services bitcoin swiss we've been a very early participant in the crypto valley even before the crypto valley existed from a context of branding 2013 we got started as a brokerage and custody house and very early on we realized that our clients want to see more from their assets than just store them safely at bitcoin swiss it's about

using the assets to get a yield so invest some time to speculate as well so we've been part of the first icos we helped ethereum foundation with the fundraiser tesla's foundation and other projects throughout the history thinking beyond just what it takes to safely let people trade and custody assets in the meantime we are close to 300 people most of them located here in zug and close to 100 people in technology supporting us in building decentralized products for our clients two months ago

we sent a coin to space look at this we're thinking even beyond what we have here and today and when you look down to the earth you see europe you see switzerland it's beautiful that's our home and that's what we use as a home base to build products and to to have a vision of where we go and this is a nice segue to actually the coin has value it has it can be used to store digital assets a bitcoin coin and the custody of digital assets of course is at the center of making use of more of digital assets

we start with store of value that's custody we start with means of payment or means of well payments but very early on you are staking you had nfts you had decentralized financial products in general so that's the wave of products and use cases that all center ultimately in custody in the control of the private key and then you look at the custody solution today you need one that does a lot more than just store crypto assets you need one that satisfies all these use cases and that's what we're going to speak about today first we take a little bit of detour

back just like looking back down to switzerland and europe we look back down to the old times of the traditional financial services infrastructure as recently as 2018 people wrote scientific papers about financial infrastructure saying that swift is the way to go it's never going to be replaced well we're all here because we believe that's not the case we know not the case so we are all here thinking beyond the traditional world to digital financial before i'm going to speak more about what's beyond custody let's take a little

detour into custody extending also on what uh boris said before on copper many of the words things he mentioned are true so i'm going to skip some of the elements and focus on what's new here you all know that whoever controls the private key also controls the asset the bitcoin and that's what's key in crypto assets in custody and that's what's leading to the situation that if you don't manage your private key correctly and adequately then your assets can be stolen your assets can be lost if you lose the private key boris has spoken about that it's a

different chart so in the same thing and ultimately what you see here is that all of the audience speak about the risk that you have in digital assets if you don't have a proper custody solution what is the proper custody solution you may ask and that's what i'd like to explain here comparing again to the traditional environment on the left side you're all familiar with the bank account and your bank has a core banking system sitting under the hood very complex it takes care of all the transactions the security moving around stock investing everything what you see as the client is a front-end it's a app or a browser you can even call your client advisor and

usually when you speak about the app or a browser-based website you have password you may have a second factor so that's what's giving you access to your assets that are managed in the core banking system and to uniquely identify using iban number that you use to send assets out and especially also to receive assets on that account number when we look at the puristic cryptos then you create the private key using a whole total hardware can be a lecture device treasure or a phone application it's very simple and very high risk because you're responsible

to keep the private key secure irresponsible to not lose the private key and what a good custom resolution does is emerge both environments where you have a full-fledged application letting you control your private key from the security of a managed environment letting you access additional and new functions over custody and giving you the security and certainty that your private key will never be lost and it's not possible to abuse the private key so to steal from your assets both of these critical cost resolutions are exactly that cryptocustody solutions

so they share the public key address that is used to identify uh your adders on the blockchain they share that there is publicly photography used and the privacy is to be managed this is a lot more insecure and a lot more user-friendly what's going on under the whole dimension public key cryptography and that's really what's going on under the hood it's all coming down to technology and science that is more than 40 years old public key cryptography 1976 that's when i was born actually 45

years ago people started putting down on paper what it means to split keys in a public and a private pair to make it easier to share them and to sign or to encrypt messages and that's still the same technology that's used in blockchain today it's also the technology that secures your web shopping over the internet or your applications that speak from the phone to a server all the same application so it's very simple and very well understood the security that we get from this it's the system that sits on top of it that makes the custody solution good and proper

and such a custody system will typically have three components we've also seen these components in my bodies presented earlier you have a layer that interacts with the requests we call is a request manager for example that accepts the information about do i want to send something to another address do i want to delegate some assets into staking pool or do i want to do some defense transaction then you have a policy engine that checks is this transaction in line with the rules that the owner of the address has established so if it's below or off a certain threshold of value maybe

different approvals have to be given or a different time delay has to be enforced between entering the transaction and signing it and releasing it on blockchain and when all these checks are true sufficient approvals given then the transaction can be signed in a high security whole storage environment such as a hardware security module hsm and ultimately broadcast it to the blockchain to the internet and become effective [Music] these are the three key elements that every custody system will have now

