Custody, Trading, Staking

In our talk at Consensus last week, we talked about security in crypto land.

There are a few highly trusted custody services in crypto, including the popular consumer and institutional custody services offered by our portfolio company Coinbase.

These companies have invested tens of millions, sometimes more, in building highly secure storage systems to keep their customer’s crypto assets secure.

There are also exchanges all over the world that people can use to trade crypto assets. While they may be great places to trade, they are often not great places to custody your assets.

And then there is “staking” which is a term I am using for all sorts of validation services that crypto holders are increasingly doing to secure networks that use proof of stake and other approaches to consensus. There are and will be more staking services that crypto holders can use to participate in these services and get paid for doing that.

Again, these staking services many not be great places to custody your assets.

What is emerging are different services that specialize in different parts of the crypto economy.

There will be best of breed offerings in each sector and there will be a few, like Coinbase, that will offer leading services across all of these sectors.

The nice thing about crypto is it is programmable money. It should be possible, and I think it will be possible, to use one service for custody, another for trading, and a third for staking.

But it has to start with custody. If you own crypto assets, you need to secure them. And that is often not at the place you trade them.


Comments (Archived):

  1. awaldstein

    Staking fascinates me.You’re investing in the operation of the network itself which is honestly just very cool.The idea that eventually anyone will be able to simply build portfolios of slotted incentivised nodes generating passive income is fascinating, if not a game changer for a whole new generation of investors.

    1. William Mougayar

      It’s another take on saving your money while earning real interest.

      1. awaldstein


  2. jason wright

    Hardware wallets will evolve (and probably find their way inside smartphones, but with strictly partitioned architecture and security) . Centralised custody is antithetical. Sorry.On another topic. I think we now see what the Huawei shouting match is really about. Google must be so deep inside the US state to be able to work this strategy, which is ironic when we consider the primary accusation being made against Huawei.

    1. awaldstein

      Don’t see it that way.I have a bunch of crypto with CB and it doesn’t keep me up at night at all.You keep yours where?

      1. jason wright

        Walls have ears Arnold.It’s less about security and more about the opposing forces of central and decentral. The former contradicts the latter. Coinbase has the unhealthy power to manipulate the market. Litecoin as an example of one form of this.

        1. awaldstein

          Have huge amount of respect for how useful they have been to me as a customer and handled their own success and the power that comes with it.Been fortunate to be there a few times so get the tradeoffs.Re: Defi–i’m only 6 months into truly understanding it and trading on different platforms mostly AirSwap to internalize it.

  3. William Mougayar

    At the institutional level, you do want convenient bridges between storing and trading, so totally separating these functions brings some inefficiency in the movement process, which is why some consumers don’t bother setting-up secure storage independently from the exchanges. Those bridges are not easy to cross, today.Staking is different all together, as it’s another form of saving crypto money while earning real interest.

  4. LIAD

    i remember years ago (5+) discussing here how all crypto rivers flow from the fiat on-ramp – and whoever nails that, can likely go on to own the stack.the company you trust with your fiat – has the ceteris-paribus advantage on a user level to be the company you trust to custody your essence – at least on a retail basis – custody is coinbase’s unless they screw it up, which i doubt they will. – would be interesting to dig out those 2013 vintage posts and comment threads and see how smart/dumb the conversations were if we knew then what we know now.

  5. Hugo

    I see staking as a way both to generate additional income and to participate in the network. I stake my Decred tokens to get 10% return and also get to vote on the future of the project, it’s super interesting

  6. Ran Oz

    Did Coinbase get an SEC approval for Custodian services for crypto?

    1. fredwilson

      they have a NYS Trust Company which is one of the many ways to offer an SEC compliant custodian

  7. Guy Lepage

    There will be best of breed offerings in each sector and there will be a few, like Coinbase, that will offer leading services across all of these sectors.I feel that “secure” custody is no different than banks. To make the statement that there will be few “secure” custody companies is like stating that there will be only a few banks. Imo, there won’t be as many “secure” custody companies as there are banks but I would not be surprised to see thousands.One major form of custody not mentioned above is what we call “less-secure” custody. “Secure” custody models are for the 0.001% of the population. “Less-secure” custody model is for the 99.999% of the population. Which, in my biased opinion is much more important.The most difficult problem crypto/blockchain tech faces today is not scaling as only a very small fraction of the world has started using crypto/blockchain tech. The real problem is on-boarding and less-secure custody. Worry about scaling once the issue has reared its ugly head.

