How Crypto Will Rebuild After Collapse

The buckling of centralized crypto institutions like Celsius and Three Arrows Capital is being called a Lehman Brothers moment, a reference to the collapse of the financial services giant that catalyzed the 2008 financial crisis. The irony of this is not lost on those who have been in the crypto space for a while.

Bitcoin was formulated by Satoshi Nakamoto to cut out third-party risk and as an antidote to the lack of transparency, shady dealings and excessive risk-taking that sparked the worst financial meltdown in decades. In fact, memorialized in the very first block of the bitcoin blockchain is the text, "The Times 03/Jan/2009 Chancellor on brink of second bailout for banks," referencing the dangers of a centralized monetary system. The fact that we are now seeing similar problems infect areas of crypto — particularly centralized entities lacking transparency — underlines how parts of the industry have abandoned the principles that drove much of its earlier growth.

The recent turmoil doesn't signal the end of crypto, as the doomsayers would have it. But it will provide a powerful incentive for crypto investment platforms to return to the technology's decentralized roots, with customers maintaining direct control over their assets rather than handing them to "trusted" third parties. This will be a healthy shift with the potential to drive more mainstream adoption of technological innovation that offers users the best of both worlds: direct control of their tokens through secure, easy-to-use platforms.

"Not your keys, not your crypto" has long been the refrain of those warning against entrusting digital assets to exchanges and companies that offer yields. It has been proven right in the past by disasters like the infamous Mt. Gox exchange hack and, more recently, by Celsius's decision to freeze customer withdrawals, having previously had $28 billion in assets under management only seven months prior. Celsius seemed unstoppable at a $3 billion valuation from Canadian pension fund CDPQ amongst others. Yet earlier this month, Celsius filed for Chapter 11 bankruptcy.

Against this backdrop, crypto holders are already voting with their feet. Cold storage wallet provider Ledger has reported a surge in sales since the Celsius news, for example.

Investors have always faced a dilemma in deciding how to secure and manage their digital assets. Centralized, custodial platforms look comfortingly familiar and provide convenience and user-friendliness, but require you to hand over your private keys. Non-custodial methods like cold and hot wallets allow you to keep hold of your keys, reducing vulnerability to third parties. But these come with the extra hassle, complexity and the prospect of losing everything if you forget or misplace your keys. Just ask the British man trying to recover the 7,500 bitcoin contained on a hard drive he mistakenly threw in the garbage 9 years ago.

Crypto was invented by geeks for geeks, and we're still living with the consequences of that more than a decade on. One of the biggest turn-offs is having to memorize or otherwise secure a seed phrase of up to 24 random words. Crypto's promise to allow you to "be your own bank" is good in theory, but the reality can be nerve-wracking for many, representing a major deterrent to mainstream adoption.

Until now, technological limitations have kept developers from creating products that combine the smooth user experience of Web 2.0 with the autonomy of crypto-native Web 3.0. But recent innovations, such as bridges between blockchains and Layer 2 scaling solutions that allow for faster, cheaper transactions, are paving the way for more user-friendly decentralized products.

Centralized exchanges such as Binance and Coinbase won't go away, but we will see more iterations of products that address the friction points of self-custody and make Web 3.0 more attractive to a mainstream audience. In fact, even the head of the world's largest centralized exchange, Binance, said this month that decentralized solutions will win out in the long run.

Take the technological advances that are making it easier and far less costly to rebalance crypto portfolios. DeFi investors have long had to endure paying high blockchain mining fees of up to hundreds or thousands of dollars just for a single transaction. Now, though, smart contract modules and Layer 2s have been developed to allow for cheaper transactions, allowing DeFi to become more competitive with centralized exchanges. Notably, Uniswap, the largest decentralized exchange, has been seeing volumes comparable to America's dominant centralized exchange, Coinbase.

Innovations keep occurring in the Layer 2 space as tech improvements reduced Optimism gas fees by 30 percent earlier this year, for example. Vitalik Buterin, Ethereum co-founder and popular figurehead, mentions that fees need to be under $0.05 per transaction for true scaling for mainstream adoption. Although transaction volumes are down (and therefore cheaper) in the current market environment, the trajectory of Layer 2 scaling is undoubtedly in the right direction.

Technology is also coming that will relieve users of the burden of securing a long seed phrase without asking them to hand over their keys. Private keys can now be extracted into a more familiar password and username format, with extra layers of security provided by two-factor authentication and QR codes. Different multi-signature and social recovery mechanisms are also being explored.

The open-source nature of crypto means we won't have to wait long for more solutions to this type of problem either. Innovation happens extremely fast in this industry. DeFi pretty much came out of the blue in 2020 and quickly spawned multiple new iterations as developers forked — or copied — the code from protocols such as Uniswap. Even Uniswap, the original automated market maker protocol (facilitating the swapping of tokens) has gone through several iterations (now on Uniswap V3) to maintain relevancy amidst a relentless bout of competitor innovation.

The best consumer platforms today combine simple, easy-to-understand interfaces with powerful, secure technology running under the hood. Think Uber or Spotify. That's where we are headed with crypto. Before long, users will more easily be able to hold their own keys and earn a yield on their tokens, cutting out unnecessary third-party risks that users have been exposed to during recent events. Nor will they need to understand the technicalities under the hood. By truly owning their own keys, investors will be able to forge ahead confident they are operating in a way that Web3 was meant to be: transparent, trustless and accessible.

(Alex Wang is the CEO and Co-Founder of Ember Fund, a self-custodial crypto investment app that gives retail access to curated thematic portfolios and strategies, managed by experts.)