we're also going way back but it's important to understand the elements that form part of blockchain besides custody which is securing a private key ultimately and doesn't necessarily involve any action we have the element of sending assets through space through the blockchain and then we have a multiple participants that come that are needed to make this happen we have the miners that mind blocks improve of work or um proof of stake

and we have the blockchain notes that validate transaction and confirm that yes indeed all the transactions that have been made in a blog are valued or not that's the typical participants in a blockchain transaction there are interesting business models possible in this case for example we're soon going to hear more about minor extractable value around decentralized exchanges there are a lot of research going into this over the last nine to 12 months because decentralized exchanges and decentralized activities are soaring and who's at the pulse of everything that's

happening it's the miners they see all the transactions all the activities that should happen on the network and they choose which one they accept they may choose exactly the transaction that benefits the most or if they're not well-behaved miners then they may choose to inject their own transaction to benefit from a situation such as front running a transaction somebody wants a trade they trade a little bit more efficiently and mine their own trade into the blockchain instead of the other traits that they also see in the workspace and i say it's a business case and i say

no very well behaved minors these are ideological questions whatever is possible in the blockchain is also legal in the blockchain from a perspective and then it's a matter coming down to your business model and ethics do you want to benefit from this situation we also need to be aware that besides solid enterprise custodians such as big coins copper we've heard them before we have lots and lots millions of participants in the blockchain that use these consumer devices and they're also custodians in their own

way but they also need to think about what's beyond just storing assets and transferring them back to the exchange or to a friend or to a company for payment so they share the same challenges what does it take to think beyond custody what we have here is a few examples very early on about 2015-16 we've seen the first project starting to think about what's beyond

proof of work it's a lot of energy consumption there needs to be a better way hence they came up with proof of stake there were a few icos around that time teslas could know others and eventually these blockchains went live around 2017 2018 and very early on good custodians realized that this is changing the game in custody our clients wanted to be able to participate in proof of stake because it's not only securing the network and helping the community it's also earning a reward staking rewards it's getting a yield on assets

just like in traditional financial services when you lock up your assets through a loan or investment you expect a reward and proof of stake is the same thing and you should have the same expectation to your cost resolution today that if you look up a proof of steak assets it should get you a reward i show some prominent examples and i mean these numbers are crazy that's totally unused from the traditional world and these numbers on the other hand are quite conservative when it comes to the crypto world in the meantime there are more obscure

more complex staking opportunities that will get you bigger percentages so it's important that any cost resolution that you have or that you evaluate offers staking on proof of stake assets what does it mean to stake typically the assets stay in the high security of the vault of the custody solution and they are delegated like put on alone loan to the actual staking environment frequently we call this a validator because it's validating transactions on the blockchain so we have the best of course worlds the

assets are staying in the security of a cost resolution but they're able to put on a loan delegated and participating in the blockchain network to secure transactions you get a reward you get your yield on the assets when we look at how is this implemented in cost resolution it's quickly becoming very complex because every blockchain is different every proof of stake implementation is different and you see this immediately from the numbers here different yield they can look up periods that's superficial differences

but under the hood the commands look different the control looks different some of them require a one-step delegation others have a two-step delegation where first you want to a controller and then you nominate to validate this uh that's the polka dot and kozama case for example or the more a little bit older blockchains such as cardano and pesos they have a one-step delegation process some of them have a lock up also with entering into a staking agreement where you need to wait a few days or cycles or epochs whatever they're called until you start getting

rewards for others you start earning rewards immediately there's a huge complexity in making staking work that's where a good custodian really excels in mastering this complexity and hiding it behind an effective user interface any questions on staking otherwise are going to go next yes what's driving the percentage it's i'll try to answer this

and if somebody else has a better answer please shoot in so you were asking what's driving the percentage is it supply demand or other elements from what i understand that's pretty much baked into the protocol and the white paper that the foundation set into so the crypto economics of the blockchain in question then it's slightly changing based on the actual performance of the validator so if they're able to validate at every opportunity that they get during the proof-of-stake process let me hold on for a second

please come in sorry all right so the question was what's influencing the staking reward that you get and the

basic size is coming out of the white paper of the and then it's heavily influenced by the efficiency of the staking pool or the validators and that's where a good staking pool obviously is achieving 100 percent reward or a bit higher even sometimes depending on how you calculate because what's going on under the hood is that each of the validators gets an opportunity to contribute to the next block that's equal to the percentage of the size that they have over the overall number of validators or validating so if your validator say has one percent