  8. William Mougayar

    I would caution on understanding really well what you’re staking. I predict there will be emerging scams selling “staking services” for imaginary or far fetched things.In essence, it’s an extension of Delegated Proof of Stake, so you are “delegating” your money to someone else who is staking it to secure a network or something. Let that something be real, or your staking will be gone. That’s why going with reputable intermediaries will be important, ie Coinbase is going to conduct a certain level of due diligence on the coins they agree to introduce staking services for.

    1. JamesHRH

      I won’t take the bait on the multiple jabs available here.I will just add that it makes me feel old.No interest.

  9. JLM

    .When the banks and savings and loans were under attack back in the day, they negotiated an increase in FDIC insurance from $50,000 to $250,000 per account.This effectively placed individuals under an umbrella of financial security — as opposed to physical security — that prevented a potential run on the banks.Many of y’all are too young to have lived through the S & L crisis and bank devastation of the 1980s.Today, whoever is able to cobble together a coalition or a product for financial security — meaning deposit insurance of some kind — in tandem with physical security will emerge from the pack and steal a march on its competitors.There is a huge amount of theft in the crypto world. In 2018, it was up more than 400% and the thefts are skillful — at least as skillful as the underlying code tying it all together.…People have the same concerns about security and insurance in the crypto world as they do in the “real” world — no slur intended.JLMwww.themusingsofthebigredca…

    1. Richard

      Building Coinbase for cryptocurrencies is like building a library is for audiobooks. It’s not if Coinbase is displaced it’s only when.

    2. Girish Mehta

      See the attached post. The author says toward the bottom – “I treated Coinbase like a bank account and you have absolutely zero recourse in the case of an attack”.…In the case of credit cards or banks, people are accustomed to a level of recourse.

  10. pointsnfigures

    True and because of the failure of many exchanges worldwide, you might not want to custody there.

    1. awaldstein

      i think coinbase offering is really smart.though i don’t and most retail investors don’t fit within the limits to use it as right now.

  11. awaldstein

    The point that drew me to staking originally was that by design it is pretty carbon neutral, green mining if you will.I know that this doesn’t address the need for cleaner electric sources to handle the massive power needs for legacy PoW, and future AI, VR and others but it is a start. And great to see the mass of level 2 solutions focus on PoS.Funny how little attention this gets. Almost zero during Blockchain Week but obviously important and very much so to me.

  12. Richard

    Simply stated, most of this is pure bunk. You can get 1-10 million people to do or watch about anything today.

  13. Artem K

    Custody seems a bit “enterprise” and for HUGE clients, so far this barely complies with decentralisation philosophy and “no 3rd party”, especially for massive asset-holders market. Our world meeting trust/confidence crisis, so as soon as useful solutions for personal trustless management will be available – it seems certainly boom. E.g. proper hardware wallet + DEX should provide more freedom in upcoming future for personal owners, at least a little qualified.

  14. Chris Phenner

    I don’t know if this is the right way to think about Coinbase Custody, and I am pretty sure Coinbase would not promote Coinbase Custody in this way, but I’ve been thinking about it this way for some time (and I am unencumbered by any conflict).Riddle me this (and please, poke holes in what I write below):1. Assume one has zero interest in ‘currency positions’ in crypto, and only seeks to focus on tokens and participation in token-based networks. Further assume one does not have time to diligence individually all 1,000+ tokens, and simply wants a reliable filter.2. Assume one keeps a keen eye on Coinbase Custody, and its now 30+ tokens for which it provides Custody. This occurred to me as Coinbase Custody ‘signaled its roadmap’ last summer, alluding to the possibility of adding new tokens.3. Now assume the aforementioned Token Investor sees Coinbase Custody has added what is now 30+ tokens for which it will provide Custody (as they did on 5/6/19), below.…Question: Is there any alternative, more rigorous filter via which the Token Investor can feel ‘even better about’ a token that was previously not part of Coinbase Custody?I can tell Coinbase goes to *great pains* to make clear ‘Custody’ and ‘Coinbase Products of the Future’ have no relationship (I get! I really do!). But pushing past regulatory language, can anyone think of a better ‘Token Value Funnel’ than what I say above?Put me in custody if I’ve misread any part of the above (har).

  15. Richard

    The great part of the AVC blog is you never and I mean never get a full analysis of the risks of a new concept (e.g., staking).It makes it so much much easier to leave your computer always on and always open to scams and invaders.