of all staked assets in a blockchain then you should get an opportunity at one percent of all chances to stake so to get the reward and when you have that opportunity you need to take it so you must not miss it the validator needs to be up in the morning and then you optimize which transaction you take in and which control points you do again huge different implementation between the different blockchains so that you optimize the reward of uh the block of the staker i mean the validate ultimately the rewards that are paid out

to everybody delegating assets into the validation here's a slightly sideways question then so the idea the idea being that you said it yourself staking is complicated you know it's like unless you happen to be a techie person or in the world of finances or you're used to that kind of stuff it's kind of like you look at it you go like hey it's just complicated right so you end up not doing it and for general people not people in the room but the people that that may be in theory potentially going to benefit from this transition in the financial system so then we then become dependent on on blockchain swiss or whoever it is

whoever it is so ultimately i just see a process where ultimately blockchain swiss just basically replace credits lists as becoming this kind of you know we will because it becomes too complicated for individual players we end up using these um services but you but then we then end up with still beholden to whether it was credit suisse or you know central bitcoin swiss yes how did we remain decentralized and empowered as individuals suffering sovereign financial entities whilst with complexities of the system that are driving us into the arms of

corporations it's a good and loaded question let me take a step back on this when satoshi and cypherpunks released bitcoin and started working on it of course the motivation behind it was to make us all less dependent on intermediaries and especially also central banks and such and blockchain now offer this and everybody who's sufficiently economically savvy and technically savvy and security-minded i would have is able to do this but few of us actually are able to do this and even those of us who are maybe

don't want to because they understand the risks of being responsible for being your own bank for a long while i'm convinced we are going to have intermediaries such as big countries who are here to make crypto financial services accessible for the everyday person these solutions are going to be improved people are going to be more technically and economically savvy over generations so that they will be less and less dependent on intermediaries that's my personal expectation but i wouldn't say that's the thing of the next two three years we've speaking quite long term and that's basically also my mission of bitcoin's risks is to

offer solid secure and accessible services that make it encrypt the financial services available to people who cannot or who don't want to be involved in the technical complexities of exchange almost everybody yes yes you're showing this list with their rewards is this expensive of services or you have many more and if yes how do you choose which ones you you offer the service to because obviously you could select some brand coins of 100 whatever and your customers put it there because the number looks

really nice yeah right now i believe these are seven blockchains and that's what we offer today what's important for us is that we work and offer blockchains and cryptoservices to clients on blockchains that we know are secure and stable and that's what this shows we're also continuing to evolve and adding more as the ecosystem evolves and more and more participants become secure with this approach we're obviously lagging behind a little bit behind people who manage their own

assets and can jump to the next opportunity at any time they have a different risk appetite than what our typical client has we're also happy to work with specific clients where we both understand the particular risk appetite to make special solutions possible but then we don't necessarily put it on a website and offer it to everybody because these are specially required especially risk appetite and a typically also special investment to make it happen as i said it's complex and complicated and we invest heavily in automating these solutions and making them available securely to our clients just wanted to have um

like part of the answer to the question why i think 20 percent yield is another one um i mean you say like obviously you have this notion of performance of the validator so there is top of the either is missing uh at the station block rewards for 300 percent of these stations uh i think based on three factors right decides to create uh six percent new uh

tokens every year then the metro fees right if you have a lot of people using the protocol you will pay some gas fees of how much you can have a bigger yield it's not people paying to gas fees directly to the network but it's people paying the miner or the validator uh to pass transactions and this goes

to the validators so i guess you know these are the three factors while you have uh seven percent yields on uh or you have a fifteen thanks very much yes that was a nice explanation much better said than i could have said oh and what are the three factors that add together to the overall expected reward on these proper state blockchains just simply yes okay so we have three factors that come in to make up this reward besides the efficiency of the validator first it's the base inflation that's paid into the white paper the protocol second it's

uh mining fees that are added for transactions in each of the box and third one is minor extractable values where miners can choose to prioritize or inject specific additional transactions based on mostly d5 fair summary if we want to stake our assets with the websites we need to have accounts with bitcoin with bitcoin swiss if it's possible we just get our one-night for example without mega mask

for that to be able to stay here because the reason it made a difference that means for example if i got your metaphors metamask and onenet i do not want to have on hand with the bitcoin i just want to connect with my medamaster onenet and take it okay i take this as the last staking question then we'll continue and we should still have a little bit of time at the end so your question was is it possible to use bitcoin's staking service but not usb cons which is custody service so basically to delegate from or nominate from outside into bitcoins with staking infrastructure and

the answer is right now this is not possible we want to keep it simple and have a accessible user experience for our clients and we do this by offering everything out of one hand okay we add a little bit of complexity now when we speak about decentralized finance everybody's been speaking about decentralized finance for quite a while by now and most people mean different things many people mean lending because that's was one of the first profitable

use cases and also use cases that actually work then we have decentralized exchanges what we see now is a whole lot of basically all kinds of financial services that we see in the traditional world and i love how this is proliferating and that chart is almost a year old november 2020 it's obviously outdated but i didn't find a better one and the article the d5 stack by multi-coin capital is still very recommended read what we see is that all of the geniuses

most of the genius is working on or not putting their genius to work in replicating traditional financial services processes and functions and making them decentralized in the the reason is not that they want to replicate today's world typically but this is a foundation this is the infrastructure and it should get us to the next level beyond just replication what we have today that's where my imagination starts to be limited i know today's world i see where many of these functions replicate today's traditional world it's very hard for me to see where is

this going and many of us here i see from the shades in the hair have been around 20 years ago in the dot com boom at least as young people it reminds me of this because then we had the internet we had the web as foundation of technologies we had traditional business models put into the internet e-commerce amazon pets.com many of this was very successful but what really came out of this was google and facebook all of these companies and that was not imaginable at that time

that these companies will be based on internet technology and it's not imaginable to me as a person right now what new business models are going to be built on these foundational elements that we are becoming available on decentralized finance now but what we can imagine of course is what are the business opportunities that our clients need right now when you're here and look at where can you put your capital to work and get a yield in accordance with your risk appetite and this is the right discussion to have

and this is a good discussion to have with your custodian how can they help you make this happen to keep your assets secure and to participate in decentralized finance honestly not all of these protocols and use cases can be had from the security of custody for some you need to lock your assets outside of custody in a smart contract somewhere in the internet that you better hope it's been audited properly and nobody was smarter than the auditors and the auditors were honest not abusing what they found because we've seen examples of all of that

so d5 when your assets are leaving the security of your cost resolution it's becoming a whole new high-risk where things are moving so quickly that very frequently assets are lost stolen in this context to the multiple millions uh we just had a couple days ago 100 million lost sorry i should say stolen of course because somebody has them still frequently these hackers are playing around they're not very good

in their operational security so they found out quickly and assets can be recovered but do not bet on this also attackers are becoming smarter will be better prepared but then these assets will be gone forever that's also a discussion to have before your assets leave the security of custody make sure you understand where they're going and i can only support boris who said as a custodian copper is checking which smart contracts which d5 protocols they enable based on the risk assessment based on understanding what can happen

to their clients assets very similarly to what i said about staking at bitcoin space if bits bitcoin swiss were hacked and this was probably part of previous conversation attacked and and lost a chunk of a chunk of money with the swiss regulatory system are you um are you insured so that you know do you have some kind of offset pool so that you know like you know it's probably you won't be but if if you were is that and how does that how does that work for bitcoin that's a good question what happens if for whatever reason somebody's able to have big coins with and i would add to or bitcoin swiss goes bankrupt similar

to what body said similar risk what we have is our client assets are always safe we do pool some assets those that are pooled are uh um on the line with a bank guarantee so we have more than 150 million swiss francs in a cantonal bank from around here very high trusted bank covering every single bitcoin and other crypto assets in our pool storage so if whatever happens there it gets paid out from the bank everything else is in secure call storage on separated addresses for each client has their own address totally

separated and when you're a client you can download your account statement and you see exactly what's covered by the bank guarantee and what's covered on separated calls to each other back to d5 actually any specific questions about d5 good then i let me show you vitalik's nft oh you had in here we're not everything we're only 300 people

we can't make everything possible with uh 300 people no that's that's a huge universe we're here helping our clients navigate that environment figure out what are types of defy use cases that are in line with the risk appetite that they have and make defy available on case by case basis the italics nft collection as shown on rainbow.me and only a very small extract of it nfc's non-functional non-fungible tokens

have come up as a huge hype again as with any bull run we had the previous bull run in 2016-17 immediately followed by cryptokitties and crypto punks even at that time already this type of non-funchable token that we see here that's the most prominent type that is all speaking about right now but it's a very simple use case it's putting art pictures on the blockchain tying them to blockchain addresses and this is vitalik's address people have sent him pickers and and he's keeping them and then everybody can look

at them that's the transparency of the what we all expect is that the very simple nft use case that's resolving around pictures now is very quickly becoming a lot more complex because these are unique tokens each token is unique no two are the same or necessary have to be the same but they're not fungible so they cannot be connected and torn apart again meaning they can be used for many other different use cases they can represent a liquidity pool share in unison

they can represent a domain address in ethereum name system that's use cases that already exist now but are hidden only visible to experts or they can represent a token getting access to a service digital identity is also a very strong use case that's mentioned frequently we are all speaking about what does it take offer custody of nfts and then constantly suddenly becomes a

fancy pants user interface question because how do you show all these pictures in a way that looks great and suddenly somebody doesn't have a picture but also has a piece of music how does that fit in that's a simple challenge to solve but we're thinking beyond the simple challenge we're not trying to understand what are the use cases that come into nfps and how do you represent these use cases in a proper custody system so that clients can use nfts for the service that they intended to do when we speak about identity they're going to be used in maybe a lock or a card

then they need to be able to send into the card and take them out again that is evolving and and moving so quickly and so unpredictable for me at least which one of these ideas are going to succeed and which ones are going to just blow up and be nice and then two months later nobody's going to speak about them that it's probably wise to be a bit careful about which use case to invest in beyond uh digital art those of you who are art collectors know that you can pay insane amounts for the picture whether it's physical or ritual and that

collections have a value in and of themselves and the same applies to digital collections as well any questions about nfts and maybe excuse me now i've got time to answer this question but i like the issue about identity you know identity but what i'm not really understanding is is is let's say i have a digital digital identity and the blockchain is so immutable and i've got to see that accesses all these different things in a really positive way but somehow it's corrupted how how can that corruption be changed going back into the maybe now let's take this offline over coffee

afterwards yeah okay so when we think beyond coffee these are important topics that we think about right now and i think you got an impression some of these have been around for long enough and the markets and the business models and the services have matured and they can be integrated into enterprise cost resolutions with hsm solu backends they can be integrated into the traditional consumer devices wallets such as defenses and lectures many of them still require specialized software solutions such as metamask that somebody mentioned or such as the polka dot universe

poco.js which is a specialized solution again that's just adding to the complexity for users to deal with a great number of different cost resolutions also to the complexity for users for all of these software wallets and consumer devices hardware wallets private keys need to be managed seats need to be written down and not lost and not shown to somebody who's not trustworthy well actually better don't show it to anybody depending on your risk appetite then your technical abilities and interests to spend time on

might also be worthwhile to wait a bit until these services are properly supported in financial intermediary such as bitcoin swiss obviously as i said earlier it's our all here to be at the leading edge of crypto financial services to monitor and risk assess these new protocols and make them available to clients as soon as they have reached the right maturity good then we think a bit further beyond as usual by first looking back 20 years ago

we had the microsoft oracle ibms and intels of the world huge and dominating uh not only technology but the the share indexes of the world nasdaq nice etc biggest companies in the world 20 years later this has changed to the cover of the world google app both facebook and amazon we're all here in the room we know what this is going to be it's going to be crypto financial services what i don't know is which one to three of them and what i suspect is it may not be one

two three of them what i hope is it's going to be hundreds and thousands of them for the proper decentralized so that none of them has too big a share to be a good power uh because big share and power uh corrupts concentrates risks in the hands of a single protocol and in the near future and maybe before the future all of these protocols still have their switches and control levels built in where ultimately humans people are involved and as people with all week

that's what we're working towards uh people developing d5 protocols they're trying to remove themselves out of the equation that's what we have done in our own costly bitcoin space we have removed ourselves out of the equation so that the cost resistance works independently of individual people and nobody no single person has access to all of the required elements in the solution and that's the kind of decentralized control that you need to know that your assets are secure we are working actually a little bit of side note here with raphael domijan from solar stratus

to go to the stratosphere where no plane has been before just powered by solar energy that's a two-year project 2023 we're all expecting that he'll be able to take that brand new technology leading-edge development into space 15 20 maybe 25 kilometers up there in the air and because this is going to be part of it because we see what he's doing is advancing solar energy is it on its inhumanity and we're doing the same in crypto financial services